What Questions Should You Be Asking?
Reduce Your Business Credit Risk
In order to keep up with today’s businesses, credit managers need the most relevant and useful information available. The challenges of watching all the moving parts can be daunting. Typically, companies are happy when they’re getting paid, and especially when they’re getting paid consistently on time. There is a very delicate balance between reading data and understanding if the data you read is even accurate. Let’s take a look at the evolution of balance sheets for just a minute. Twenty-five years ago accountants used graph paper and a pencil, and a big eraser. An accountant would labor over every last detail, writing, erasing, writing, erasing. Then came the advent of computerized spreadsheets, such as Microsoft Excel. That significantly reduced time and energy, allowing for more number crunching in the allotted time. All along, commercial credit companies provided payment history data, at exorbitant cost to the company, so accountants could monitor customers. These were standardized measures to help reduce your business credit risk. But as businesses get more sophisticated, additional factors continue to cloud the financial path of your customers. So, what questions should you be asking about how to look at the totality of your accounts receivable portfolio? Obviously how your customers pay you is your first concern. But is payment history enough to go on when making crucial financial decisions that can significantly impact your company? The answer is a great big, definitive NO!
How Do Your Customers Pay You?
For many, your question has typically been when do your customers pay you. What may be more important in the grand scheme of things is how do your customers pay you. There are many insights that you will need moving forward to help make better decisions about managing credit risk. If your customer is paying you late, wouldn’t you like to know how they are paying your competitors? This type of insight is of key importance for a few reasons. If they are paying competitor A and B before they are paying you, what will be your takeaway? Do your competitors offer a product your customer finds more useful? Do your competitors offer better terms, higher credit lines, or do they just have a better relationship? If you have access to this kind of information, you can make appropriate adjustments to make your company more competitive. Conversely, you may learn that your competitors are potentially putting themselves at risk. Either way, having access to this data will give you a much clearer picture of your customer’s operational strategies. This however, is just the tip of the iceberg.
What Are Your Customers Buying and How Much?
This is the big payoff. This is the part of the credit and risk equation that will, in many cases, be the tipping point for the astute credit manager. By knowing what, and how much, your customers are purchasing, you’ll see indicators of growth or decline. These leading indicators are much more telling than simple historical payment data. They create a realistic view into your customer’s most important behaviors where their growth or downsizing strategies are illuminated. These types of insights are becoming more necessary by the day, as big companies masterfully manipulate millions of dollars. It’s getting harder and harder to find the money trail, but the behavior trail does not deceive. Every few months we are confronted with a story about a gigantic company that suddenly closes it’s doors. To the surprise, and sometimes shock of creditors, the announcement often means that creditors will be taking a financial bath. This is a result of a credit department relying on historical data and not equipping their company with predictive data. These kind of scenarios should no longer happen, yet time and time again some creditor is finding themselves in tears. Having a bird’s eye view of your customers payment and purchase behaviors means never having to endure such a disaster.
A View Into Your Customer’s Shipping Activity
Finally, one of the hidden keys to your customer’s financial being is revealed in their transportation activity. If you were to have a view into your customer’s shipping activity, you might be able to avoid catastrophe. There have been cases of companies paying their bills within a reasonably close window of their terms, and suddenly closing. Oftentimes there is a slowdown in shipping that tips a creditor that their customer may be fighting a losing battle. Long before the payments start to slow, a decrease in freight transportation precipitates a financial struggle that is to come. By monitoring every aspect of your customer’s payment and purchase behavior, you can reduce your business credit risk. In addition to risk mitigation you can use the predictive data to capitalize on growth opportunities. Alerting your sales and marketing departments to signs of customer growth can create those rare, but welcome financial windfalls.