By Michael Feldwick, Head of UK and Ireland at Tinubu Square, developer of credit risk intelligence
For corporate treasurers, CFO’s and CEO’s of B2B organisations, stablising customer debts is an increasingly important factor in lowering operating costs, generating higher working capital and engendering more confidence in shareholders.
In Europe more than a quarter of business failures are as a result of customer defaults and rates relating to bad debts have risen from on average .6% to 1%, depending on the industry and location. Only last month research from the insolvency trade body R3 showed that in the UK there are now 160,000 businesses that are only paying the interest on their debt, but not the debt itself. This has given rise to what are being termed ‘zombie’ companies, and includes organisations that are so over-exposed that they are never likely to pay their debts – technically insolvent.
This makes protecting customer receivables every B2B company’s greatest priority —and biggest risk. And it puts credit risk management at the top of the strategic agenda for CFOs and CEOs of small and large businesses, whether or not these businesses carry credit insurance.
The key to navigating a safe course is by identifying and analysing risk wherever and whenever it’s possible to do so. Managers should be seeking proactive credit risk management, that provides detailed intelligence on the financial health and credit worthiness of all customers or clients —and appropriate tools for assessing their individual and collective impact on the balance sheet.
So the CFO can easily assess the relative security of a debt, he or she needs answers to key questions such as what are our outstanding per risk categories and what is the cover rate of total outstanding customer debts? Being risk-aware will require knowing how secure trade debts are and whether they can be leveraged to guarantee bank credit and reduce borrowing costs.
Single source reporting will not be enough. It can take days or weeks to collect information and make thorough credit assessments manually, by which time, the information is already outdated. An effective risk-aware assessment process takes into account industry risk, country risk and customers’ financial health and credit history—all of this information gathered, integrated and analysed from various sources around the world. If your credit management is not integrated properly throughout the organisation you will be left vulnerable to risk and lacking the real intelligence needed with which to make strategic business decisions.
Companies need to be alert to changes in credit status. Today’s economic climate can impact even customers with a strong credit history and historically good financial health. Every B2B, no matter what their size, needs timely visibility into current or potential customers’ businesses. They need to know, and be able to track, customers’ supply chains, the nature and source of their debts and what factors make them able to pay or likely to default on credit. Visibility into the always current financial health of customers lets companies understand their exposure instantly as “very good risk” “low risk” “average risk” or “high risk.”
For companies looking to expand into new markets the question is what level of risk can be tolerated. As more European based companies look for growth in new, unfamiliar markets in Asia, South America and Russia, risk increases. Companies have to be able to determine the credit risk of potential buyers operating in these areas based on “on the ground” intelligence.
Risk-aware credit intelligence improves corporate performance by providing superior control over customer credit exposures in existing and new markets. Companies secure their trade debts and improve liquidity, working capital, credit management processes and growth position.For these companies, the pay-offs are strategic, operational and financial.
Immediate visibility into the current financial health of customers lets B2B businesses understand their exposure instantly—so if one customer slips from low or average risk to high risk, businesses 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 pursue export markets.
With real-time intelligence about trade debts and improved decision making about credit, enterprises can manage risk according to their risk appetite—for each account and aggregate risk on their entire Accounts Receivable (A/R) portfolios. They are then better able to hold the value of customer debts, sustain cash flow, and improve the accuracy of forecasting. Ultimately, when receivables are strong—fewer days outstanding and fewer customer defaults—they’re worth more to banks and credit insurers.
Bridging the gaps between back-office financial (ERP, A/R) and front-line CRM systems ensures that everyone involved with customer acquisition and management works with the same information—from lead generation, to closing a sale, to follow up throughout the entire order-to-cash 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 customers’ orders, payments and credit status.
According to a 2011 report by Aberdeen Group, companies that have implemented just a common repository for customer risk information lowered past due A/R by 10% and are 31% less likely to cite customer non-payment as a top pressure affecting their business. Companies that regularly score their A/R portfolio, experience 28% lower past due trade debts than companies not scoring their entire A/R portfolio.
With strategic risk awareness, marketing can purge high-risk companies from campaign lists—saving money on campaigns, eliminating follow-up to responses from high-risk companies, and earning a higher ROI from marketing initiatives.
Sales can focus their 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 higher assets(revenue and low-risk accounts receivable), but possibly a lower debit (cost of sales) because sales teams will be tangibly more productive.
Michael Feldwick is Head of UK and Ireland at Tinubu Square, the developer of credit risk intelligence solutions.He has spent over 25 years as a highly successful credit management specialist with experience in domestic, export and international credit insurance within a commercial and risk environment. Prior to Tinubu Square, Feldwick was Head of Foreign Risk Underwriting at Euler Hermes UK plc.