Preventing credit risk: yes, but at what cost?
Risk management within a company helps to control the budget and reduce cash flow volatility. But what about your biggest current assets: customer receivables? A threat can only be countered if it is recognised. When it comes to credit risk, the main danger comes from a customer failing to pay its invoices.
This is the reason why every business should have clear guidelines for managing their credit risks or, better still, a credit management procedure. Its form will vary from one company to another, but should, at the very least, assess the credit-worthiness of customers which have been granted credit and decide whether it is appropriate to give them some flexibility when settling their debts, should they encounter any difficulties.
But how much does it cost to monitor credit risk? What features need to be considered?
- Information gathering: audited accounts, management accounts, solvency ratios from commercial information service providers or directly from the customer itself
- Analysis of gathered information to assess the quality and sustainability of a clients’ business. This implies having the in-house expertise to do so as well as the time… without any guarantee of the ongoing solvency of the customer
- Monitoring of solvency and payment experience over time, crucial in a customer-supplier relationship
- Debt collection: handled entirely internally or partially/completely outsourced. Comparing the success rate of debt collection with the time it takes can be a good measure of the effectiveness of the procedures in place
- Risk management tools and collection: essential in dealing with risks daily, providing a true picture and ensuring good provisional cash management.
Lack of information may influence the financial risks a company decides to take, but this can also hinder sales development. Lack of knowledge about a client can be a good reason to refuse a sale and lose a revenue opportunity despite the buyer’s potential good performance.
Likewise, the net loss to the business if a buyer defaults. To offset a loss of €10,000 with a margin of 10%, an additional € 100,000 of sales must be generated!
There are today effective tools within the market to encourage business development while securing sales-generated cash.
AU Group, specialist in trade receivables, can assist you with your analysis and, in compliance with your development strategy, help you with solutions tailored to your company with proven success… and often at a lower cost!