6577 EULER PLA COUVE sans rabat 26/10/06 14:27 Page 2 ......to grow in a profitable way and avoid...

An independent research study of 2,000businesses in 10 European economies

Credit insurance supports companies’profitable growth

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Background. During the first semester of 2006, the CreditManagement Research Centre based at the University of Leeds Business School, in the United Kingdom, wascommissioned by Euler Hermes to carry out a study onCredit Management Practice in ten European economies.

A total of 2,000 companies were surveyed in the 10 following economies: Belgium, France, Germany,Hungary, Italy, the Netherlands, Poland, Portugal, Spain, and the United Kingdom. The study methodologyemployed a number of fieldwork techniques including a postal survey combined with follow-up telephoneinterviews.

The study panel has been analysed by: Size by number of employees, Size by turnover, Breakdown of survey panel by industrial sector and Breakdown by specific activity.

Sample characteristics

Methodology

The study aims to examine the importance of trade credit, variations in credit policies, credit managementpractices and the impact of credit insurance on corporate performance. The research focuses on the keydifferences between credit insured and non credit insured companies and compares the way companies invarious markets manage their credit function.

Objectives

Agriculture, hunting & forestry

Business/financial services

Construction

Energy and water

Hotels/recreation

Manufacturing

Repairs (vehicles/household goods)

Retail distribution

Transport/communication

Wholesale distribution

Breakdown of survey panel by industry

Size by number of employees

Number of employees

Breakdown of survey panel by manufacturing

Under 10(Micro)

10 to 49(Small)

50 to 249(Medium)

250 +(Large)

% offirms 0

10

20

30

40

50

0

10

20

30

40

50

Size by turnover

Turnover level - € millions

‹ 1 1-2.4 2.5-4.9 5-9.9 10-19.9 20-49.9 › 50

% of firms

0 10 20 30 40

Food, beverages, tobacco

Textiles and textile products, upholstery

Paper and paper products, publishing, printing

Chemicals, plastics, petroleum

Non metallic products

Metals and fabricated metal products

Machinery and equipment

Electrical and optical equipment

Transport equipment

% of firms

0 10 20 30 40

% offirms


Editorial

More than 80% of daily business-to-business transactions are on credit terms. This is the most important form of short-term financing within the corporate sector.Trade debts are one of the main assets on most corporate balance sheets. They canrepresent up to 35% of total assets. Credit management is therefore crucial for companies and can be an important strategic or competitive tool for capturing newbusiness. Better credit terms improve supplier-customer relationships and signalfinancial health and “reputation”. Granting a payment delay to customers can causecash flow or financing difficulties for many firms, especially for small ones.

Credit insurance improves the profitability of businesses and therefore helps them to grow in a profitable way and avoid the risk of insolvency. In a project withProfessor Nick Wilson, director of the Credit Management Research Centre, at LeedsUniversity Business School in the UK, we investigated credit management usage in ten major European economies. The results of this study provide evidence tosupport the professionals’ view that customer late payment does affect cash flow.The study shows how companies are aware of it and how they usually treat this issue.Among all the credit management measures the study shows that credit insurancehelps to improve banking relationships and access to finance. With credit insurance,companies protect both their current and future cash flow and net profits. The management of credit insured companies can then concentrate on their coreactivities, e.g. the development of production, commercial operations, new markets...

We are proud to present you the detailed results of this first European researchstudy on credit management usage. We trust you will find them instructive and their insight valuable.

Clemens von Weichs,CEO Euler Hermes

“Credit insurance improvesoverall credit managementpractice and corporate value”

Key findings The Credit Insurance impact• Operational stability through supplier relationships• Improved banking relationships and access to finance • Increased commercial dynamism from enhanced customer relationships• Excellent information on companies’ risk through the credit reference information provided• Comprehensive protection against the risk of insolvency

Credit insurance improves the quality of companies’ bottom line

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The vast majority of business to business transactions across Europe are undertaken on a trade credit (open account) basis. Consequently businesses have to devote resources tomanaging credit relationships and the resultant credit risk. Data analysis includes typicalcredit periods and terms granted; credit policies; the collection and recovery cycle; riskassessment and management; the use of third parties, credit services and outsourcing. We start by examining the extent and causes of payment delays.

