How active are you when it comes to credit risk management?
While the importance of credit risk management is generally well recognised, too often, companies vet customers at the beginning of the sales cycle and then leave it to accounts receivable to deal with payments. As a result, stakeholders within the business don't have the visibility they need when it comes to individual customers as well as the overall state of credit risk.
What is credit risk management
Credit risk management is the process of ensuring that your business' customers, prospects and clients financial health is assessed in order to lower the risks associated with late or non-payments. Managing credit risk is an ongoing process, relying on assessing your customers' business risk profile.
These four credit risk management strategies will help minimise your exposure and boost control over cash flow.
1. Monitor existing customers for changes in credit risk
It’s all well and good investing time in credit checking potential and new customers. Just ensure you maintain a watchful eye over your existing ones.
No matter how reliable they’ve been to date, it only takes a bad couple of months to affect how they manage accounts payable. Is their purchasing behaviour changing? Is it taking them longer to settle invoices? Have you run a third-party credit check recently?
Risk management is a continuous process, and your goal is to gather information that could affect the customer's willingness (and ability) to settle your invoice. Make sure you're extending credit based on up-to-date information, so you don't expose the business unnecessarily.
2. Take a holistic and consistent approach to credit control
Managing credit risk doesn't just sit with the salespeople who close the deal and the accounts team who invoice and chase payment. Every touchpoint in the business needs to be engaged, whether it's account management, customer service or technical support. When you give everyone in your business visibility and ensure they follow processes consistently, you'll start reducing the average time to payment.
This doesn't mean everyone is constantly chasing invoices, but it does mean everyone involved with a customer understands the current position and can engage their contacts if necessary. It's about using all your touchpoints to strengthen relationships and ensure clear communication.
3. Don't forget about your suppliers
It's easy to compartmentalise suppliers and customers from an internal process perspective, and it's a common pitfall.
A key credit risk management technique is to vet your suppliers in the same way you do your customers, so you're aware of any changes that could affect their ability to fulfil your order.
4. Structure payments to minimise exposure
One way to do this is to stagger payments based on milestones achieved (e.g. part up front, part before installation, remainder post-installation).
Offering a supplier finance solution - such as leasing or hire purchase - is another way to do this. In this scenario, your approved supplier takes on the bulk of the risk. You receive full payment as soon as delivery is confirmed, and the customer pays the lessor in instalments over the defined term.
- Constantly monitor your customers' risk profile so you're extending credit based on up-to-date information - and take the same approach for your suppliers
- Engage the entire business in credit control - account managers, salespeople and service should all know the status of the customers they deal with
- Put processes in place and implement them consistently, so your employees and customers are clear