The management of accounts receivables as a crucial corporate finance component has attracted a lot of interest by board of directors during the current Covid-19 crisis. Studies done show this is a global challenge, with many manufacturing firms and distributors showing high levels of account receivables as compared to their total assets. In most cases, such receivables represent approximately 40% of a company’s current assets. Poor management of account receivables generally lead to challenges such as an increase in cash-flow problems thus disrupting the daily operations of the firms. The key outcome of this includes inability to pay employees, pay for supplied goods and services and meet other statutory obligations.
In Kenya, the situation is not so different as highlighted above and has led to collapse of institutions in key sectors such as Agribusiness (Mumias, Muhoroni and Miwani Sugar companies), Finance Sector (Imperial Bank and Chase Bank) and the Service Sector (Nakumatt Holdings). It has been observed that in most cases the credit controllers still insist in using the same tried and tested receivables management procedures with the result being limited liquidity to finance growth. However, the situation should not be all gloomy with the advent of Trade Credit Insurance. This insurance solution compliments the institutions credit control policy and ensures that despite having receivables, the company is guaranteed that the same will not turn out to be bad debts. In essence, this allows the organization to aggressively grow their sales by selling to existing and new customers on credit resulting to a growth in their P&L and long term financial stability.
The Trade Credit Insurance protects your business against both commercial and political risks that are beyond your control. It shields a company’s domestic and/or foreign accounts receivables from non-payment caused by the following: Protracted Default (non-payment past due date/ inability to pay), Insolvency (as provided for by legislation under the Insolvency Act 2015 -Section 236), Political Risk (such as currency inconvertibility, license cancellation, public buyer defaults). The structure of the cover could be on a Single Debtor Policy (insures only one key debtor), Key Account Policy (insure on a named basis as few as 3 accounts, all the way up to 200 accounts) or Whole Turnover (Insures all of a company’s sales).
Administratively, as a risk mitigation measure the insurer usually monitors the financial performance and well-being of your customers and allocates a grade that reflects the health of their activity and the way they conduct business. In the event that your client cannot or will not pay you, you will be insured and indemnified up to the limit of your policy.
Despite the above, it is important to note that the Trade Credit Insurance Solution doesn’t extend to cover default penalties, customer disputes with the buyer that may result in withholding of partial or full payments by the buyer, amount owed by any government entity which cannot be declared insolvent and currency fluctuation risks.
By Fred Muchina