What is credit risk management and why it is essential for your business

Monday, 8th March 2021 17:32

No matter what business you are in, making sure that you get paid for services rendered or your product is the most crucial part of business.

And, unless all your customers pay upfront, you will be extending some form of credit; for most businesses this is the usual 30-day terms which then enables you to secure, retain and build solid customer relationships, as well as add orders to your sales ledger.  

However, there needs to be balance of caution against risk when it comes to setting out the payment terms. This is what is known as ‘Credit Risk Management’ which is the process of reviewing criteria to build an accurate picture of another firm’s financial stability in order to set realistic payment terms. Failure to have a robust credit risk management process in place can cause a serious impact on a company’s capital and in some cases, can see businesses fail should a customer move into administration.

In order to avoid these unwelcome situations, a solid credit risk management process should be applied: At the start of any new business relationship,  the supplier should look at certain key figures; these include looking at the customer’s overall profit, the existence of any detrimental data and any signs of cashflow issues.

Profit is the primary indicator which will demonstrate how well a business is preforming and its likelihood to stay trading. Secondly, look at cash flow. Poor cashflow in a business points towards mismanagement of funds in and out of the business and could result in the inability for a customer to settle your invoices efficiently. Lastly, a look at directors and shareholders, as recent changes to structure can indicate that the business is in a period of transition and that caution should be applied.

Here at identeco, we can provide all the above intelligence in one portal, allowing subscribers to search for a company by name or registered number (or by director name) and get an accurate picture of their financial performance (we keep ten years of records), director and shareholder structures, any detrimental data such as CCJs or High Court Writs, validation of trading and registered address and a suggested credit score based on days sales outstanding (how regularly a company settles its invoices). In addition we also provide an at-a-glance overall financial health check score – from gold right through to amber and red flags to allow you to make quick, informed decisions.

To make your credit risk management process even more robust, we suggest that you add your customers to our company monitoring service which will enable email alerts to be sent directly to your inbox should any of the above areas change. This means that you can respond to fluctuating credit scores in real time, rather than get caught out later should payments stop hitting your business account.

The services listed above are all included as part of an identeco Business Support Toolkit subscription. For an annual payment of £79.95 +VAT, subscribers have unlimited access to the following services:

  • 10 years financial reporting on over 6m UK companies and businesses
  • Director and shareholder structures and cross-associations
  • Insights into any detrimental data or CCJs, should they exist
  • A unique, at-a-glance financial health rating and suggested credit limits
  • Account monitoring alerts straight to your inbox
  • Data audit reporting to highlight where your data could be improved
  • Unlimited, bespoke marketing, telesales and prospecting lists
  • New market entrants reporting
  • Acquisition and merger reports
  • Preferential subscriber rates to over 25 other business services

To sign up and begin using today, please click here.         

If you are still not sure how much value a subscription would add to your business, we welcome you to sign up for a free, no-obligation (and no payment details required) 48-hour trial. Please click here to get started.