Managing Customer Credit Limits: Benchmarks, Technology, Opportunities

Effectively managing counterparty risk should be a top priority for companies of all sizes. There has not been much attention paid to the role of automation and AI in managing counterparty risk exposures despite increasingly dynamic market conditions driven by unforeseen events such as supply chain disruptions and geo-political instability.?

Treasury Webinars partnered with BlackLine to conduct the Measuring & Managing Accounts Receivables Counterparty Risk survey in June of this year. The purpose of this survey is to help companies understand what defines and empowers effective AR receivables counterparty risk management. The survey had over 250 responses from companies of all sizes across a diverse set of industries.

This blog shares key inferences and insights discovered by analyzing the survey data related to managing customer credit limits.??

Companies need the right data at the right time to inform the right actions by accounts receivable and sales teams to effectively manage counterparty risk exposures. In terms of data, those monitoring and managing credit limits need to know current levels of exposure in terms of dollars by customer, the nature of the exposure due to the financial health of customers who have credit limits, and the levels of exposure relative to all factors used to manage aggregate exposures (i.e., currency, industry).?

Companies can be proactive in managing risk exposures by automating actions that can delay or stop orders if their systems have the right data at the right time. An order can be put on hold for review if an order places a company over its credit limit and/or if an order is for a company that has been put on a watch list because of adverse changes in its financial health. Almost eighty percent (79%) of survey respondents are actively managing company credit limits based on the amount of exposure by customer and/or the financial health of the customer making an order (Figure 1 and Figure 2). Companies can also be proactive in managing risk exposures by periodically conducting a credit assessment of existing customers.

The frequency of periodic credit reviews of companies varies across survey respondents. Thirty-one percent (31%) do reviews at least monthly, 22% do reviews quarterly and 28% only do credit reviews as warranted (Figure 3). The practice of only doing credit reviews for customers only as warranted can be overly passive as information that impacts the financial health of a customer is often not public knowledge even if a company invests in consuming all public information available related to a company.

Do the companies surveyed have the right data to effectively manage accounts receivable-related risk exposures? Almost half of the companies surveyed did not agree that they had the data needed to measure and manage counterparty risk exposures (Figure 4). These data struggles are consistent across companies of all sizes in terms of the number of employees: small (0-100 employees), mid-market (101-1,000 employees), and enterprise (more than 1,000 employees) (Figure 5).

Our analysis included a question focused on the ability of a company to monitor the financial health of customers that have credit limits. Material changes in the financial health of customers should cause companies to reassess current credit limits. Forty-seven percent of survey respondents do not agree that they track changes in the financial health of customers promptly (Figure 6). This means that these companies face a huge blind spot in trying to actively manage existing credit limits effectively.

Monitoring and measuring counterparty risk exposures is challenging at best. Companies can have the right data at the right time to help manage counterparty risk exposures, but they still need to get this data to the right people. If companies only produce standardized credit reports this often means that the right data is not getting to the right people, even if it is available. Over two-thirds (67%) of survey respondents only produce standardized credit reports (Figure 7) even though they have consumers of these reports across the office of the CFO including treasurers, treasury managers, credit managers, finance managers, controllers, and CFOs (Figure 8).

Even if companies have the right data to measure, set the right targets for credit limits, and get the right data to the right people at the right time, this may not be enough for them to effectively manage credit risk exposures. Targets for specific types of exposures specified in a formal credit policy, or managed without a formal policy, are only aspirations if sales teams can push orders through that do not comply with these targets. Credit exposure targets need to be defined, understood, and adhered to as closely as possible if counterparty risks are to be managed effectively. The level of compliance with formal or informal credit policies was an area of inquiry in the survey. Forty-six percent of companies report that more than ten percent of customer orders fall outside of the company’s credit policy. Non-compliance with a credit policy and targets set put a hard ceiling on the effectiveness of any accounts receivable team in managing counterparty risk related to customer credit balances (Figure 9).?

Misalignment between a company’s credit policy and sales goals can drive and enable non-compliance. Thirty percent of survey respondents could not agree that their credit policy aligns with sales goals (Figure 10). Companies should ensure that sales goals align with their credit policies. Misalignment will lead to overexposure to risks that can negatively impact the bottom line. The more significant the misalignment between sales goals and a credit policy the larger the inherent barrier a company will face to effectively managing customer counterparty risk exposures.??

The strategic role of accounts receivable is evolving and the increased expectations that go along with that include more effective management of accounts receivable-related counterparty risks. Companies need to invest in the right data and right technology that empower collaboration within an accounts receivable team and between AR, sales, and finance teams. Reports need to be created and distributed that meet the needs of each person involved in managing credit limits based on criteria (company, currency, country). This facilitates data-driven decision-making in managing counterparty risks while not negatively impacting the customer experience which encompasses each interaction with a customer from any department.?

You can discover many more benchmarks, insights, and recommendations to optimize the strategic value delivered by accounts receivable in any business environment by attending the webinar “Measuring & Managing Accounts Receivables Counterparty Risk” on July 12. You can REGISTER HERE.