Default and late payment: a real challenge for company directors

1

A widespread threat among all countriesOn most balance sheets trade debtors represent up to 30-35% of total assets, on average,for all companies. Of the companies surveyed, 83% sell across all countries between 81-100% of their goods and services on trade credit. Germany, 94%, Poland, 92%, andFrance with 86% have the highest proportion of countries within this 81-100% bracket. The Netherlands holds the highest percentage of companies (27%) whose overall sales ontrade credit are between 0-20% followed by Portugal with 24%.

What percentage of your overall sales are on trade credit terms?(Percentage response)

0-20% 21-40% 41-60% 61-80% 81-100%

All countries 12 3 1 1 83

Belgium (BE) 15 3 0 0 82

France (FR) 10 2 1 1 86

Germany (GE) 2 1 2 1 94

Netherlands (NL) 27 3 0 1 69

Hungary (HU) 9 2 1 0 88

Italy (IT) 13 2 0 0 85

Spain (SP) 10 3 2 0 85

Poland (PL) 6 1 0 1 92

Portugal (PT) 24 9 5 0 62

United Kingdom (UK) 13 1 1 1 84

Question ?

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76% of all companies’ cash flow has been affectedby customer late payment 98% of all companies experience late payment by their customers. A third of them think itis an ongoing problem.

Has your cash flow been affected by customer late payment?(Percentage response)

Question ?

Never Always

1 2 3 4 5


Belgium (BE) 28 24 30 17 1

France (FR) 19 21 34 17 9

Germany (GE) 48 30 12 8 2


Hungary (HU) 46 31 15 6 2

Italy (IT) 20 31 31 6 12

Spain (SP) 31 34 24 6 5

Poland (PL) 10 36 45 8 1

Portugal (PT) 11 31 30 25 3


Why do customers pay late?The main reasons why companies feel that their customers pay late are due toCollection Department Inefficiencies (the highest percentage of responses was given by Italian firms- 22%); Poor Risk/Credit Assessment (Poland 36% vs. Belgium 9%); and Inaccurate Invoicing (The Netherlands holds the highest percentage, 30%, andPortugal the lowest 2%). Poor After Sales Service seems to be the least likely reasonwhy customers pay late, with only 7% of the sample identifying this as a likely cause of late payment.

In Germany and the Netherlands, almost 80% of companies surveyed claim that their cash flow is hardly ever affected by late paying customers, with only 20% claimingthat cash flow has “sometimes” been affected in this way. Italian companies (12%) are the most likely to “always” have their cash flow affected by late paying customers. The same issue would not appear to be as frequent a problem in Belgium, Germany,Hungary and Poland.

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What is the average DSO and payment beyond due date, in days?Question ?

Ensure payment on delivery to improve liquidity Among all the methods which can be used by companies to protect their cash flow andprovide enough liquidity for the business to operate, most companies delay their own payment (42%) and offer discount to suppliers for prompt payment (32%). This method is particularly popular in Poland with 65% of companies using it. Companies use tradedebtors to secure borrowing (14%) and factoring (12%) the least to improve their cash flow and liquidity.

What methods do you use to improve your cashflow position? (Percentage response)

Question ?

Default and late payment: a real challenge for company directors1The risk of trade debtThe average “DSO*” is 45 days. In terms of “Payment Beyond Due Date”, the average is 15 days and most firms in participating countries do not have a figure beyond 20 daysapart from Spain (23), Germany (21) and Portugal (21).

0

20

40

60

80

100

% ofFirms

ALL BE NL HU IT SP PL PT UK

■ Yes ■ NoGEFR ALL BE NL HU IT SP PL PT UKGEFR

Delay own payment to suppliers

0

20

40

60

80

100

% ofFirms

■ Yes ■ No

Offer discount for prompt payment

0

20

40

60

80

100

N° ofdays


■ Days sales outstanding ■ Payment beyond due date

GEFR

The average accounts which arereported to be paid on time acrossthe sample are 71% for salesaccounts** and 67% of customeraccounts***. Conversely, this meansthat 29% of sales accounts and33% of customer accounts are paidafter the due date.

