Starting a complete credit risk management process the easy way
While often overlooked by business owners, being able to manage credit risks can mean the difference between success and failure
The notion of risk and risk management is well-understood among business owners and entrepreneurs, and there is an element of risk in just about every endeavor that we attempt. Successful business owners are usually also those who find the most effective ways of managing their risks – be it through insurance against business interruption, or by having a network of alternative suppliers.
With that said, I am surprised that credit risk (one of the biggest threats to any company’s cash flow) is often not managed effectively by business owners. Of course, most business owners have an element of credit risk management in different parts of their day-to-day operations. Credit vetting of new customers, tracking payments and sending out payment notices, and conducting age analysis on overdue accounts are all part of the process.
However, having these very simple measures cannot even remotely achieve the same outcomes as a dedicated credit risk management plan. Being able to effectively manage this risk means being able to analyze and predict problems and threats long before they manifest – and for that you’ll need a complete strategy.
So, with the above in mind, I have put together a few first steps to get small and medium businesses started on building the comprehensive credit risk management process that they need:
- Assess your actual risks
Looking at your customer accounts, you may think that your only concern should be to discern between paying and non-paying customers. However, a host of possible problems could turn even your most loyal customers into problem accounts. With this in mind, you should begin by making a list of possible factors that can affect each of your accounts. One of the most effective ways of finding out which risks you face, is to divide them into the categories of known knowns, known unknowns, and the unknown unknowns. While this may seem nonsensical at first, I would really encourage anyone to give it a try.
- Evaluate
From here, you need to start prioritizing the risks that you have identified. When it comes to account management, this step involves finding out more about your specific customers and their current situations. While you could do this with customer and account surveys, you may also consider conducting ongoing credit checks to understand whether your customers are still doing well financially.
- Act
The next step is to get a strategy in place to actively manage all of your risks on a day-to-day basis. The first part of this naturally involves getting your finance team involved. The only real way to ensure that your risks are being managed effectively is to get buy-in from your team. However, this is not enough. You also need to furnish your team with the tools to do their jobs in this regard. Putting the right software solution in place to monitor and predict credit risks is paramount here.
Ultimately, these three steps are only the beginning. The real work starts when you begin training your team and perfecting your strategy. With this in mind, our next article will be taking a look at how to get your team trained and ready for peak efficiency.
For information on how to streamline credit risk management processes, contact us on 021 – 0014758 or visit the Jumping Fox Software website