Credit and Receivables in Uncertain Times

In Canada the inflation rate is at its highest level in over 30 years and there doesn?t seem to be any end in sight. As inflation ripples through different supply chains many commodities have seen phenomenal price increases and supply issues. Personal disposable income is being decimated at the fuel pumps and price increases from all different directions. This inflationary spiral and shortages creates uncertainty, which in turn is bad for credit and receivables.

The higher the inflation rate, the higher the risk to your accounts receivable portfolio. Many companies are having a hard time adjusting to the inflation spiral. In some instances, a supply shortage can literally put a company out of business. As inflation decreases disposable income, some companies will see a drastic drop in sales. The longer inflation and shortages continue the greater the number of businesses that will fail.

When granting credit, the industry inflationary risk of the company applying for credit should be considered. If a company is in a high-risk industry, then it may be wise to insist on a personal guarantee. Proper credit screening will reveal if the reason they are applying for credit with you is because other suppliers have cut them off.

If a customer starts to fall behind on their account, then it could be an indicator of being affected by the continuing economic uncertainty. Accounts like these need to be monitored. If payment habits return to normal then they just needed to adjust to the current market conditions. If they fall further behind it could be a signal they are not going to survive.

It is easy to see the damage being done to companies as they adjust to the new economic environment. The collection business is booming, as more and more companies get squeezed out of business. For some companies it is a question of whether they can ride out this inflationary storm.

Whatever industry you are in inflation will have an impact on your bottom line. Unlike the phenomenal mortgage rate crisis in the early 1980s (five-year fixed-rate mortgages were over 15 %) this inflationary storm is spread throughout every nook and cranny of the economy. Also, at present there is no indication how high inflation will climb, or when it will level out.

In uncertain times like these it pays to take the time to analyze your accounts receivables and tweak your credit screening process. Keep current on industry news and be on the lookout for new patterns that will have an effect on your business. Maintain a tight rein on your receivables and adjust to new trends, or patterns.