*DSO: days sales outstanding.** Sales account: whole amount added. *** Customer account: number of customers.

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60% of the overall sample claim that Trading Relationships are the most important factor that influences their credit policies. This relates to important aspects such as customer bases, order frequency, geography, repeat purchase etc. Competitive Positionand Availability of Finance also influence the trade credit policy of the majority of firms.Parent Company Policy least determines most firms’credit policy.

2How companies face debt challenges

Written policy: communication leads to greater efficiencyThe existence of a well-documented written credit policy helps to place the managementof credit in the context of the firm’s overall mission and objectives. 75% of companiesagree terms in writing before a sale.

42% of companies have a written credit policy

It is most likely to be inplace in the Netherlands(70%), Belgium (63%)and Germany (60%). In contrast, companies inmarkets such as Hungary(12%), Poland (28%) andPortugal (27%) are leastlikely to hold a writtencredit policy which suggestsa less formal approach tocredit management practicein these countries.

0

20

40

60

80

% ofFirms


■ Yes ■ NoGEFR

75% of the entire research sample agree written terms prior to salesCompanies that give preference to agreeing payment terms prior to sales in writing include Germany (86%), Belgium (81%), the UK (80%) and Hungary (73%). Respondentsfrom Spain (50%), Portugal (34%) and the UK (30%) indicate that they agree terms prior to sales verbally. A large proportion of French (39%), Spanish (33%) and Hungarian (27%)companies agree to payment terms after sales (by invoice). The majority of firms, in all markets, display their credit terms on invoices. Significantly, fewer companies displayterms on statements.

Do you have a written credit policy? Question ?

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Managing DSO as the most relevant sign of management efficiency

In your company credit control and collection performance is primarily measured by: (Percentage indicating a positive response)

Question ?

69% of respondents mention managing debtor days outstanding as the most popularmeasurement of a company’s credit control and collection performance. Particularly withinFrance and Portugal (81%). Reduced bad debt write off is the least popular measurementin the majority of countries surveyed (20%): only 9% of respondents in the Netherlandsand 8% in Spain view this as a very important measurement of departmental performance.

Managing Achieving cash Maintaining bad Reduced bad debtor days (DSO) collection targets debt/sales ratios debt write off

All countries 69 36 54 20

Belgium (BE) 43 60 27 13

France (FR) 81 14 74 29

Germany (GE) 47 40 67 33

Netherlands (NL) 47 47 50 9

Hungary (HU) 41 29 57 25

Italy (IT) 54 17 53 20

Spain (SP) 75 25 68 8

Poland (PL) 73 64 55 27

Portugal (PT) 81 32 47 24

United Kingdom (UK) 80 37 51 15

Outsourcing credit managementUsing third parties to undertake credit management activities is a strategic issue that willhave a bearing on overall performance. Risk management is the most likely activity to beoutsourced by companies, with almost two thirds (64%) using external resources in this area.

Do you manage your credit function internally and what external resources, if any, are employed by the business? (Percentage indicating a positive response)

% Managing % Outsourcing % Outsourcing % Outsourcing % Outsourcing credit internally risk assessment collection legal recovery


Belgium (BE) 87 46 58 40 46

France (FR) 78 46 36 73 73

Germany (GE) 82 71 39 13 21


Hungary (HU) 80 46 50 33 32

Italy (IT) 94 90 97 68 68

Spain (SP) 85 57 86 57 57

Poland (PL) 75 68 40 50 50

Portugal (PT) 97 96 92 89 94


Question ?

