Analytics: Impaired Receivables

How do you respond to the imminent failure of a major customer, which is threatening to force a substantial write-down in current period earnings?

A realistic scenario is:

  • Supplier X sells product / services to 200 customers on 30 days terms.  Annual turnover is $100M.
  • A net operating margin of 6% gives an annual profit of $6M.
  • Without warning, a major customer, CC, with purchases of $12M p.a., defaults on a payment.
  • If credit is stopped immediately, CC will collapse, owing X $1 – 1.5M.  Recovery by the administrator of CC of preference payments may well increase this amount.   Management of X must decide quickly how to respond to this situation.

The simplistic strategy of “cutting our losses” ie take the hit on our balance sheet today, and not “sending good money after bad” is guaranteed to incur a write-off of a substantial part of X’s annual profit, and leave it mired in provisions for subsequent claims by the administrator.  Worse, it may well trigger a default by X of its covenants with its lenders, and will certainly lead to higher borrowing costs due to the reduced quality of its receivables. Furthermore, it will wipe out 10% of its business, at a time when it is stressed by the incident.  Not good!

We propose a method of matching risk profiles, administered between supplier and customer (the latter possibly operating under administration or after a Deed of Company Arrangement), to optimise the result for both entities, and permit either a resumption of normal trading or an orderly termination of supply with an optimal outcome for the supplier (including preferences).

Simply stated, our method measures the entire risk / reward (including trading profits, write-offs, preference recoveries, and consequential costs to the supplier of goodwill, opportunity cost, borrowing rates and disruption).  This risk profile spans both entities, and is a dynamic metric which provides transparency and guidance to the supplier at every stage.

We further recommend that this method be adopted for regular dealings with all major customers, both to alert the supplier to a nascent issue, and to mitigate losses in the event of customer default.  The profile is built to conform to the external and internal constraints imposed by lenders, credit management and available parameters for terms of trade by both parties, and factors in customer cash-flow, WIP and accruals to accurately state the true exposure of both entities.

Related Articles

QMetrix is ISO/IEC 27001 certified: Information Security Management System

QMetrix is pleased to announce we are now ISO/IEC 27001 certified, demonstrating our commitment to information and data security. Highlighted by various data breaches in recent times, cyber threats and criminal activities are on the rise. It is paramount for organisations to uphold high security standards and manage cyber-risks even before they occur in order

QMetrix is named 2024 APJ Workday Adaptive Planning Partner of the Year

QMetrix is named Winner of the 2024 Adaptive Planning Partner of the Year Award – APJ at the annual Workday Sales Kickoff. QMetrix announced it was named a winner of the 2024 Adaptive Planning Partner  of the Year Award – APJ by Workday, Inc. (NASDAQ: WDAY), a leading provider of solutions to help organisations manage

Stay in touch

Get the latest insights from QMetrix straight in you inbox.

Scroll to Top

This website uses cookies to ensure you get the best experience on our website. More Information

Skip to content