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30-01-2022 09:00

Nordea’s Overdues Report 2021 – Time to maintain and strengthen liquidity and risk management capabilities

Nordea Overdues Report 2021 reveals that large Nordic companies have displayed an incredible amount of resilience in protecting their risk profile and maintaining solid liquidity management. When the previous report was published in 2020, in the midst of the economic crisis generated by the COVID-19 pandemic, Nordea's working capital experts warned about the consequences of such a financial shock on liquidity and overdue payments. This year's analysis finds if COVID-19 proved to be the wake-up call for liquidity and risk management that companies needed, now is the time to maintain and strengthen newly implemented capabilities.
Two farmers opening barndoors

Henrik Anbelin from Nordea Finance and Vanessa Komorowski from Nordea Trade Solutions, analysed the 2019 and 2020 annual reports of 130 listed Nordic large cap companies in order to study the share and volume of overdue payments of accounts receivables.

Focused on preservation

The COVID-19 pandemic and the associated consequences for the global economy have had a huge impact on companies in the Nordic region. Compared to last year, total sales for the 130 large, publicly traded Nordic companies included in our sample (listed on the Nordic Large-cap lists) reported a contraction of 4% in 2020. Since the pandemic began, businesses had to face volatile financial markets and uncertainty about their current and future revenues and cash flow. With worries about a potential recession growing, many businesses have taken steps to preserve cash, while exploring potential lines of credit and other ways to maintain liquidity.

Following the same sample of companies as last year (companies listed on Nordic Large-cap lists), in 2020 total Gross Trade receivables decreased by almost 5 EURbn*. While in 2020 we worried about the possible deterioration of late payments due to the challenges posed by the pandemic, the data from our report prove that many Nordic companies reacted swiftly and put a lot of effort into protecting liquidity by closely monitoring and protecting its credit risk and late payments.

Key results of the report

  1. For 2020 the foreseeable / perceived risk increased for credit losses, depicted by the general raise of Provisions for bad debts and credit losses in all sectors
  2. Trade receivables and overdues/late payments decreased in absolute terms as a natural cause by the contraction of sales
  3. A more interesting number is that overdues in relation to trade receivables improved with 4 percentage points (in absolute numbers overdues decreased with more than EUR 3bn)
  4. Lower levels of overdues has positively affected the time used to collect payments, measured by Days Sales Outstanding (DSO), which has decreased with 3 days in 2020 compared to 2019.

*Gross Trade Receivables and Overdues figures have been extracted from the public Annual Reports 2020 of the 130 companies included in the sample, according to the IFRS 9 rules. IFRS 9 requires to recognize the impairment of financial assets in the amount of expected credit loss.

Since the pandemic began, businesses had to face volatile financial markets and uncertainty about their current and future revenues and cash flow.

Large companies in the Nordics have on average decreased the time taken to collect the payments from their customers, measured by Days Sales Outstanding (DSO)

The decrease of total Trade Receivables over sales resulted in lower Days Sales Outstanding (DSO). The graph below shows that, on average, Large-cap companies in all Nordic countries have been able to lower the time used to collect payments from their customers. A lower DSO can be achieved by lowering the payment terms in commercial contracts and / or decreasing the level overdues (late payments).

Despite the differences in sector-composition among the Nordic countries, the average Days Sales Outstanding (DSO) are quite similar, with an average of 55 days taken to receive payment for a sale. In each country, the average Days Sales Outstanding decreased in 2020, meaning that, overall, companies have been faster in collecting their payments compared to pre-pandemic levels.

Large-cap companies in all Nordic countries have been able to lower the time used to collect payments from their customers.

Sales and Trade Receivables decreased and level of overdues has improved – meaning that a higher share of receivables are paid on time

By looking at the Receivables and overdue data, it clearly signals that the Nordic companies have focused on liquidity and applied robust credit management practice, in order to optimise cash collection and reducing overdues.

In 2020, 81% of the total Gross Trade Receivables has been collected within the negotiated payment terms, compared to 78% in 2019; with overdue payments falling from 18% of total trade receivables to 14%. In absolute values, this corresponds to more than 3bn EUR paid on time compared to 2019. At the same time, provisions for credit losses were increased by 1 percentage point, reflecting the rise of corporate credit risk triggered by the coronavirus economic crisis.

The breakdown into sectors shows that there are significant differences among industries when it comes to the level of late payments. The range spans indeed from 12% to almost 35%. Overall, as seen in the aggregate results, Overdues over Trade Receivables have decreased during 2020.

However, some sectors seem to face challenges with improving on late payments. For example the Industrial sector, which in comparison reports a high share of overdues did not improve on the level of late payments. Likewise, the Utilities and Consumer Goods sectors display no improvement, where the Utilities sector even display worsening levels over the past years.

The management of collections and late payments of some of the largest Nordic companies has improved, mitigating the impacts of the pandemic.

Provisions for credit losses increased in 2020 –  a signal for increased risks

Pivoting back to provisions for credit losses, all sectors followed a similar trend, with provisions significantly increasing in 2020, with the exception for the Basic Materials and Consumer services industries.

Forecasting expected credit losses in the corona environment has certainly been a challenging task, and impairment of Trade receivables models have been adjusted.

With the introduction of IFRS 9, companies are required to account for what they expect the loss to be. The expected loss is revised until the date the invoice is settled. An outstanding debt may either be definitively irrecoverable, or its recovery may be classified as uncertain, in which case a provision is calculated and posted. Considering the challenges faced in 2020, a large number of receivables has been considered uncertain at the end of the year.

In an economic environment where businesses might have found it hard to service debt, with risk of raising borrowing costs, bankruptcies, and customers defaults, perceived risk has significantly increased, as signalled by the higher provisions reported. However, the management of collections and late payments of some of the largest Nordic companies has improved, mitigating the impacts of the pandemic.

The combination of demand shocks and supply shocks disrupting global value chains is still impacting entire sectors. Therefore, good practices and key learnings should not be forgotten, and they can always be improved further.

About the Nordea Overdues Report 2021

If you are interested in learning more about how to improve your credit and liquidity management and which solutions Nordea has to offer relating to this, please reach out to Henrik Anbelin at  henrik.anbelin [at] nordea.com or Vanessa Komorowski at vanessa.komorowski [at] nordea.com.

Check the list of all companies in the sample to see your company’s or your competitors’ levels for overdues, DSO and provisions: Nordea Overdues Report 2021 Data.

 

Scope: Level of overdues for Nordic companies listed on the Nordic Lage cap lists.

Overdues/ Late payments from customers:

Range: from 1 day and beyond.

Total Gross Overdues:

On Balance sheet included Overdues in Account receivables+ Provisions for Credit losses

Provisions for Credit losses:

For  overdues  deemed  not  to  be  collected  a  company  shall  make Provisions  for Credit  losses  which means that they are not shown as Account receivables in the Balance Sheet but as Provisions for Credit losses. Provisions for credit losses are not  the same as realized credit losses and provisions can be redeemed while actual credit losses will not.

Total Gross Account receivables:

On Balance sheet stated Account receivables+ Provisions for Credit losses

Total Gross Overdues in percentage of total Gross Account receivables:

When calculating Overdues  as  share  of Account receivables, we  use  the Gross  amount  in  both numerator and denominator.

Insights
Cash management
Payments
Reports