Trade credit insurance is important, indeed necessary to most organisations to ensure they are protected against the current, high risk of bad debts. But, despite trade credit insurance capacity remaining buoyant, research suggests that terms have hardened for firms with poor loss histories since the fourth quarter of 2012, and there is more reluctance to offer insurance if a business appears to be an unattractive risk.
There are ways, however, to make your business more appealing to trade credit insurers, and at the same time make shareholders more comfortable that tighter governance is being applied to credit management and risk mitigation. Where there was a gap in trade credit management processes inside companies and a lack of solutions designed specifically to help, there are now options that will improve operational agility and free up revenue and working capital.
Essentially, companies need to identify and analyse risk wherever and whenever possible. This means having detailed intelligence on the financial health and credit worthiness of customers and the right tools to assess their potential impact on the balance sheet. Most financial directors and CFO’s want to know what the outstanding risks are, what the total customer debt amounts to, and which accounts represent the biggest risk in terms of recovering the debt. They want to be able to assess the security of the debts and make accurate credit assessments based on real-time data.
Immediate visibility into the current financial health of customers lets businesses understand their exposure instantly, so if one customer slips from low or average risk to high risk, the business can adjust credit limits until the customer’s financial position improves. And when companies can accurately qualify, assess and monitor the credit worthiness of customers and prospects, they are able to grow safely and represent a better prospect for trade credit insurers.
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Real time intelligence that leads to improved decision making about credit means that companies can manage risk according to their own appetite. They are then better able to hold the value of customer debts, sustain cash flow and improve the accuracy of forecasting. Ultimately, when the likelihood of recovering debts is strong—fewer days outstanding and fewer customer defaults—their value to a credit insurer is greater.
Bridging the gaps between back-office financial and front-line CRM systems ensures that everyone involved with customer management works with the same information—from lead generation, to closing a sale, to follow up throughout the entire order-to-payment cycle.
With an integrated credit risk management process in place, businesses can control and enforce credit authority levels, customers’ credit-worthiness and credit limits, workflows for credit approvals and ongoing monitoring of customer orders, payments and credit status. The increased awareness also means that high-risk customers can be purged from prospect lists and the sales department can focus its efforts on the strongest, high-value opportunities that will actually deliver fast, full revenue recognition. This will show up on the company’s balance sheet not only as greater assets but possibly a lower debit (cost of sales) because sales teams will be tangibly more productive and the company will be focused on maximizing profitable sales.
To ensure that these processes can be expediently implemented, businesses need to look for proven credit risk management software solutions, such as our own Tinubu Risk Management Center, which provide real time risk intelligence reporting, and also offer companies an accurate picture of their own customers’ financial health, providing them with visibility across the business. The aim should be to reduce days-sales-outstanding by 25%, lower the cost of risk management and claims by 50%, make financial governance more effective, and ultimately make the business a more attractive insurance prospect.
By Michael Feldwick, Head of UK and Northern Ireland, Tinubu Square