At Cortera, we get a lot of questions surrounding portfolio monitoring, like “why do I need a monitoring system?” or, “which accounts should I be monitoring?” or even, “what data should I use?”. When you drill down to it, no matter what industry the business is in or how large they are, the answers are usually the same.
Organizations typically spend most of their time and energy monitoring their largest accounts. There’s certainly merit to that, since resources are limited and surprises with your largest customers tend to leave the biggest bruises. But when you have thousands of customers, your exposure to risk increases across a much larger range of accounts. Your days of having only a handful of customers producing the majority of sales are likely a part of the past.
Now that you have hundreds or even thousands of customers spending large sums with you, it’s hard to maintain a close relationship with them all. That’s challenging enough, but what makes the stakes even higher is that over 600,000 US businesses close their doors each year. That averages down to 2,000 companies closing each day, some of which could be your customers.
Leveraging Tools to Monitor Your Entire Customer Base
Remember this: you do not work for tools, tools work for you. An emerging best practice for monitoring your entire customer base is to break it up into two segments: individual accounts and the overall portfolio.
Leading companies are evaluating changes in every customer; large and small. They’re most likely to follow up on the alerts in different ways based on factors such as the size of the customer balance and their payment activity, but they are also able to identify the useful nuggets pertaining to important customers that may have small current balances. Leading companies are also saving the history of alerts to support future credit decisions. Many of today’s small accounts become tomorrow’s large ones, and the alert history can provide valuable insight for that future credit risk management.
Aggregating the individual account monitoring to an overall portfolio level is also providing companies with insights that help them improve risk management. Just looking at trends and benchmarks for the largest accounts in the portfolio can be misleading. It’s not uncommon, for example, for smaller customers as a group to have a higher risk exposure than larger customers as a group. Monitoring each segment separately and against the customer base as a whole can help avoid missing negative trends while providing a more balanced and complete view of the company’s credit policy performance.
How Often Should You Monitor?
Many companies are inconsistent in how often they monitor information about their customers (and prospects and suppliers). Typically, the more informal the monitoring process, the more the variation in the frequency and timeliness of alerts. If your monitoring entails reading the weekly industry publication for news on customer events, you’re probably not doing that the moment the publication arrives. You’re getting to it as quickly as possible, but there are often other priorities to be completed first. Plus, the more layers that exist in the process of the monitoring, the longer it takes for the information to get to you. By the time a bankruptcy filing or news article announcing a plant closing is picked up by the publications you read, days or weeks may have passed.
Companies that are most on top of monitoring strive to gather information as close to the source of the data and as close to real-time as possible. This provides the timeliest delivery of insights so that they can be the first to know about customer changes and react, if necessary. Not all alerts need to be followed up immediately, but receiving the information as quickly as possible puts the decision power for follow up in the hands of the users. Leading companies are using this time advantage as triggers to be the first mover to tighten or loosen credit limits and to pursue collections of late paying customers.
Which Data Sources Should You Use?
Historically, monitoring bankruptcy filings, reading as many industry publications as possible and quarterly review of portfolios were the accepted methods of avoiding risk. Receiving timely information on risk signs such as bankruptcy filings and payment score declines has been helpful but these conditions are typically lagging indicators of increasing risk exposure. With more and more data available electronically, there’s a wealth of new information available. The decreasing costs and increasing power of computing are helping to create new analytic insights previously hidden in the raw data.
Many companies are now incorporating new data sources into their risk monitoring to provide leading indicators about companies such as:
- Purchase Trends
- Sales Trends
- Hiring Trends
- Organizational Changes
- Other Business Events
Changes in these areas can often provide signals, even months in advance, of a significant financial stress situation like a bankruptcy filing or severe delinquency. As an example, identifying significant, persistent declines over time in a customer’s largest expenditures may signal declining sales and production which can tip off their future ability to pay you. On the other hand, increased hiring, spending and opening of new locations could be cause for an evaluation of a proactive credit limit increase.
For too long, the commercial credit world has been too complex and too costly. The goal is to simplify your processes down to these 5 things: monitoring all of your customers, receiving daily alerts, using automation tools, setting up workflow processes, and establishing formal follow up procedures.