Average payment arrears in Europe now stand at 53 days. The best payers can be found in the Scandinavian countries. Portugal is at the other end of the scale. The public sector is the worst payer.

Throughout Europe, the term allowed for payment is becoming shorter, while arrears in payments are becoming longer. The average term that debts remain unpaid is lengthening. Yet deferring payment by just seven days can increase a company's financing requirement by 50%.

Say a company's suppliers allow it a 60-day extension of payment of its debts. But the company's customers pay after 67 days, a difference of seven days. If the customers don't pay for another seven days and suppliers continue to be paid after 60 days, it confronts the company with a financing requirement of 14 days instead of the original seven.

Insolvency and risk management

One quarter of unpaid bills are never collected. Bankruptcies are the biggest cause (also see sidebar article). The insolvency of a foreign payer is sometimes difficult to detect. National laws concerning bankruptcies, compositions and legal settlements are anything but harmonised.

So a reliable partner who can manage accounts receivable, using an international network and local expertise, will provide greater security.

Another consideration is that Basel II has made banks more alert to risks. When providing credit to a company, they are attaching increasing importance to proper risk management by the company.

The importance of companies managing their accounts receivable cannot be underestimated. Internationally, the Days Sales Outstanding (DSO) standard is increasingly being adopted. This is a ratio for accounts receivable to annual sales. DSO is a yardstick for how many days it takes to convert sales into cash. The decisive DSO factor is not just the collectable amounts, but also the way a company manages its accounts receivable.

Real-life example of managing international accounts receivable

A producer/trader is growing by 25-30% year-on-year. To grow quickly and above all safely, the company decided to outsource as many activities as possible. It handles its own product development, procurement and sales, but contracts out everything else. This company has completely outsourced the management of its international accounts receivable to Fortis Commercial Finance.

First and foremost, the company wants to optimise its working capital. So one of its objectives is to reduce the payment term through smart management of its accounts receivables. What the company definitely does not want is to finance invoices through a classical factoring solution.

The wide range of services Fortis Commercial Finance offers includes private label credit insurance (in association with a major credit insurer) for which FCF acts as an agent.

For this company, Fortis Commercial Finance produced a bespoke solution for managing their accounts receivable. The company sends out its invoices as normal on its letterhead paper. A copy of every invoice goes to Fortis Commercial Finance that is fully responsible for chasing up and collecting the amount owed, including reminders by telephone and letter.

Foreign debtors pay the amounts owed into a foreign bank account held by Fortis Commercial Finance. The amounts are repatriated every day to the company's own bank.

If a payment has still not been received after the agreed 90 days from the due date, Fortis Commercial Finance informs the company. If the invoice is not covered by credit insurance, the company starts its own debt collection procedure. In the other cases, the company files a claim with the credit insurer through Fortis Commercial Finance.

Fortis Commercial Finance

Fortis Commercial Finance (FCF) is part of the Fortis Group. FCF ranks fifth in Europe and has offices in Belgium, Denmark, Germany, France, the United Kingdom, Italy, Luxembourg, the Netherlands, Spain, Turkey and Sweden.

FCF is a member of Factors Chain International (FCI), the world's largest network of commercial finance companies. FCI has 166 members in 55 countries who act as each other's correspondents in chasing up foreign debtors.