How companies face debt challenges26577_EULER_PLA_V6 26/10/06 14:22

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90% of companies in all countries manage their credit activities internally. The UK (98%), Portugaland the Netherlands (both with 97%) hold the highest percentage overall. Germany holds thehighest percentage of firms with a separate credit department. In terms of outsourcing for riskassessment, companies from Italy, Hungary, Portugal and Poland are most likely to do so. Companiesfrom Hungary, Portugal and Germany are the most likely to outsource legal and recovery work.

When their in-house collection efforts fail, 83% of companies use external agents. 57% ofcompanies using those third parties do so for both their domestic and export collection activities.Only 6% of respondents use third parties solely for export collections which is most likely tobe the case for Italian firms (15%) and Portuguese (14%). Firms from Spain (57%) and Hungary(58%) are the most likely to use third parties for their domestic collection activities only.

Companies using third parties for collection?Question ?

Over 80% of companies outsource debt collection

0

20

40

60

80

100

% ofFirms


■ Domestic ■ Export ■ Domestic & export GEFR

For 55% of companies, legal action is the most common debt collection method

What was the percentage of companies who used collection agents last year? (Percentage response)

80% of companies have used collection agents within the last year, although only one third of Spanish firms claim tohave done so. Only 25% of Spanish firms were satisfied with the perform-ance of their collectionagents, compared to anoverall average for thestudy’s population of 66%.Germany has the highestlevels of satisfaction withthe collection agents beingused (88%), followed byItaly (75%).

All countries 80 1 66

Belgium (BE) 73 1 55

France (FR) 81 1 60

Germany (GE) 84 1 88

Netherlands (NL) 86 1 65

Hungary (HU) 55 1 50

Italy (IT) 91 2 75

Spain (SP) 33 1 25

Poland (PL) 89 2 61

Portugal (PT) 75 1 60

United Kingdom (UK) 74 1 66

% Using agents Average number % Satisfied with in last year of agents used collection agents

Question ?

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How companies face debt challenges2Why do companies choose not to use debt collection agents’ services?Among all the reasons given as to why companies choose not to use the services of debt collection agents, 89% of companies mention using their In House Methods first. Belgium(96%), Portugal (96%) and Italy (91%) hold the highest percentage. All countries also seem to fear the possible negative impact on customer relationships of using collection agents (75%).Companies in Poland (97%) and Germany (93%) being especially wary of the impact outsourcing to agents may have on their customers. The reasons with the least influence are quality (48%) and cost (47%) of the service provided by agents.

COMPANIES ATTITUDE TOWARDS CREDIT INSURANCE

Why are companies credit insured?Question ?1 Peace of mind 77%2 Protection of cash flow 71%3 Need to improve knowledge about the customer base 64%

Why are companies not credit insured?Question ?1 Cost 74%2 Cover not appropriate enough 59%3 Not simple enough 54%

69% of companies would withhold supplies from slow paying accounts

As a reaction to paymentdelay, the vast majority of companies surveyedwould retain suppliesfrom their slow payingclients. Especially in theUK, the highest percentage(81%), and Spain (56%)and Portugal (57%) thelowest.

0

20

40

60

80

% ofFirms


■ Yes ■ NoGEFR

Do you withhold supplies from slow paying accounts?Question ?

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3 The positive impact of creditinsurance

By minimising slow payment from customers, effective credit management can make anoticeable difference to the short-term finances and long-term viability of any business.But there can be significantly more to credit management than collecting cash. The research shows that many credit managers in business (being at the main interfacewith the customer) now find themselves as much aligned to the marketing function as to finance. The study’s findings prove that adopting a credit insurance policy can benefit many aspects of a business including: customer relationship management; supplier relationships and banking as well as financing relationships.

Credit insured companies enjoy suppliers’ attractive conditions From the perspective of current and potential suppliers a credit insured company is a better risk as they are protected against the “knock-on” effects of bad debt. Credit insuredcompanies experience more stable supplier relationships than non insured firms. Theyalso have fewer suppliers which leads to greater efficiencies within the credit department.This ultimately impacts on the efficiency of the business as a whole since the costs offinancing supplies are reduced.

