Firms secure their income

THE YEARS of prosperity which preceded the current crisis made Slovak companies less cautious and led them to neglect the management of their finances. The crisis has caught such companies, many of which had come to expect never-ending growth, unprepared and led them to the brink of insolvency. Drops in revenue have started a lethal sequence of secondary insolvency in which companies do not pay their contractors because they have not received payments for their own orders. This has raised interest among companies in ways to manage their finances better and protect themselves from such an uneven market situation.

“Companies significantly underestimated the management of their finances,” Tomáš Jurík, Managing director of Coface Slovakia, told The Slovak Spectator. “This was because we experienced a period of growth and serious problems with claims actually disappeared. It was as if companies had forgotten the recent past, specifically the 1990s, which was affected by secondary insolvency. The crisis has forced Slovak companies to look back on this field of management and re-evaluate processes. They have started to focus more on management of receivables.”

Tomáš Mezírka, representing Atradius Credit Insurance N.V. in Slovakia, said that even at the end of 2008 Slovak companies refused to admit to a large extent that there was a problem and, despite being encouraged to do so, refused credit insurance. At the end of the first quarter of 2009, when problems fully expressed themselves through significant falls in payments, the brake was applied swiftly, payment periods were cut or transformed into advance-payment and cash-payment demands. All these, along with a halt in financing from the side of banks, threw the market into even greater turmoil.

Jurík confirmed that the problem of secondary insolvency in Slovakia worsened as Slovakia started to experience the most difficult period during the middle of 2009. He said that trouble has persisted and has even deepened. While the number of insolvencies in mid 2009 was at the previous year’s level, by the end of 2009 Coface reported an increase in Slovakia of 16 percent. However, the trend from the first quarter of 2010 is even worse, with growth in tens of percents. This is reflected in the number of declared bankruptcies and authorised restructurings.

“If this negative development is not halted, Slovak companies in many sectors will experience an even more difficult year than in 2009,” said Jurík.

According to Mezírka, secondary insolvency could have been predicted due to the fall in exports in combination with limited financing, and because a far from negligible number of companies were set up for ‘never-ending growth’. Thus, he said, the fall of these companies was unavoidable from the very moment the crisis started.

“Because the capital adequacy of our companies is low, they were not able to cover drop-outs in payments from their own resources and thus halted their payments further,” he said, adding that with regards to a moderate, though still fragile, stabilisation and gradual revival of the economy, it is possible to expect a certain stabilisation. “But we expect problems in the increase in the number of insolvencies, where companies will be not able to survive any more.”

With regards to reviving economies and the growth of orders in many sectors, Jurík sees the availability of financing as the most important factor in halting this negative trend.

“During the previous period, when revenues went down companies which survived the crisis also ‘used up’ their cash,” said Jurík. “Now they will need external financing to support their growth. If the cycle of financing is re-started, Slovak companies can get out from the current situation with their heads up. But if this does not happen, we face a year with a record number of insolvencies.”

Mezírka sees small and medium-sized companies which have low capital adequacy and are focused on larger, more cost-sensitive orders as being most endangered by secondary insolvency.

“For these companies, one delayed payment can mean their failure,” he said.

With regards to most problematic individual industrial segments, according to Jurík these are the same as during the main wave of the crisis, i.e. construction, transportation, the clothing industry, trade companies, and the wood-processing and automotive industries.

Companies have several options to protect themselves from secondary insolvency. These depend on the segment in which a company is active, as well as its size and number of customers, according to Jurík.

Jurík lists four basic products. The first one is business (or credit) information about existing or potential customers. The second is credit insurance, in which an insurance company takes over the risk coverage linked with its client. It covers payment insolvency, as well as payment default. If a customer does not pay, the supplier is sure of receiving income (from the insurance company) and thus can better plan its cash flow. Moreover, it avoids the risk that it will never get its funds.

“This product is the greatest form of protection,” said Jurík.

The third method is collection of receivables, for which each company should have a proper internal process that includes cooperation with an external collection agency. This is because a collection agency, apart from its professional experience, also brings into the process a third-party effect, which often proves to be a decisive factor in debt collection. However, the most important thing is to respond in time and not underestimate delays in payments .

The fourth product is factoring. This is actually a combination of the first three products, linked with granting of financing. A company obtains financing for its commercial claims, which it can use for further growth, according to Jurík.

