Customer risk management is a major challenge for any company: avoiding unpaid invoices and reducing payment delays are key factors in guaranteeing good financial health and promoting growth. The current crisis is reshuffling the cards: your solvent customer last year may be in serious financial difficulty now… To preserve your business, don’t rest on your laurels. Find out how to effectively reassess your customer risk on a case-by-case basis in light of recent upheavals.
Evaluate the company’s financial situation
Crisis or not, the right reflexes must remain in place to assess the risk when entering into a business relationship with a new customer. Knowing your future client is essential to deciding whether or not to enter into a contract with him. Find out about the legal and judicial situation of the company in order to assess its solvency:
Internally, the relevant departments of the client company can provide you with useful information. The accounting department, for example, will tell you the payment terms used and the details of the payment policy in general.
You will also find several valuable external sources on information:
- At the Crossroads Bank of Enterprises, you can consult – free of charge – the company’s annual accounts to get an idea of its finances. Moreover, you will find the publications in the Belgian Official Gazette and the Statute Book (COSTA);
- At Graydon, you can – for a fee – consult extensive credit reports with scoring for your current or future customers
Gearing, Days Sales Outstanding (DSO) and EBITDA
Financial ratios help you refine your assessment of customer risk. You get a more complete economic and financial analysis.
- Gearing measures the impact of the company’s debt on its equity. Its result must be assessed in the light of the specific strategy of the business sector concerned.
- The DSO (Days Sales Outstanding) indicates the delay observed in the company between the day of the transaction and the day of collection. This is how you assess the company’s risk of non-collection of receivables.
- EBITDA is a profit indicator, to be compared with companies in the same sector of activity.
In the current context, the vision of the company’s legal situation and the calculation of its financial ratios remain good indicators. But be careful. They are only the beginning of a customer risk assessment: the data is based on a past vision.
In particular, the time required to publish financial statements can be misleading. Another major difficulty is that the various measures to assist companies delay bankruptcy proceedings and distort your vision.
A forward-looking approach is necessary in times of uncertainty. As the economic situation is changing rapidly, customer risk management requires you to monitor your outstanding receivables in a particularly rigorous manner.
Analyze payment behavior
Monitoring your outstanding receivables must be done on a daily basis, so that you can take appropriate measures without losing time. Is a customer unusually late in paying? Is a customer account accumulating unpaid invoices? The collection period of your receivables is getting longer in a subtle way? These are all events that should alert you: your customer risk is increasing.
To effectively monitor your outstanding receivables, you need a comprehensive, real-time view. Analytical tools and alert functions also help you to act quickly.
Adapt your billing and payment terms to the risk
Each customer reacts differently to the crisis, so adopt a case-by-case strategy to avoid penalizing good payers – and thus maintain an excellent customer relationship! By categorizing each customer into a payer profile, you can easily adjust your billing and payment terms.
A scoring tool helps you assess customer risk, so you can adapt your policy on a case-by-case basis. For example:
- A high-risk customer will be given a tighter credit limit.
- You will reduce the payment period in case of high risk, to be able to act more quickly in case of default.
- Putting in place guarantees allows you to secure the payments of your high-risk customers.
The objective: not to exclude any customer ab initio, but to make your conditions evolve as the customer’s situation changes.
Personalize your dunning processes
Dunning is the best operational way to manage your customer risk. It is a question of finding the right balance between strength of conviction and cordiality, to address the dual challenge of the commercial relationship and the reduction of your payment deadlines. Be firm, while preserving good relationships with customers. Three good practices :
- Do not exclude any customer from the dunning procedure on the pretext that he is not at risk. Reminding is virtuous: the customer is indeed grateful for this reminder – provided that it is expressed in a pleasant manner
- Personalize the reminder according to the customer profile. The level of pressure should be gradual, taking into account not only the customer risk, but also the delay in payment
- In the midst of the economic crisis, make your dunning scenarios evolve in an agile way.
Be ultra-reactive with a customer risk management tool
In 2021, prevent risk with optimized monitoring of your outstanding receivables. Your debt collection software must address your specific issues in times of crisis:
- An exhaustive dashboard and an alert system to act quickly at the slightest payment anomaly.
- Scoring functionalities to adapt your procedures to different customer profiles.
- Automation to follow up all your customers in a reliable and personalized way.
- Collaborative mode to share information at all levels of the company, and gain efficiency in the collection of your receivables.