Covid-19: The Perfect Business Storm?

By Ian Logan, Chief Revenue Officer, Inoxico

Industry data indicate declining debtors books

The impact of Covid is counted in infection rates, hospitalisations and deaths. Behind these heartbreaking numbers is the impact to consumers and the knock-on effect to businesses.

The recent implosion of CNA into Business Rescue highlights the knock-on effect the economic downturn and rapid change in consumer behaviour has had. Most sectors are feeling the impact of increased unemployment (>75% for under-25s and 34% overall), as well as significant changes in how we do business.

With businesses not being in the position to pay their suppliers, there has been a ripple effect with companies applying for business rescue. The list includes such renowned household names as Edcon (Edgars, Jet), SAA, SA Express, Ster-Kinekor, Busby and Phumelela. 

Some of these do manage to reengineer their debtor base and reemerge as trading entities, but often with creditors accepting a few cents in the rand. With or without business rescue, the creditors are severely impacted, often forcing them into restructuring.

So how do you grow your business in such turbulent times? How do you extend your trade credit, by how much and to whom?

Relying on historical public information such as CIPC is risky when making forward-looking decisions. There is a delayed court process that takes years and not months. The impact of this is that directors may be delinquent, the company may not be actively trading, resulting in a creditor at risk of extending credit to the unknown. In addition, this statutory information is often ‘static’ and does not reflect how a business is operating today and will in the future.

Knowing the company for many years does not solve the problem – the companies mentioned have all been in business for decades.

Figures released by Statistics South Africa demonstrate the declining economic environment with the total number of liquidations increasing by 21,5% in the first seven months of 2021 compared with the first seven months of 2020.

The estimated number of insolvencies increased by 103,1% in the second quarter of 2021 compared with the second quarter of 2020. There was a year-on-year increase of 147,8% in June 2021. Seasonally adjusted insolvencies increased by 784,4% (from 32 to 283 cases) in June 2021 compared with May 2021. 

Businesses want to know if and when they will get paid. Inoxico data indicates that average debtors’ days (the time taken to pay an account) has increased from 46 to 52 days – an increase of 13% from Q1 2020 to Q2 2021. The cost of funding these extra days is straight off the bottom line, as well as the missed opportunity of extending credit to other potential clients.

Businesses need to find new clients and grow. Knowing who to avoid is half the battle won – the other half is who can I trust to extend credit to and grow my sales? Inoxico data shows over 40% of companies have had a change (positive and negative) in their score which overall indicates a probability towards delinquency and payment challenges.

The end result is that businesses appear to be cautious in extending trade credit, with the data indicating a 27% decrease in average trading volumes. 

This indicates three possible scenarios – creditors are tightening up on credit granting, debtors are trading at significantly lower levels and need less credit, or a combination of both.

The Conundrum 

In summary, the growth and risk conundrum is weighing more heavily on businesses. And, with no improvement expected in the short term, managing the risk and exposure aspect is more critical than ever.

Encouraging news is that by focusing on predictive data and increasing our leverage of analytical power we can improve the profitability of trade credit sales.

*Check out the latest edition of the Public Sector Leaders publication here.

For enquiries, regarding being profiled or showcased in the next edition of the Public Sector Leaders publication, please contact National Project Manager, Emlyn Dunn: 

Telephone: 086 000 9590 |  Mobile: 072 126 3962 |  e-Mail: emlyn.dunn@topco.co.za