Are you prepared to manage the risks associated with the growing insolvency of your customers?

The extreme pressure of current events on firms significantly increases the likelihood that some of them will be unable to meet their obligations. In particular, the sharp rise in input prices (12.7% year-on-year increase in inflation in March 2022), the slowing growth rate of the Czech economy (forecast growth of only 1.2% in 2022), record energy and fuel prices, the sharp rise in input prices on commodity markets and shortages, whether due to the economic impact of the COVID-19 pandemic or the unpredictable development of the war in Ukraine, are impacting corporate financial health. In this context, many companies will also be affected by the de facto impossibility of repaying loans secured by COVID mechanisms (some of which will mature during 2023).

While current statistics do not yet paint a dire picture, a significant increase in insolvency can be expected in 2022 and 2023.In the first quarter of this year, 286 insolvency petitions were filed by commercial companies (6% more than in the comparable period last year) and 1,435 insolvency petitions were filed by individuals.

Some insurers are expecting a significant year-on-year increase in insolvencies of up to 30% this year.

Surveys of insurance companies indicate a higher proportion of unpaid invoices. Data from claims insurers also show that only a small proportion of claims more than 90 days past due are usually paid.

Early identification of the problem and an adequate response to the borrower is crucial for the lender. The success of debt recovery often depends on how much time has elapsed since the due date of the debt. 

The following are simple principles that contribute significantly to the proper management of receivables through in-house processes. These principles should be formalised within the company, e.g. in the form of an internal directive.


Evaluation of customer creditworthiness

  • Take the time to check the financial stability of potential business partners before committing to an order.
  • Create collaboration within the company between financial specialists and salespeople to finalise terms of business.
  • Set appropriate payment terms and performance milestones to reflect the identified risks. It is appropriate, for example, to divide the contract into sub-parts with staged payments, advance payments, purchase of part of the inputs to the contract directly at the customer's expense, use of bank guarantees, guarantees for payments by a third party, securing part of the payments with a lien, etc.

Standardisation of the process of managing overdue receivables

  • Designate a lead coordinator (credit & collection specialist/manager) with a link to the management of the debt management and collection company, whose priority agenda is the management and overall coordination of the debt collection process, reporting, etc.
  • Divide the debt recovery into several escalation stages, e.g. the first attempt at recovery is carried out by the salesperson / key account manager, in the next stage a dunning letter is issued in writing by the coordinator and the third stage is handled in cooperation with a legal specialist.  
  • Standardise the documents or templates used for written communication and set regular deadlines for checking the status of claims, sending out dunning letters and coordinating critical cases.

Properly maintained accounts receivable records

  • Maintain accurate accounts receivable records. In the case of debt collection, you must document not only the amount of the claim, but also keep documents proving the legitimacy of the claim (contracts, delivery notes, etc.). 
  • Set up regular reporting of receivables, highlighting overdue receivables with a clear indication of potential risks. This report must be available to salespeople, key account managers, etc.

Timely resolution of critical cases

  • Clear overdue debts at an early stage without delay. You can gradually escalate collection from a reminder, acknowledgement of the debt owed by the customer to your company, applying a contractual penalty for late payment, making further delivery conditional on payment (if contracts allow), proposing a payment plan, etc.
  • Require collateral for overdue receivables, e.g. a third-party guarantee (e.g. a sister company, parent company), collateral in the form of a pledge of the company's assets (which may be movable, immovable, patent, receivable, etc.) or collateral in the form of a promissory note with a direct enforceability clause.
  • Consult early on critical cases with specialists who will be competent to manage the risks in the process of recovering your debts in or out of court.   

The current economic climate brings with it higher risks of insolvency of companies directly or indirectly affected by sharp increases in input prices. For these situations, it is advisable to strengthen receivables management processes.