Managing Credit Risk

Dun and Bradstreet estimates that more than 90 percent of businesses extend credit without a reference. For organizations that operate on relatively slim margins, this can easily lead to bankruptcy.

But managing credit risk effectively is no easy matter. Most organizations rely on manual or semi-automated processes, and depend upon concentrated clerical effort to do the heavy lifting. The problem is, even the most energized, dedicated credit staff can only do a hit-or-miss job with these time-consuming and never-ending data collection and analysis tasks.

Although ERP systems can provide some insight into aging and overdue invoices, that’s a reactive approach that alerts the C&C team only after the risk has already been taken on.

The Challenges of a Manual System

This largely manual approach to managing credit risk presents major challenges.

First, it’s hard to collect complete data on customers on an ongoing basis. Although thorough research involves checking credit ratings, news stories and annual reports, and then combining that with customer payment history, that’s a very complex and time-consuming process to do manually. As a result, most businesses adopt a less-than-thorough data collection method out of necessity.

Nor is the manual approach your friend when it comes to risk modeling and reporting. Since that should really be done daily in combination with the data gathering process, it’s burdensome for a team that may already be overstretched. But inadequate reporting can lead to mistakes in credit decisions.

And what happens when an order is placed by a customer with late payment issues or who is over their credit limit? Again, this is a time-consuming and inefficient resolution process that requires not only the credit manager’s involvement, but probably the sales department as well, complicating and delaying matters by the back-and-forth.

Then there is the matter of audit trails. A manual system requires manual documentation that can stand up to an audit. Spreadsheets do not afford an adequate audit trail of credit risk decisions. This is yet another time-consuming administrative effort, if it’s even done at all.

Automation Can Help

An automated credit management solution gathers data an ongoing basis, including sales trends, customer profits, borrowing behavior, and working capital ratio. A good solution will automate this process and perform the risk analysis, producing a credit score, risk category and credit limit. This information is kept constantly up-to-date, and reporting can be produced daily.

This enables staff to turn their focus to customer service, negotiating payment terms, and analyzing the reports for important industry trends. Not only does automation facilitate full transparency for credit-blocked sales orders, it can integrate with the ERP system and speed up order processing when a credit decision has been made. Sales staff in the field can access data online to prepare for customer meetings, all of which makes for happier customers.

As might be expected, the tasks managed by automation will also reduce administrative burdens at the clerical level, as well as providing a solid audit trail.

Another interesting benefit automation offers is its ability to manage credit insurance. Credit limit requests can be sent securely from the ERP to the insurance provider, and the solution notifies the insurer of any deviation from the discretionary credit limit (DCL).

It’s Worth Considering

Automation can identify credit risks, payment delays and defaults, and constantly monitor risk modeling, enabling an organization to save time and money, improve customer relationships, mitigate late payments, project important trends, and reduce the administrative burden on staff.

This is particularly important for growing businesses in a volatile economy or industry, and it certainly warrants serious consideration.

From an AR & O2C white paper sponsored by Hanse Orga Group.