The pressure businesses are facing from inflation is increasingly reflected in three main areas:
- higher operating costs
- pressure on profit margins
- challenges associated with maintaining pricing
At a basic level, input costs have risen across many sectors. Inflation and elevated oil prices have contributed to higher materials, energy, and transportation costs, affecting a wide range of industries. For manufacturers, key commodities have generally become more expensive, while many retailers are managing higher shipping and distribution expenses.
There are instances in which companies cannot pass these higher costs directly on to customers. The extent to which prices can be increased without affecting demand often depends on market position and price sensitivity. This creates a trade-off: raising prices to help protect margins or holding prices steady to retain customers while potentially putting pressure on profitability. At the same time, higher costs can also affect cash flow. Some businesses, particularly smaller firms, may require additional working capital, carry higher inventory costs, or make greater use of credit facilities.
Cost pressures, shrinkflation and the evolving inflationary environment
One response that has attracted attention is what is sometimes referred to as “shrinkflation,” where product sizes are reduced while prices remain unchanged. A typical example might be a packaged food item that contains a smaller quantity but is sold at the same price point. This approach is one way some businesses are seeking to manage cost pressures without implementing explicit price increases.
“In some respects, this environment represents a shift from pre-pandemic conditions, particularly over the medium term. Inflation has remained elevated in many markets since the pandemic, and price levels in many economies have not returned to earlier norms. In response, central banks, including the US Federal Reserve, have tightened monetary policy, contributing to a higher interest rate environment,” says Bill Weiss, Industry Practice Lead at Moody’s. “Oil price volatility, influenced in part by geopolitical developments such as the Russia–Ukraine war and, more recently, the US-Iran conflict, has added to cost pressures. Costs also tend to rise more quickly than they fall, which can extend their impact on businesses.”
Looking ahead, some market participants expect these dynamics to persist in the medium term, although longer-term outcomes will continue to be shaped by factors such as new geopolitical developments, technological change, and the evolving role of AI.
Re-examining trade credit policies in a higher risk environment
Against this backdrop, companies may be re-examining how they manage trade credit. Historically, credit limits have often been set based on expected customer demand or past purchasing behavior. Increasingly, however, organizations are basing credit decisions on assessments of a customer’s financial strength rather than anticipated usage alone. This has been accompanied by tighter credit policies in many organizations. Payment terms may be shortened, for example, moving from net 60 days to net 45 days, alongside requests for additional collateral and more frequent reviews of customer creditworthiness. Where reviews may have previously been conducted annually, some companies are reviewing accounts on a semiannual or quarterly basis. There is also in some cases closer monitoring of payment behavior, with potentially reduced tolerance for overdue balances.
Third party data and analytics to support credit risk management
Another notable development has been increased use of third-party data and analytics to monitor customer portfolios. Businesses are increasingly making use of external information to help assess whether existing credit limits remain appropriate. This has become more relevant in an environment where costs are rising, but customer demand is not necessarily growing at the same pace, which may require more active credit risk management without a corresponding increase in revenue.
For smaller businesses, these challenges can be particularly acute. Larger organizations may have greater capacity to absorb margin pressure, whereas smaller firms may face more pronounced impacts if they rely heavily on credit to manage cash flow. Understanding working capital requirements and maintaining access to funding can therefore play an important role.
Improving collection efficiency and strengthening customer insight
Some businesses may be seeking to develop greater resilience by improving collection efficiency, for example, using data to help identify customers more likely to pay promptly and prioritizing collection efforts accordingly, as well as introducing automation into parts of the receivables process. Lower risk accounts may be managed through automated reminders, while higher risk relationships may require more direct engagement and negotiated payment arrangements. At the center of these types of decisions is often the objective of developing a more complete view of the customer.
Decisions around pricing, credit extension, and payment terms are often informed by how well a business understands the financial position and behavior of its counterparties. From a risk management perspective, there is growing use of scenario analysis and stress testing. Inflation and oil price volatility has contributed to increased uncertainty in many markets, which can make forecasting more complex. “To address areas of uncertainty, many organizations are modeling a range of macroeconomic scenarios, such as changes in interest rates, economic slowdowns, or geopolitical shocks. This might involve establishing a baseline scenario and assessing how outcomes may vary under alternative conditions,” says Weiss.
Other organizations may be developing customized scenarios aligned to their specific risk exposures, drawing on historical data and a broad set of economic indicators. In addition to traditional economic risks, there is potential consideration of factors such as sustainability-related risks and considerations, although these may be less central in day-to-day credit decisions.
Where Moody’s solutions may help
Tools such as Moody’s EDFX platform are designed to support this process by helping teams to identify potential early indicators of changes in credit quality. These indicators may draw on multiple data sources. For example, AI-supported analysis of global news can be used to help assess trends in how companies are being discussed across positive, neutral, or negative contexts, supporting more consistent monitoring alongside human review. Peer analysis can also provide useful context: movements in a company’s probability of default relative to industry peers may highlight areas that warrant closer attention.
| Case study vignette: A regional wholesaler tightens credit reviews* |
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A regional building-materials wholesaler operating across the US saw supplier costs rise while several customers began paying later than usual. Rather than applying across-the-board term changes, the firm refreshed its trade credit approach to focus reviews where exposure appeared to be shifting. The firm’s credit team introduced a simple segmentation framework that combined internal account history with external indicators and portfolio monitoring processes. Accounts showing signs of slowing payment patterns were in some cases moved to more frequent review, while lower risk customers continued under standard terms with automated reminders. For higher risk relationships, the team began earlier outreach to confirm purchase plans and agree payment expectations, escalating where additional action was deemed appropriate. This approach helped the business with prioritizing attention toward accounts most likely to require intervention, while aiming to preserve customer relationships in cases where risk indicators remained stable. |
Using payment behavior data to inform credit limit decisions
Payment behavior can provide another valuable source of insight. Aggregated payment data sourced from Moody’s contributory database consisting of thousands of trade data contributors can be used to help highlight changes in how businesses pay their suppliers. Shifts such as slower payment patterns or changes in spending behavior can serve as potential early indicators of financial pressure, particularly for privately held companies, which may publish limited financial information. This can be especially relevant in regions such as North America, where private companies are not required to disclose their financial statements as they are in other regions.
When setting credit limits, a structured, data-informed approach may also be beneficial. Rather than relying primarily on intuition or demand forecasts, credit limits may be aligned to a company’s profitability and capacity to absorb potential losses, including consideration of its cost of capital. This may result in a range of recommended approaches, from more conservative to more balanced or growth-oriented, so organizations may be better positioned to select a risk posture that aligns with their broader strategy.
Closing thoughts
Overall, the current macroeconomic and geopolitical environment is prompting many businesses to take a deliberate and data-driven approach to decision-making. Balancing margin protection with customer relationships has become more complex, and effective trade credit management may increasingly depend on the ability to monitor risk, interpret emerging indicators, and respond in a measured and timely way.
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For more information about Moody’s solutions for trade credit and risk management, please get in touch with the team at any time. We would love to hear from you.
*This anonymized case study is for illustrative purposes.
*Disclaimer: This content is for informational purposes only and does not constitute legal, financial, compliance or other professional advice. Please consult with a qualified professional for specific legal, financial, compliance, or other professional advice. For more terms and conditions pertaining to Moody’s products and services, refer to the https://www.moodys.com/web/en/us/legal/global-disclaimer.html on Moody’s website.
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