Credit insured firms achieve better credit terms from suppliers Credit insured firms are clearly able to negotiate more flexible payment arrangements with suppliers: 90% of credit insured companies state that suppliers are willing to offer trade credit versus 73% of non insured companies. Credit insured firms have longerpayment periods (50 days versus 41 days), with a greater discount offered for early pay-ment of almost 1% (3.4% vs 2.5%). Average Credit Days (i.e. the length of time it takes respondents to pay their suppliers) is on average 7 days higher for insured companies (54 days vs 47 days). On the contrary,additional time allowed for Payment Beyond the Due Date is on average higher for uninsured firms (16 days vs. 13 days). This means that credit insured firms gain access to longer payment periods which impacts positively on the cash flow position of the company.

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The positive impact of Credit Insurance 3Credit insured firms get better access to finance from banks Credit insured companies tend to have a better and longer relationship with their currentbanks than non insured respondents: an average of 21 years compared to 16 years for noninsured firms. 49% of insured firms have managed to obtain a bank loan in the last year compared to34% of uninsured businesses. The average interest rate obtained by insured firms (3.5%)is lower on average than for non insured (3.95%).

Credit insured companies have more repeat sales than uninsured companies (73% vs 67%).Their strength gives them more flexibility and 54% of credit insured companies view givingcredit as a Customer Relationship Management marketing decision, compared to only 26%of non insured companies.

When your company needs to raise finance which of the following does it use?(Percentage indicating a positive response)

Question ?Credit insured businesses are most likely to use bank overdraft facilities (62% vs 55%), secured long term bank loans (49% vs 34%), factoring(24% vs 5%) and extended trade credit (41% vs 16%).

Bank overdraft facilities 62 55

Secured banks loans (short term) 30 42

Secured bank loans (long term) 49 34

Leasing/hire purchase 47 47

Commercial mortgages 15 15

Commercial paper (bonds) 10 3

Factoring 24 5

Invoice discounting 28 40

Extended trade credit 41 16

Venture capital 7 3

Group funds 34 33

Credit insured

Non insured

Credit insurance enhances Customer Relationship Management

Credit insured firms are more customer focusedFor credit insured companies an increased customer loyalty (i.e. how many customersare tied into a long term relationship with respondents) is the result of the specificattention they pay to improving customer relationships: 84% of credit insured firmsregard it as important, compared with 79% of non insured firms.

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% Of customer base with credit account 51 69 18% more customers with a credit account

% Of customer base with a credit limit 62 77 15% more customers with a credit limit

Number of requests for credit received 656 1416 More requests for credit received per annum

% Requests for credit accepted 72 81 9% more credit requests accepted

Days Sales Outstanding 44.5 46.2 +2 days credit flexibility

% Of sales exported 24 30 6% more sales exported

Average number of countries exported to 3 6 Greater international market penetration

% Likely to introduce new products/services 57 64 More likely to introduce new products and services

Number of customer accounts as a % of sales 0.34 0.83 Higher % of customer accounts to sales

Uninsuredscore

Insuredscore

PotentialImpact

Clearly credit insured companies are more pro-active in terms of flexibility to “gain customers generally” (30% vs 19%), to “beat the competition” (32% vs 27%), to attractlarge customers (56% vs 50%), and respond to a change in customer risk (45% vs 34%).Credit insured companies also appear more responsive to external influences on theirbusiness environment with 30% (vs 18%) of insured companies stating that they wouldvary terms as a direct response to changes in economic conditions.

If you do vary your credit terms how likely are you to do so for the followingreasons? (Percentage response)

