Status agency reports may not be a sufficient, but they are an essential part of risk management: Effective credit risk management is dependent upon access to a comprehensive and detailed range of up-to-date, accurate and predictive information.
There’s risk in every business activity but with company liquidations rising nearly twelve percent to a record 4,607 in the fourth quarter of 2008 according to the Insolvency Service, credit management really does represent the front line of defence in the fight for survival.
Unless you know that each of your trading partners is sound – that’s everyone in your supply chain – the domino effect of insolvency could affect you. And you don’t get much notice. The last thing any business wants is to make public any capitalisation or cash flows difficulties.
Late payments; bad debts; failing customers; suppliers going bust or getting refused credit are a few of the risks that could face your customers or the people who supply you with business critical components goods and services, and the old boy network is no longer a viable way of assessing their reliability says Nic Beishon, head of commercial information solutions at Equifax.
Credit status management is as important as new business prospecting – indeed it should be an integral part of sales activity, he says.
Whatever the size of an organisation, Beishon advises checking the financial status of all customers and suppliers thoroughly, both as part of the initial prospecting process and on an ongoing basis.
It is absolutely not a witch hunt aimed at striking off anyone with a problem: “There is often a misguided perception that the best strategy is to avoid all risks, only trade with companies with long and clean financial histories and reject orders and customers that do not fit perfectly with rules set out by your credit accountants.
"But this strategy could cost you dear, as it may mean missing out on profitable prospects such as young companies with financially stable directors or potential customers that have had cashflow problems (who hasn’t?) but dealt with them effectively.
"Checking the directors behind a newer business could uncover a long, steady and safe financial background. And this means you could broaden your customer base even further for long-term commercial gain.”
Ongoing monitoring is essential in the current climate, he continues.
“The financial situation of customers and suppliers could change dramatically in a short space of time. Using a credit agency to check the trading history of a potential client could at one extreme save you from getting into a doomed relationship, or at the other ensure that you ask the right questions and get the right assurances before committing.”
Credit management is ultimately a question of information says Beishon: “Don’t assume that once a customer or supplier’s history is checked at the outset of a relationship, it is secure for the future. Monitor them on a regular basis to reduce the risk of non-payment or not receiving goods or services ordered and ensure your business doesn’t become victim to clever fraudsters.”