Argument for a Risk Monitoring Policy

Argument for a Risk Monitoring Policy

Reviewing the credit report of new customers is a basic business practice that’s essential to limit your company’s risk of bad debt and write-offs.

If that’s the extent of your credit department’s risk management, however, your business is still vulnerable to preventable losses, and you may be missing out on revenue-generating opportunities as well.

A risk monitoring policy can help you identify customers who require credit reviews on a frequent basis so you can both protect your bottom line and grow your business.

Why Every Business Needs a Credit Risk Monitoring Policy

Vetting new customers and setting terms is only part the equation when it comes to mitigating risk. Performing regular reviews of customer payment history and reevaluating the credit terms you’ve extended is equally important.

In the day-to-day operations of a business, changes that can impact creditworthiness take place continuously. A well-developed risk management strategy not only protects and creates value; it also addresses and relieves uncertainty and allows your business to continually improve.

The Aim of a Risk Monitoring Policy

A well-defined risk monitoring policy should outline the steps necessary to assess which customers should be reviewed more often.

To provide you with the framework to spot changes in customer behavior that warrant a change in review status, your risk monitoring policy should be integrated into all of your credit management processes, and it must be tailored to your company’s unique requirements.

A systematic, timely, inclusive and transparent risk monitoring policy will accurately evaluate customer stability, as well as a customer’s ability to pay for the goods or services you provide.

A well-designed policy that’s both iterative and dynamic takes human and cultural factors into account. In order to allow you to identify those customers who need more frequent reviews, it must be based on fresh, reliable credit data and intelligence.

How to Develop a Risk Monitoring Policy

To be effective, risk monitoring needs to zero in on both negative and positive changes. If positive changes in a customer’s financial situation aren’t noticed, your business can miss out on opportunities to improve your relationship or increase sales.

If negative changes in a customer’s behavior or circumstances are overlooked, your risk of not receiving payment for the goods or services you’re supplying increases.

In order to determine when to perform customer credit reviews and how in depth they need to be, divide your A/R accounts into groups based on history and perceived risk. For example, your A/R portfolio could be divided up into groups of:

  • Larger accounts that potentially represent the greatest financial loss and need to be monitored closely year-round
  • Long-term customers who’ve always paid on time and have a spotless business credit report who only need an annual review
  • New customers who are reviewed quarterly until they’ve shown they’re reliable payers
  • Customers with any history of late payments who are evaluated monthly or even weekly
  • Customers who you’ve put on prepayments or C.O.D. terms who are reviewed monthly or quarterly to determine if they qualify for terms

The assessment policy you develop should allow ample flexibility so groups can evolve to meet the changing needs of your business.

Reliable Credit Information Plays a Crucial Role in Risk Monitoring

Up-to-date credit intelligence and analysis tools are critical for successfully implementing a risk monitoring strategy.

When you’re looking for a resource to supply credit information, consider the following factors:

  • Integrity of the data - Is it validated?
  • Breadth and depth of the data - Does it come from a variety of sources?
  • Technology - Does the provider use the latest technology and tools?

At safe consulting services, our goal is to provide accurate, real-time business credit data and cutting-edge tools that make it easy to assess and monitor risk. Contact us today to learn more about our innovative products.

How to Audit and Rebuild a Dated Credit Risk Policy

How to Audit and Rebuild a Dated Credit Risk Policy

A credit risk policy sets forth standards, procedures, and definitions that guide the credit decisions made by a company, with the overall goal of mitigating credit risks.

As market conditions evolve and the financial situations of credit customers change, your existing credit policies may become out of date and inapplicable to evaluating new credit customers and modifying the terms governing existing ones.

By using reliable credit indicators, such as business credit reports and other financial data, you can revise and rebuild a credit risk policy to maintain low risk for your company while providing customers with the credit terms they need. Here are some ways to ensure a dated credit risk policy is up to date.

If you believe that a current credit risk policy is no longer valid, a careful audit of the policy will give you a foundation from which to make changes and revisions. With the assistance of credit managers and financial experts, plus data from business credit reports and other sources, assistance is available to assess how current credit risk policies are affecting your company.

If you believe that you are taking on too much credit risk, or that the evaluation procedures are not accurately identifying both good and bad credit customers, you can proceed to a detailed evaluation of your credit risk policy.

Look at elements of your credit risk policy and how you currently handle factors such as:

  • Application requirements.
  • Credit review policies and sources.
  • Approval procedures.
  • Credit limits.
  • Prefunding, collateral, or down payment requirements.
  • Characteristics of responsible parties.
  • Financial and market conditions, both general and in specific industries.
  • The role of business credit reports, references from other companies, or other credit data in your decisions.
  • Signs of increasing or deteriorating credit worthiness.
  • Procedures for increasing or decreasing credit limits.

When you have this information available, you can use it to rebuild your out-of-date credit policy. For example, if you know that a specific industry or business segment is experiencing difficulties, you may need to impose more stringent credit requirements for companies in that industry.

If your current sources for credit data and business credit reports are insufficient, you will know that you need to expand your acquisition of credit data to other credit reporting agencies and financial companies.

You may use a procedure such as the following for reevaluating and reestablishing a customer’s credit standing (dollar amounts listed are for example only; your specific dollar limits may be higher or lower):

  • Establish a threshold dollar amount for reevaluation of customer cre dit. For example, you may set an AR threshold of $200,000 for each customer.
  • For customers with an AR threshold above $200,000, you may want to reevaluate their credit terms every month without taking action. Contact them every three months. Set new credit limits every four months based on the date you’ve collected over that same period.
  • For customers with an AR below $200,000, you may feel comfortable establishing longer periods for reevaluation and resetting of limits. For example, you may reevaluate credit terms every four months and contact them every six months. New credit terms could be set up every eight months, as needed.

When you assess a customer’s current credit worthiness, pay particular attention to factors such as:

  • Credit history: Past credit behavior that indicates level of ability and willingness to repay.
  • Company financial status: Customer company’s debt burden, income, assets, and other indicators of financial stability.
  • Credit limit: How much credit you are willing to extend to the customer.
  • Frequency of credit use: How often, and to what extent, a customer uses credit.

Ansonia Credit Data’s in-depth business credit reports and associated data give credit managers the data they need to make informed credit decisions and establish workable, mutually beneficial credit risk policies. Contact safe consulting services today for more information on our detailed, reasonably priced business credit reports and how they can help you when making financial decisions for your company.