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Optimism Erode Accounts Receivables Management

Is it ok to let invoices slide when your business is flush with cash?

It can be tempting to take your eyes off the ball in accounts receivables when business is going well. You might decide to give “good” customers a little more leeway on past due amounts or procrastinate on credit analysis. It’s the holiday season, right? Maybe they were too busy to send a payment. Maybe you were too busy to notice an issue.

Experience has shown us at The Credit Department that even the largest and seemingly stable customers can experience bumps that impact your trade receivables. Regular analysis of credit risk is the only way to notice early warning signs of instability.

Read our case study about Toys R Us bankruptcy filing

Part of a strong trade receivables (and business) strategy is to review leading indicators rather than lagging indicators. Receivables and cash are lagging indicators, based on actions taken in the past. But national economic indexes on things like consumer confidence and trust in federal policies can give you a hint of any trouble ahead.

In December, for example, the IBD/TIPP Economic Optimism Index decreased across all measures. This index, which polled 901 adults in the last week of November, indicates pessimism with a reading below 50. The December reading dropped to 51.9, a decline of 3.2 percent from the month before.

What does this mean for your business? It may indicate that Americans still feel some instability despite gains in GDP, stable energy prices and record gains in the stock market. The pending tax reform package has not yet given enough Americans a boost of optimism. Decreases in consumer confidence eventually impact equity markets and corporate confidence. Your customers may rein in spending or delay payments to conserve cash flow in anticipation of a bear market.

The IBD/TIPP Economic Optimism Index has three key components. This month, all three index components decreased. The Six-Month Economic Outlook, a measure of how consumers feel about the economy’s prospects in the next six months, slipped below 50 in December. The Personal Financial Outlook, a measure of how Americans feel about their finances, slipped 4.1 percent to a reading of 59.1. And the Confidence in Federal Economic Policies reading, slipped to 1.3 percent to 47.3.

The IBD/TIPP precedes the well-known national polls by the Conference Board and University of Michigan, and has shown good reliability for foreshadowing confidence indicators. We’ll have to see what these other polls report in the coming weeks.

In the meantime, don’t let a little confidence in your business results influence how you approach accounts receivables and credit analysis in the next six months. If you don’t have strong processes and controls in place, working with The Credit Department can help you identify gaps in risk management (in real time) and improve your credit forecasting.

As an example of how we recently saved customers thousands of dollars and the hassle of pursuing creditor remediation, read this case study.


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