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.