Putting your credit risk management process into action
If you’ve been following our previous articles on building an effective credit risk management process, you will already be familiar with the first two steps that will get you started on the road to success. Firstly, you had to analyse your company’s risks and place them in order of importance. After that, you had to act by finding the right software solutions that would equip your accounts management and collections department to adequately deal with your existing and future credit risks.
Once these are done, your work is not over yet. Your next point of priority is ongoing risk control. Luckily, the foundations for this are already firmly in place, and you just have to build two more foundations into your credit risk management plan to make it complete:
Risk response planning
The groundwork that you have done thus far, should have helped you to understand the credit risks that exist in your business – from your largest customers becoming insolvent to simple missed payments. Logically, you now need to put the protocols in place to deal with these events as they arise. You create risk mitigation strategies, preventive plans, and contingency plans in this step.
You start by putting your risk management strategy into words. For example, if customers miss payments, your official response may be to follow up via SMS initially and then to escalate to phone calls before going to the next step in the collections process.
You also need contingency plans in place for when your highest priority risks actually take place – for instance when one of your biggest debtors files for liquidation. You need to know well in advance of such issues whether you will be writing off certain debts, or whether you will be taking on the difficult task of recovering funds.
During this step, you also have to assess your highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels. Ask yourself how you can minimize the probability of your biggest risks manifesting, while possibly enhancing your opportunities.
Lastly, you need to keep track of the actual risks that manifested throughout the year in a dedicated risk register.
Monitor and review risk
You need to understand that risks are dynamic and evolve over time. Your most reliable customers may become your biggest concerns, while new economic challenges could change your accounts department’s risk profile completely. In light of this, your risk management plan needs to be dynamic as well.
This is the step where you take your risk register and use it to monitor, track and review your most likely risk. You may indeed find that your risk register also helps you to identify opportunities for new business or cost-saving measures. At the same time, you also need to review the tools that you have provided to your team, to ensure that they always have cutting-edge solutions on their side.
Clear communication among your team and stakeholders is essential when it comes to ongoing monitoring of potential threats. While it may feel like hard work at times, your risk management process and its corresponding risk register are your best chance at keeping track of the issues that pose threats to your business.
And with that, your risk management process is finally in place. While it is something that needs continuous revisiting and tweaking, you’ll soon discover that a good process frees you and your team up to better focus on growing your business.
For information on how to streamline credit risk management processes, contact us on 021 – 0014758 or visit the Jumping Fox Software website.