How do you mitigate credit risk preventively rather than reactively?

Reading time 6 minutes | Written by Anne de Geus | June 26, 2012

As a credit manager, you want to minimize credit risks and optimize sales. It is therefore important to know as much as possible about existing, but also potential, customers. This already starts at the recruitment stage. You are therefore closely involved in the sales process. Many companies skip this step and therefore experience all kinds of problems later in the accounts receivable process. In this article we describe how you can best map out the credit risk and how, by monitoring customers, you can optimize the sales process and reduce any financial worries in the future.

How do you mitigate credit risk preventively rather than reactively?

There are several things you can do to reduce credit risk. For example, you can run a credit check, but it will be immediately outdated after it is done. Analyzing financial statements may give you an idea about the creditworthiness of a customer, but remember that there are many companies that have no obligation to file. In addition, financial statements are based on figures from a year ago, old figures in other words. So how do you make sure you minimize the risk?

Choose a preventive creditworthiness strategy

Determining the creditworthiness of customers is mainly done in a reactive way. In most cases, companies hardly look at the creditworthiness of a potential or newly accepted customer. This is often due to the commercial pressure to accept new customers and sell products or services. Only when deliveries are made and eventually not paid do alarm bells start ringing. And then you are too late.

To strengthen your company's financial position, it is important to keep the DSO (Days Sales Outstanding) as low as possible and to reduce the percentage of past due balances. It is therefore advisable to shift the creditworthiness strategy from reactive to preventive. The more you know about a potential customer at the beginning of the sales process, the better you can assess the risk. Does the customer have an increased risk? Then you can then set additional conditions in the offer phase, such as a down payment.

Keep monitoring the customer

Monitoring customers is an ongoing process. In fact, the real risk only begins when the customer is accepted and the goods or services are delivered. Will the customer pay or not? By using data in a smart way, you reduce risks and can make better decisions as a credit manager. Combine your own customer data (e.g. payment data) with data from an external party. In this way, you easily gather enough valuable information to segment your entire customer base.

Map risk at all levels

You need data from an external party to be able to paint an up-to-date picture. Signals from the market may indicate a deteriorating situation. A customer may pay your company on time, but he may not pay other suppliers. This could be a signal for a deteriorating financial situation.

The Altares D&B- data cloud ensures that you are the first to be informed of such signals. Altares has access to real-time data on corporate structures, payment behaviour, turnover figures, balance sheets and so on. These data are processed in score models and a figure is then generated. This creates a business dossier of data, scores and predictive risk indicators about, for example, bankruptcy risks and payment arrears. This data can also be used to optimize the sales and debt collection processes in your company.

Are there any changes within your customer portfolio? Then you will receive an alert of this. This change can be both negative and positive. For example, when a score changes to negative you can set additional conditions, while when the change is positive you can increase the customer's credit limit. This gives the sales department more room to do business with a customer.

By choosing a strategy in which you preventively determine and continue to monitor the creditworthiness of (potential) customers, you build a high-quality customer portfolio without too many risks or defaulters. Know who you are doing business with, only then can you grow your turnover in a sustainable way.

Are you interested in using an external database for your business? Read Read more more about our capabilities for your organization. 

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Anne de Geus

Marketing Campaign Officer

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A credit check at customer acceptance is valuable, but also immediately outdated. The real credit risk actually begins after you have accepted a customer. accepted. The solution: monitor the financial health of your customers in real time.

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