Clear vision in today’s murky economy

Tips for effective credit management and risk assessment.

According to the World Economic Situation and Prospects 2012 mid-year report released by the UN, global growth would likely remain tepid for the rest of 2012 with its biggest threat coming from the seemingly unending Euro debt crisis. The report estimated that world trade growth would slow further to 4.1% this year, down from 13.1% in 2010 and 6.6% in 2011.

While trouble seems to be brewing more in the West, export-driven open economies like Singapore and Hong Kong are not immune. The inter-linking of global trade, export consumption and capital markets means that businesses need to carefully consider their counterparties in every transaction and ensure they mitigate risks associated especially with non-payments.

Risk is everywhere and the key to business success and stability often comes down to recognizing and managing these potential risks. Good credit management and risk assessment plays a significant role in helping protect businesses from the prospect of payment default, by signalling potential risks before any transaction has even been conducted. This essential process helps maintain a company’s cash flow, and also makes a significant contribution to its financial health and strength.

Atradius Country Manager Matthew Cockerill offers some credit management and risk assessment tips to ensure your business stays clear of the red:

A. Credit Vetting

The potential for payment default or bad debt due to insolvency is an ever-present risk when trading on credit, so the process of assessing the creditworthiness of customers i.e. credit vetting is vital. Such information helps the supplier company decide how much credit to allow their customers as well as what credit period should be allowed under terms of business.

While specialized credit vetting agencies can provide a range of up-to-date and robust information, individual businesses should also undertake their own research, using publicly available information or through direct contact with their customers. These include company name, registration details, principal activities, directors and shareholder details, legal civil judgments or cases pending, internet news and information, company accounts, etc.

Obtaining the information is one thing. Interpreting this information correctly is more vital to build an accurate picture, so investing in credit information can often help avoid bad debts later.

B. Terms & Conditions

The importance of terms and conditions (T&C’s) are often overlooked, however they are integral in providing a sound basis in the event of a dispute. Some points to note include:

- T&C’s help provide trade protection. Ensure they are up to date
- When possible always include a ‘Retention of Title’ clause
- Avoid buyer ‘purchase agreements’ as they can over-ride the T&C’s
- Ensure customers are aware of the T&C’s before the goods are dispatched
- When trading overseas, ensure the T&C’s reflect legal practices for credit terms in both the buyer’s country as well as the supplier’s
- Establish a clear and robust credit policy that is applied consistently in line with the T&C’s
- Always ensure buyers are credit checked before trading with them
- T&C’s should be verified or prepared by qualified legal professionals
- Always obtain a signature from buyers on any agreed contract incorporating T&C’s

C. Collections

There is a natural tendency for businesses to want to hold on to their cash, particularly in times of financial uncertainty, as it provides the added benefit of improving liquidity, even though the bills will have to be paid at some point.

So what can be done to tackle overdue debts?

- Send an early reminder that payment is becoming due
- Segment accounts by size and amounts owing
- Ensure the invoice is correct
- Check there are no outstanding disputes
- Set a DSO (Days Sales Outstanding) tolerance and adhere to it
- Call in third party help

D. Credit Insurance

Credit insurance is a way of protecting your domestic and export contracts of sale against the risk of not getting paid when you’re trading on credit payment terms. Having such a policy covers you against financial loss in the event a customer becomes insolvent or defaults on an amount owing, a contract cannot be performed due to political intervention or other reasons, and ultimately protects your bottom line. As part of this service credit insurers underwrite (credit vet) your buyers for you, and offer an integrated collection service.

Conclusion

Good credit management and constant risk assessment is vital to the financial health of companies. Businesses that spend time and effort on the aforementioned processes enhance their collections successes when their invoices are due as well as are protected against any risks.