But Jurík and Mezírka agree that Slovak companies use these opportunities only to a very limited extent and that the number of companies which use them is relatively small. According to Mezírka, Slovak companies mostly rely upon good trade relations and only a small portion have realised that this will not protect them.

“For example, credit insurance was a quite under-rated product and financial managers looked on it only via the prism of costs,” said Jurík. “The crisis has shown why this product is good, when even large and strong companies were going bankrupt and no trade partners were absolutely safe; interest in it is growing enormously.”

Mezírka confirms that interest in credit insurance has increased several-fold. But the situation is similar with flooding – everybody wants to sign an insurance policy after their house has been flooded with water.

“We expect that after the experiences of last year many companies will ponder whether it is suitable within cost saving to save on protection of investments,” said Mezírka.

In case of debt collection, the volume of international debt collection (either by foreign importers selling to Slovakia or Slovaks exporting abroad) has increased, according to Jurík of Coface Slovakia. The volume of such problematic debts which companies are actively trying to address has soared by hundreds of percent.

As regards claims towards Slovak clients, companies are trying to solve this on their own until the very last moment. When they realise that this is not possible, it is often too late.

“This is bewildering, especially because there are no initial costs for companies with this kind of debt collection,” said Jurík. “All renowned debt collection offices solve domestic claims only on the basis of a success fee, i.e. the company pays only when the debt is collected.”

Higher interest in debt recovery

Peter Makovický, the executive officer of Exekučná, a debt-recovery company, confirms a growing interest in his specialised business of finding corporate deadbeats and getting them to pay their bills.

“As a specialised company active in the business-to-business (B2B) segment we are registering a rapid increase in interest in our services,” Makovický told The Slovak Spectator. “When compared with the pre-crisis period inquiries about our services in Slovakia rose by about 200-250 percent. And the trend is persistent and does not have any declining tendency. But we register a much greater increase in interest in our services from foreign companies who have debtors in Slovakia. This increase is at the level of 800 percent compared with the pre-crisis period.”

About 80 percent of Exekučná’s customers are mid-sized commercial companies. The rest are international corporations doing business in Slovakia. Exekučná serves companies that are, in most cases, among the four biggest businesses operating in their respective sectors in Slovakia. But its clients do not include banks, insurance companies or telecommunications operators, Makovický told The Slovak Spectator.

When assessing his company’s success rate in debt collection, Makovický said that while leading insurance companies operating on the debt market all point to a deep fall in the debt-collection success rate, exceeding 40 percentage points, many other experts also share this opinion.

“Since Exekučná does not operate in the business-to-consumer (B2C) segment and our specialisation is in B2B we belong among the top in Slovakia; I dare to say that our total average debt-recovery ratio – compared with the pre-crisis period – decreased by only 6.4 percent,” he said. “Of course, there are sectors, especially construction and auto transport, where these drops were greater, but for example in agriculture we have registered an increase in the debt-recovery ratio.”

Makovický says the revival of Slovakia’s economy is behind this and predicts a successful end of the year for the economy. But this will not be the case for trucking firms, where he predicts continuing stagnation. The outlook for construction is not positive either, as he believes the decline is not yet over for this sector in Slovakia and that a recovery is far off, meaning that stagnation may continue for as much as two years.

Slovak companies’ financial literacy

Jurík sees the main problem as being the low number of companies using active management of receivables. But when they start doing so, then financial or credit managers are both well trained and follow current trends, and adjust processes in the company accordingly.

“For the time being it will be important to show this field to as many companies as possible that are not using management of receivables and trade risk control,” said Jurík. “This is the biggest difference, for example, compare to western Europe. In an environment where a large share of companies use management of receivables, all companies breathe easier because fewer problems occur with payment discipline.”

Mezírka divides Slovak companies into three groups from the point of view of their management of receivables. The first category includes those companies which have already been burnt and have started to secure their receivables. The second are those who are still waiting to be burnt, and the third category are those who realised in advance or were instructed by foreign owners that it is not the invoiced turnover but the actual turnover, based on funds received, which is important.

“At one conference which I attended, there was a figure quoted which says a lot about responsibility towards our own companies in Slovakia,” Mezírka said. “In Slovakia about 2 percent out of the total volume of invoiced receivables are insured compared with 20 percent in western Europe.”