In a time of great uncertainty and lingering pandemic concerns, A/R must step up its game on assessing and reducing customer credit risk.
That’s one of the biggest takeaways from the National Association of Credit Management (NACM)’s 2021 Credit Congress & Expo Virtual Plus.
COVID-19 changed how companies look at credit risk. Sure, CFOs and A/R pros have used tools to measure risk in the past – but you’re in uncharted territory now. Post-pandemic recovery has been sporadic, and anything could happen still.
That’s why A/R will need to use more and different methods going forward to measure or hedge customer credit risk, explains Jay Tenney, Managing Director of Trade Risk Group. The No. 1 priority now, he says, is to know your customer and know if they have a well-run company.
How exactly can A/R do that? Check out six strategies Tenney offered during an NACM conference session on credit risk:
1. Keep customers within terms
One proactive strategy A/R can take is working to keep your customers within terms, regarding both payment terms and credit limits.
And it’s key to have these discussions before they become a big issue. With things like rising prices and inflation, if you haven’t seen issues already, you’re probably going to, Tenney warns.
2. Know your customers’ customers
Here, it’s important to focus on two things for credit risk:
- Who are your customers’ customers? Your customer may be solid, but let’s say, for example, pre-pandemic, your customer was selling chemicals to dry cleaners (an industry that was hit hard by COVID-19). That might make issues trickle down to you.
- Where are your customers’ customers? Different parts of the world have radically different economies right now. Plus, recovery has been sporadic across the globe.
3. Look at financial statements
With this credit risk management tactic, Tenney often hears clients say, “That’s easier said than done.” But the good news for A/R is that the pandemic has changed the way people approach this method.
In fact, Tenney now has many clients that tell customers directly: “If you want X level of credit, we need to see your financial statements.” Or: “If you’re using credit insurance, you need to send them to the credit insurer because I’m basically giving you an unsecured line of credit, and if anything happens, I’m the one on the line.” Generally, customers can understand and appreciate this.
4. Try to secure other statements
As mentioned, COVID-19 changed people’s perceptions on how they look at credit risk and business relationships, so take advantage of it. It’s good if you can get financial statements, but what underwriters are focused on now – if you can get them – are cash flow statements, Tenney says.
Why it’s critical now: Your customer could be growing, processing lots of orders and making lots of money – but never look at that cash flow statement and realize they’re out of cash.
5. Talk with customers’ partners
See if you can talk to your customers’ banks, Tenney advises, since they can give you a lot of insight. And if it’s a good banker, they’ll shoot straight with you, since they don’t want their customer getting overextended either.
In addition, try to talk with your customers’ suppliers, or see if you can get involved in a credit group in that specific industry.
6. Set up automatic alerts
Lastly, Tenney suggests a more old-school method for managing credit risk: Set up Google alerts for your company, your customers, your customers’ customers, key employees at your customers, etc., so you can stay on top of any major business news.
It’s amazing the information that you can get just from a free Google alert service, Tenney adds.