What is your trade credit really costing you?

Businesses may have the profitability of their trade credit sales eroded by multiple costs.

In discussing these costs with credit & finance professionals, the typical impact on profitability includes the costs of funding, default & legal as well as operational inefficiencies.

However, there is another major cost: The Opportunity Cost of Granting Credit.

What happens if the capital invested into a bad customer is invested into a good customer?

Not only would you save costs on the downside, but you also earn profit on the upside.?

Consider this simplified example, showing this impact over the course of one year trading:

The concept here is nothing new. For decades, investment managers have been rebalancing their portfolios to meet their investment goals – taking money out of losing assets and investing into winning assets.

In trade credit, we do the same: grant larger limits to good customers and tighten limits on bad customers. While the concept is simple, the execution can be challenging.

So how do you proactively adjust credit limits on hundreds of customers ? And how do you assign the right limits to new customers?

We have identified 4 key enablers to help you invest in your winning customers and grow profits:

1. Real-time, 360 degree view of your customer data:

Before you can analyse the correct credit limit, you require fresh, predictive data to build a robust internal and external view of the customer. You need a system to proactively and rapidly aggregate this data on new and existing customers.

2. Predictive payment analytics:

Just like an investor forecasts the behaviour of a stock, a credit professional must assess the future behaviour of a debtor. Using internal and external customer data, you need to build a strong predictive modelling capability that is continuously tuning your model to current conditions.

3. Smart, automated limit decisions:

Now that you have data & predictive insights, you need a framework that consistently uses this data to make good limit decisions. These decisions need to align to your specific business strategy.

Automation is key to managing this process across hundreds of existing debtors to make quick decisions on new customers. Your framework also needs to adapt to your current business context and economic conditions.

4. Continuous, proactive limit recommendations:

Allocating credit limits is not a once-off process – you need a systematic way of proactively making sure you have the right limits.

Achieving greater levels of trade credit profit is possible with the right technology and expertise.?

Get in touch with us at r[email protected] if you would like to see how Trade Shield can support your credit functions.