Question ?Credit insured 1 2 3 4 5

To attract 17 10 17 40large customers

To gain 20 21 29 26customers generally

To beat 13 27 28 23the competition

To promote a 37 20 28 11new product/service

To gain 31 16 24 24export orders

In response 23 17 30 26to economic conditions

In response to a 37 29 26 6change in interest rates

In response to a 24 10 21 26change in customer risk

To help a customer 21 20 21 33with cashflow problems

To overcome own 37 15 31 12cashflow problems

Not at alllikely

Verylikely

Non insured 1 2 3 4 5

To attract 14 17 19 38large customers

To gain 21 26 34 16customers generally

To beat 21 20 32 23the competition

To promote a 32 24 27 12new product/service

To gain 44 10 28 14export orders

In response 26 21 35 14to economic conditions

In response to a 44 24 25 5change in interest rates

In response to a 21 20 25 23change in customer risk

To help a customer 22 19 29 25with cashflow problems

To overcome own 31 21 27 7 cashflow problems

Not at alllikely

Verylikely

Credit insured companies are ready to adapt credit terms to gain business

12

3

4

5

4

4

2

11

5

14

16

4

9

4

5

4

2

19

5

5

How do you manage your customer relationships? Question ?

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The financial impact of credit insurance

The positive impact of Credit Insurance 3The financial impact of credit insurance is generated through higher levels of repeat business, lower levels of customer queries and disputes, more profitable sales, better DSO and on-time payments, lower levels of bad debt and incidences of fraud and loweroverall average costs of credit management. Credit insured firms also have access to lower costs and better quality credit information and market intelligence. The key performance differences between credit insured and non credit insured companiescan also be converted into a “Euro saving” according to a percentage of sales.

Bad debt as % of sales 0.74 0.38 0.36% of sales saved

Credit operating costs as % of sales 1.94 0.56 1.38% of sales saved

Average credit salary as a % of sales 0.65 0.49 +0.16% of sales saved

Average spend on credit information 0.49 0.25 0.24% of sales saved

Amount of frauds as a % of sales 0.20 0.18 0.02% of sales saved

% Interest rate on bank loans 3.95 3.5 0.5% of the cost of capital saved

Uninsuredscore

Insuredscore

PotentialImpact

A direct financial impact has been calculated based on the percentage savings calculatedfor various measures in the study. In terms of credit operating costs as a percentage ofsales on average 1.38% of a company’s annual turnover could be saved by the existenceof a credit insurance policy. This means that for a company with a turnover of 10 millioneuros this would represent a balance sheet saving of 138,000 euros. By having a policyin place, similar findings can also be seen in terms of bad debt write off as a percentageof sales (0.36%), average credit salaries (0.16%), average spend on credit information(0.24%) and levels of fraud (0.02%). In addition, raising finance through loans is also more likely to be cheaper for credit insured firms with an average of 3.5% forinsured firms versus 3.95% for non insured companies.

Conclusion: Credit insurance reduces the risk of insolvencyPoor management is behind most of corporate insolvencies (according to a study carriedout for Euler Hermes Krediversicherungs-AG, by the University of Mannheim published on September 27, 2006 on German companies). The Credit Management Research Centrestudy shows that there are a number of ways that companies can review the elements ofthe credit management process which make it easier to prevent any unforeseen operationaldifficulties with the company. This in turn helps to ensure a steady cash flow and reducesthe risk of financial difficulty among credit insured companies. Credit insured firms have lesscash tied up in stocks and customer debt as a result of disciplined working capital management.This not only represents a financial saving but means that a firm is less vulnerable toinsolvency through over trading and poor cash management.

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•Australia•Austria•Belgium•Brazil•Canada•China •Czech

Republic•Denmark•Estonia

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Kingdom•United States•Vietnam

For further details, please visit our website www.eulerhermes.com

Euler Hermes helps you to secure your business all over the world


Euler Hermes protects companies of all sizes and industry sectors from the risk of customer default. The leadingcredit insurance group with a global market share of 34.4% and presence in over 45 countries, Euler Hermes offersa range of integrated credit management services covering each phase of the transaction between the policyholderand its customer: protection from customer non-payment, debt collection and loss indemnification. A subsidiaryof AGF and a member of the Allianz group, Euler Hermes has the necessary financial strength to provide long-termsupport to its clients. Euler Hermes is rated AA- by Standard & Poor’s.

1, rue Euler – 75008 Paris – FranceTel.: + 33 1 40 70 50 50 – Fax : + 33 1 40 70 50 17www.eulerhermes.com

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