Tool Box
Issue No. 23 - June/Nuly 2005
Manage credit risk
by Dr David Corkindale and Dr David Corkindale
Credit Risk Management is about balancing the drive to achieve sales with the ability to collect money owed to you – in other words, before selling something, make sure that your customer has capacity to pay for it!
Just as you don’t go into business to give things away, you wouldn’t sell your valuable products or services to someone who can’t afford to pay them. That may sound obvious, but you would be surprised at the number of businesses who do exactly that!
Credit Risk Management is about knowing exactly who you are dealing with so you can enhance your company’s credit performance. National Credit Insurance Brokers (NCI) has a few tips on how your business can increase your profitability and cash flow through better credit management procedures.
Ensure you are dealing with the right entity. Typically most ledgers have an error rate of 10% in this regard. Dealing with the right entity ensures you have a contract to pursue and that you will rank for dividend purposes in the event of customer insolvency. By verifying your ledger through an experienced credit specialist you can know exactly who you are dealing with.
Have an early warning system for your debtors. By setting up a debtor monitoring system, you can identify changes or adverse events involving your debtors before they get out of hand. A credit ‘watchdog’ can provide you with debtor information such as bounced cheques, debentures over a company, and collections. This means you can steer your business away from conducting transactions that are unlikely to be paid.
Get a third party opinion on your customer credit limits. Most businesses set credit limits for their customers, but on what basis are they set and how often are they reviewed? By drawing on a credit limit recommendation service, you can gain more confidence when deciding what levels of credit to offer customers.
Do your homework on your customers. Credit reports are a good pl...
