2020 proved particularly challenging for countries in Eastern Europe. Businesses across the region surveyed in an annual Payment Practices Barometer by Atradius found late payments surged by 88%, and 59% of businesses face significant revenue shortfalls.
Businesses reported they had written off 6% of the total value of invoices owed to them. This represents a big jump from last year, when only 1% of total receivables were written off. An upsurge in late payments also led to a 103-day average days sales outstanding in Eastern Europe.
Overall, businesses in Eastern Europe found that the protection of trade receivables from the risk of customer payment default was vital. Nearly three in five businesses reported using credit insurance in the past year. A significant percentage of respondents said they would employ credit insurance in 2021, sending the clear message that businesses understand the importance of a strategic approach to credit management.
Despite the unprecedented challenges of this year, businesses in Eastern Europe are expecting quicker domestic rebounds, while the global economy is likely to face a slower recovery. As the pandemic continues into the New Year, businesses in Eastern Europe are feeling battered, but hopeful.
Businesses react to an unstable global economy
Most of the businesses polled in Eastern Europe cited falling demand as the greatest challenge posed to businesses in 2021. This was seen most often in the Czech Republic by 58% of respondents.
A significantly high percentage of businesses in Eastern Europe have taken action to manage liquidity issues caused by pandemic downturn, including payment withholding and staff layoffs to protect future vulnerability. In past surveys, businesses across Eastern Europe mentioned their primary method for managing liquidity was to withhold or slow down payment to suppliers. Post-lockdown, we have seen a major spike in the number of businesses that reported using this method, exhibiting an increase from 27% to 43%. While this method is cost effective in the short run to manage cash flow, it can lead to serious consequences for supplier liquidity and the amount of time spent chasing overdue invoices.
In last years’ survey, the second-most favored method for managing the speed of payments was seeking additional financing from external parties to protect the future viability of business. This year, the second most-often reported measures were hiring freezes and lay-offs. There was an average of 32% of respondents in each case, up from 22% last year. The social implications of this cannot be underestimated. A rapid rise in unemployment will inevitably impact the depth of economic contraction faced by individual countries. Demand will fall as workers lose their income, resulting in increased economic uncertainty.
Many businesses (49% of respondents) in Eastern Europe began offering longer terms. Payment terms stand at a 41-day average and clearly show that businesses in Eastern Europe have been attempting to support customers’ liquidity constraints with less restrictive trade credit practices.
Looking forward to 2021
In the first half of 2021, a majority of respondents believe domestic economies are more likely to grow than the global economy. While 51% expect domestic economies to grow, 43% of respondents are anticipating a deterioration of the global economy.
The pandemic has wreaked havoc on emerging and developed economies alike. Businesses in Bulgaria and Slovakia experienced devastating blows to revenue and cash flow and reported the greatest levels of negative impact out of all the countries surveyed. In contrast, Turkey reported the lowest negative impacts on revenue, cash flow and sales volume in the region.
The industry sectors facing the most severe challenges going into 2021 are those forced into closure during lockdowns. Businesses in the tourism, hospitality and non-essential service industries are severely battered and facing an uncertain year ahead depending on how the pandemic evolves.
As the businesses surveyed look forward to next year, many will continue or begin to rely on credit insurance to outsource credit risk management to external professionals during these months of increased business volatility. Outsourced credit management is a powerful tool to help businesses securely grow their business and trade safely with more profits while mitigating the risk of customer payment default.
Many businesses in this region cannot afford a large payment default or outstanding invoice. Equipping themselves with credit insurance to free up capital and secure assets has never been more vital to ensure prosperous outcomes in 2021.