Credit Management in Times of Economic Uncertainty

In times of economic uncertainty, proactive identification and management of emerging credit risks is critical. Many business owners focus on how credit risk can hurt cash flow as customers may pay slowly or stop paying altogether. There can be a negative supply chain and sales impacts as well.  For example, suppliers with credit problems may be unable to provide your business with goods, and your sales team may not be sure how to factor in credit risk when prioritizing leads. Focusing on the following activities will help mitigate the impact credit risk has on your business.

Protect Cash Flow

Cash is king. Protecting cash flow, so that your business has the resources it needs to operate is critical in difficult economic times. As opposed to good economic times, when credit managers are heavily focused on assessing prospective customers, difficult economic times require credit managers to proactively focus on identifying and managing emerging risks in the existing customer portfolio. You should not stop extending credit, but you may need reevaluate the terms under which you extend credit. Start by reviewing your customer portfolio. Divide customers into three groups based on risk profile and manage them accordingly.

Large Exposure Customers: These are top customers who typically have significant outstanding receivables with your company. As they have a big impact on your cash flow and are important to the future of your business, it is important to keep an eye on how they are doing financially. This not only involves monitoring their business credit reports and scores but also reaching out to them and initiating a dialog about their business and whether they expect to have difficulties paying you. This gives you better insights to plan for your business, and it will enable you to constructively work with them if they have short-term financial challenges. Proactively working to head off a potentially negative situation and showing interest in their success will help strengthen your long-term relationship.

Consistent Payers: These customers are smaller customers who have paid you consistently over time.  Review their business credit reports and scores on a regular basis, and if you detect an increased risk profile, proactively reach out to initiate a dialog about their situation.

Higher Risk Customers: These are customers who pose greater risk because they are relatively new, have not paid consistently in the past, or are in highly distressed industries. They need to be monitored more frequently than the consistent payers and you should have a plan in place as to how you will manage these customers if they become delinquent. This is how you can handle slow payers.

When reviewing your customer portfolio, using the right tools will make the task more efficient. In addition to using business credit reports, adding alert monitoring services that notify you about changes in a customers’ business credit report can give you early warning if problems are developing. Looking at a customer’s trade payment data and predictive scores also will give you additional insight.

Identify Financially Unstable Suppliers

Financial uncertainty can undermine the stability of your company’s supplier base. Suppliers that can’t meet their financial obligations may not be able to reliably provide your business with goods and services it needs. Proactively identifying financially unstable suppliers can help your company anticipate potential supply chain problems in time to identify alternate suppliers. Credit managers can provide significant value by working with sourcing colleagues to incorporate financial risk analysis into the vendor management process.

Focus on Promising Prospects

Even in difficult economic times, it is important not to give up on marketing because it is key to strengthening sales and laying the groundwork for growth when the economy improves. It is critical to focus your marketing and sales efforts on customers and prospects which can pay reliably and have capacity for growth. Credit managers can collaborate with marketing and sales to incorporate credit risk analysis into targeting and prospecting activities.

Credit.net offers a broad range of credit risk management tools including monitoring solutions and business credit reports on more than 15 million U.S. businesses and 1 million Canadian businesses. We offer business credit reports on millions of foreign companies as well. Contact us to discuss how you can incorporate these tools into your credit risk management processes.