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How tight credit risk processes deliver paybacks all round
06 October 2023
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10 minute read
Business accountants have an important role to play in helping guide their clients to manage credit risk. Having a best-practice credit risk management process in place can help your clients reduce risk exposure, strengthen their ledger, improve their collections rate and, ultimately, increase revenue.
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Credit risk is usually assessed by analysing a borrower’s creditworthiness, or their ability and willingness to repay their debt obligations. It is determined by evaluating the borrower’s credit history, income, debt-to-income ratio, assets and collateral. Given the range of data sources now available, compiling and assessing this information can be incredibly straightforward if your clients use the right data provider.
An ideal credit risk management process
An effective, well-designed credit risk management process helps a business improve productivity, deliver an enhanced customer experience, increase employee satisfaction, support compliance with government regulations, protect its assets and better secure cash flow.
The process can be based on the steps a customer needs to take to transact with a business – from the information they must provide to become a customer of that business, to the actions the business takes to collect payment for goods or services rendered.
The journey can be grouped into three different customer relationship stages: onboarding, account management and receivables.
Onboarding
Onboarding a customer starts with a thorough risk assessment, where a business gathers all required decision-making information such as credit assessments, director details and registration and banking details. The use of data is instrumental in this stage. Credit managers can leverage trade payment data to assess the potential customer’s payment trends and compare their behaviour with the industry average. Delayed invoice payments, reductions in business-to-business transaction volumes and payment defaults indicate high levels of credit risk and are early warning signs for business failure, so monitoring for any of these signs is essential at this stage of the process.
The data helps track and predict future payment defaults – invaluable information to know before your client agrees to work with a company. Online credit checks speed up the approval process dramatically – from days or weeks to just minutes.
Account management
Once customers are onboarded, businesses must closely monitor them to ensure they remain capable of paying invoices on time and don’t pose a credit risk. The health and solvency of a business can change quickly and are not always obvious to trading partners. Key suppliers may continue to be paid on time while invoices to other suppliers go unpaid.
Automating this process can pay dividends, like setting real-time alerts so suppliers are made aware in real-time when changes occur to their customers such as payment defaults to other suppliers, non-payment of tax debts or adverse director changes.
This allows suppliers to amend credit policies for customers deemed high risk, perhaps putting them on COD, for example.
Accounts receivable
The final step, accounts receivable, should be straightforward: job completed, invoice sent and then payment received. Many businesses struggle to keep on top of it, but strong credit risk management can speed this up and ensure your client is collecting payment in a timelier manner through automation. The business can also prioritise debtors based on real-time debtor risk and trade payment insights.
For any business, the fewer manual accounts receivable processes it does, the more efficient its credit risk management process. Automation can help remove the juggle between systems with all financial information, customer contact information and communications history in one place.
Brendan Sherry is a senior consultant at CreditorWatch.
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