by Gregor Pannike

Getting cash fit

Emerging markets such as the UAE entail by its very nature significant levels of volatility creating challenging business environments for established actors, incumbents and market entrants. Thereby, the lack of liquidity in the market and lurking risk of defaulting (long-term) business partners and customers resulting in an increase of legal cases which are often not recoverable due to the severity of defaulting party’s financial situation, are not the only imminent risks faced by the legal function within corporations in a volatile environment. Compliance with payment terms, collaterals such as advance payment and performance bonds and honouring contracts in general are at risk in challenging market conditions. Therefore, mitigation of receivable and debt collection risk is key in volatile markets to safeguard an organisation’s overall cash flow performance, as the very base of a financially-sound and sustainable corporation. Proactive and efficient receivable management is not only imperative to protect against bankruptcy and financial risk exposure within the market but also to reduce the cost of working capital and to increase the overall profitability of an organisation. Following key mitigation measures can help to reduce receivables risk.

Rigid customer due diligence and disciplined customer credit risk review
Intensive screening of new customers, particularly those which do not have any previous transaction history with the organisation is not only of utmost importance during times of economic stability but the more it applies under volatile market conditions. Robust compliance checks including diligent “KYC” processes serve on one hand the purpose to comply with more stringent compliance regulations such as the newly-issued UAE Federal Decree No. 20 of 2018 on anti-money laundering and countering the financing of terrorism and on the other hand provide essential data on the company’s activities, size of business and ownership/ governance structure which can help to decide whether to enter into a customer relationship or not. Evaluating the credit risk exposure of new customers through the Al Etihad Credit Bureau would be another helpful tool to select effectively new business partners.

Recurring review of credit risk exposure to the key customer base should generally form part of an appropriate “house-keeping exercise” within a healthy organisation but typically more relevant in times of increased credit risks. Emerging markets inherent non-transparency and lack of access to commercial data, requires either to build-up internal sophisticated business intelligence capabilities or obtaining respective services from external providers, often actors extremely familiar with respective target industries.

Increased cross-functional cooperation between the finance and legal teams
The receivable management process reveals several synergies between the finance and the legal functions. When optimally unlocked, the company’s debt collection program can be designed into a more efficient, effective and proactive process. Active sharing of information by the finance team about early stage “receivable age brackets” of overdue payments and including the litigation team with developing appropriate and customised dept collection strategies will enable the organisation to proactively address potential defaulting risk of certain key customers. The core strength of a legal team’s extensive knowledge and skillset to assess the debtor’s underlying legal transaction provides crucial insights for the finance team to redefine their approach towards defaulting customers.

Creative and flexible collection tools and settlement options
In times of critical market credit risk, experienced in-house litigation teams have the right legal tool set and experience to handle the collection process in a dynamic and creative way. Once furnished with essential intelligence of defaulting customer’s latest operative and financial status, the legal team should be in the position to come up with customised measures and strategies adequate to mitigate and resolve posed collection risk. Thereby, applying provisional measures such as relief by injunction in urgent cases where strong evidence exists (e.g. non-payment of employees and other fixed costs) that defaulting party is about to become bankrupt could be one option. Designing flexible settlement plans with reasonable monthly payments backed up with collaterals such as security cheques exceeding the AED200k threshold, might be another way to maintain strategical important business relationships with entities challenged with sudden tight cash-flows.

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