Written by Brit Williams
Posted on 01/11/2013

How to improve your credit risk modelling

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Good risk management practice can be crucial to your company’s prosperity, especially when your profits come largely from a few key clients. When more business comes in and day-to-day operations take over, credit risk controls often go neglected. But a simple, intuitive credit risk model can help you protect your business from late payments or, worse, client insolvency.

As well as cash flow and financial history, other factors like management structure and the health of the economy can play an important role in your customers’ ability to pay their invoices. Hiring someone whose responsibilities include regularly checking in with your clients and reporting on any changes to management structure will help to identify new challenges.

Meeting new key players in your client’s company will not only help you maintain a strong working relationship, but it will also allow you to evaluate any changes to the way the team is structured and its ability to make payments according to your existing invoicing arrangements.

Even if your client has a strong credit rating at the beginning of your relationship, fluctuations in the market can affect their cash flow and make them liable to bad debt.

Keeping up with daily business news will give you an overall insight into industries at risk, but it is also advisable to search directors of a company you work with on at least a monthly basis to recognise red flags early on. Annual financial reports companies issue for the public are becoming increasingly transparent and will give you a good indication of recent growth and future potential.

Industry performance reviews can also offer insight into how your clients stack up against their competitors, and of the obstacles they may encounter in the future. If their figures decline for a sustained period, you may want to add them to a list of clients with whom you take stricter invoicing measures.

Efficient enterprise risk management will minimise uncertainty and help you maintain control over your company. In addition to taking these measures upon yourself, outsourcing financial scanning to a credit risk database can reduce your workload and boost your B2C confidence.