Effectively managing credit risk
Credit vetting is a well understood process when new customers are applying to buy on account. For many companies that is as far as it goes. Consider this though: when you have had bad debt experiences in the past, was that with a new customer, or with an existing one? In all likelihood it was the latter. After all, you've just crawled all over your new customers, so it's far more likely to be a customer with whom you've been trading for a number of months/years and for whom there has been a change in circumstances.
The response to controlling this risk is simple: through life customer monitoring. Through life monitoring consists of three key activities.
Firstly keep the payment behaviour of your customers under close scrutiny. When there is a deviation from the norm this should make you investigate further as it can be an indication of a change in circumstances.
Secondly make use of automated alert systems that notify you of changes concerning your customers. Most credit management companies provide this service, and whilst there is a cost attached using a credit management specialist gives you access to their purchasing power and economies of scale. You can also consider setting up Google alerts to keep you informed, or use a media search service to keep tabs on any news items referring to your customers.
Pro-activity in your sales ledger collections can greatly improve your results
Thirdly regularly credit checks existing customers. The frequency depends on your customer base and the industries they operate in. Although it is the case that the financial information used for credit reports is historic, credit reference agencies use a lot of other parameters as well that will feed through into the information they supply. Again, a professional credit management company can manage this process for you at a cheaper cost then going direct to a credit reference agency.
Getting paid on time
Pro-activity in your sales ledger collections can greatly improve your results as well. Make sure you send your customers a regular statement of account, same time every month. This creates a routine process and a document that you can refer to when you are in contact with them later on. Most companies start chasing their customers once invoice have fallen due. This is a mistake as a lot can be achieved by contacting your customers a lot sooner.
If you approach your customers soon after you have raised your invoices - say 7 days - you can make sure they have received them in good order and that there are no queries. Contact them again several days before invoices fall due for payment to verify that payment has indeed been approved and obtain the details thereof. Remember that you are competing with other suppliers for a scarce resource - cash. Introducing a more pro-active approach takes away excuses for non-payment before they impact payment terms. It also allows you to keep your conversations with your customers open and positive.
Bear in mind that these customers have not yet defaulted on payment so there is no need to enter a conversation to chase an overdue invoice, which can very quickly turn into a defensive/aggressive conversation on the part of your customer. By being more pro-active you will create a far more positive customer experience and you will see your relationship with them improve as a result. Not only will this improve the speed with which they will pay you, it will also increase customer retention rates and improve your reputation as a positive, pro-active and professional organisation.
In short: combine pro-activity both for your credit risk management as well as your sales ledger management and you will see a distinct improvement in your cash flow, your bad debt exposure, and your reputation with your customer.
For more information visit www.optimarm.com
