Four steps to help you manage economic risk factors

A succession of macroeconomic shocks in recent years has forced organizations to reconsider the best approach to de-risking their global trading networks. Here we explore how to manage economic risk in international business, showcasing four ways companies are managing economic risk factors in order to expand their business globally.

Successive black swan events – ranging from the pandemic and Brexit to the Suez Canal blockage and the war in Ukraine – have served to highlight the inherent fragility and economic risk now associated with lean supply chain operating models. Only a few years ago ‘just-in-time’ inventory management seemed to make sound economic sense. But as shipping bottlenecks have put supply chains under pressure, car production lines have been halted by semiconductors shortages, brewing giants have run out of beer bottles, and retailers have found themselves with empty shelves  to cite the impact on just three industries. As a result, many companies globally are now re-evaluating the risk factors associated with lean supply chains.

Our global survey of more than 1,000 business leaders conducted during the pandemic, revealed that more than half (+52%) of firms had learned how to manage economic risk factors by shortening their supply chains, stock piling, and using trade credit insurance.

Investing in new hardware, systems and processes during a volatile trading period may seem like a risky strategy to some. But, in many ways, it is the best way to manage economic and political risk.

This is particularly true when it comes to digital transformation projects. Digitizing the full length of your supply chain, for example, will give you end-to-end visibility and enable your company to respond faster and more effectively to supply chain shocks, while also empowering it to take greater advantage of business export opportunities. The same can be said for investing in internet of things (IoT) sensors and connectivity within a manufacturing process. That can present you an opportunity to closely monitor processes, identify inefficiencies, achieve savings, and create products of a superior quality.

How reliable are your trading partners? Are they financially healthy and capable of fulfilling the contracts they have committed to? Being able to answer critical questions like these and analyze the right financial KPIs will help you trade with confidence, showing you how to manage economic risk factors, and expand your business.

However, with multiple trading partners potentially spread across global markets, achieving the required level of insight in-house may not be possible.

Trade credit insurance can help shield you from customer insolvency risk based on data from our proprietary intelligence network which analyzes daily changes in corporate solvency covering 92% of global GDP. It allows us to carefully map the global trade, economic and credit landscape, to grade businesses’ risk levels and to advise our clients on the safest way to do business.

Financial insight is a key factor in business success. This insight includes carefully tracking company finances, producing regular cash flow forecasts and optimizing it to ensure your organization is on track to achieve its business goals.

Setting an upper threshold on trade credit is an effective way to limit your financial exposure and protect your business against insolvency risk. Common methods of calculating a credit limit include:

•  Fixing a percentage of your client’s net worth (its assets minus its liabilities) – typically around 10%.
• Using your client’s former trade references (which can typically be found on their credit report) and choosing a median value from their credit history.
• Estimating your client’s real needs and not extending credit further.

Another strategy that embodies how to manage economic risk in international business involves ensuring you always have a cash buffer for use in the event of an emergency, such as a payment default by one of your major clients.

Your first step towards how to manage economic risk factors, however, should be to speak to your trade credit insurer, if you have one. At Allianz Trade, we leverage our proprietary risk data to ensure your credit limits are pitched at just the right level – increasing your competitiveness while also minimizing your exposure. We also provide trade credit protection, compensating our customers in the event of bad debt or late payment.