Business has always been about taking chances. Inspirational business leaders such as Virgin’s Richard Branson and Microsoft’s Bill Gates have built large organisations by taking risks, while smaller, entrepreneurial companies take chances daily in terms of the orders they promise to fulfil and the suppliers with which they deal. Times are tough these days though. The economy has contracted and risks, no matter how they are measured, have an added element of danger.
According to John Price, head of direct sales at trade credit insurer Atradius, there has been a general trend to remove all unnecessary risk. “As a society we are very risk-averse at the moment,” he says. “The desire to mitigate risk is stronger now than it has ever been. People want to be insulated and that pervades to commerce. Risk managers are becoming more prevalent in business and there are more controls to mitigate risk – not just credit risk.”
However, to progress and prosper, businesses should be encouraged to take measured risk. Those who play safe may be unlikely to suffer, but they are also less likely to thrive and, in turn, generate growth in the economy and create jobs. Putting in place sound credit management is vital to expansion and success. Researching both existing suppliers and new providers on a continuing basis is a sensible strategy under any conditions but particularly when the economy is faltering.
Here, a clearly formulated credit policy is indispensable in creating guidelines that define what is to be executed by individual, organisational and departmental units. An unambiguous contractual framework will help resolve potential legal problems with customers. It will outline, for example, the period of payment, the nature of order forms and all terms and conditions that apply.
It is essential for firms to acquire and maintain accurate and constantly updated customer data, including precise billing addresses, legal forms of business, and information regarding client-company owners and managing directors. Granting credit terms to customers without adequate or up-to-date creditworthiness information is very risky. Depending on business volume and risk assessment, firms should be informed about customers’ credit ratings adequately and on a regular basis.
There are variations within the broad range of payment terms that enable a firm to influence its risk exposure. Payment options include prepayment, down payment, payment on delivery of goods or services, period of payment/due dates, discounts and date upon which bank account is effectively credited. Each of these alternatives should be taken into consideration for every individual case. It is advisable to supply goods or services to new or unknown customers only against cash or down payment.
Collecting cash in a timely manner is just as important as making a deal. The secret of timely collections is in systematic and consistent credit management practices that underpin the relationship with every customer. As mentioned, running a credit check on prospective customers is advisable. However, these may not help when trouble arises with past buyers. So, it is necessary to keep a constant look out for warning signs like shipping payments, round-number or unsigned cheques.
Invoices should be correctly made out and sent as soon as possible. The pay-by date must be clear. Depending on the amount in question, a follow-up call can be made three days after posting an invoice. This can be done under the umbrella of checking that the customer is happy with the product or service. Assuming they are, it is then possible to confirm whether they have received the invoice and passed it for payment.
The first step in sound credit management is improving the evaluation of credit risks.
The day an invoice becomes overdue a company can ring the customer and politely ask if there is a problem, because payment is late. The only excuse for non-payment is not having the money. Being polite and persistent is wise. Point out that interest is now accruing on the invoice. If the customer is local, creditors should phone in the morning and say that they will pay a visit at a specific time to collect a cheque for payment.
If the customer is too far away to visit, creditors should write a bland letter (no matter how much anger is felt) stating the facts only. They should draw attention to their terms and conditions of trade and itemise each call made chasing payment. They should say that they can no longer supply the customer and point out that if no receipt of a letter is made within seven days, legal action will ensue. Creditors should be prepared to keep their word, however.
Thus, it is clear that supporting company expansion while protecting critical business relationships is not easy in today’s business environment. One way of the improving the risk-reward ratio is through credit insurance, which is simply a way to protect against the risk of not getting paid when trading on credit payment terms. Credit insurance provides the ability to trade safely in both domestic and international markets, which can be a vital tool for well-established business.
With offices in 45 countries around the world, Atradius is the world’s most international and integrated credit insurance company. It provides a range of tailored domestic and international policies and work with clients to ensure the best possible solution to credit risk management needs. Its credit cover options are supported by a first-class policy management system. Atradius also provides innovative business information services and a debt collection service that keeps clients fully informed and in control of credit management processes.
According to John Blackwell, senior communications manager at Atradius, “Limiting exposure to risky buyers and offering more stable buyers greater incentives to do more business could have a positive effect on cash flow and increase flexibility in expanding growth opportunities. For instance, credit-insured receivables can improve access to bank finance, which in turn improves the company’s ability to invest in distribution channels and product innovation. It also allows suppliers to offer good, reliable customers favourable credit terms that can increase sales volumes.”