Proactive credit risk management up-to-date thanks to real-time information

Financially sound for companies means knowing how to deal with financial risks. Credit managers are indispensable in this respect. They provide insights into debtor risks that are essential for informed credit decisions. This article highlights different forms of debtor risk and the importance of proactive risk management.

Allianz Trade's own research shows that Days Sales Outstanding (DSO), the number of days invoices remain outstanding, reached 59 days by 2023. Many companies express concern about the payment behaviour of debtors. Financial institutions are also seeing customers in arrears. As invoices remain outstanding for longer, liquidity comes under pressure at many companies. With the knock-on effect that these companies in turn start paying their suppliers later. It disrupts day-to-day business, it leads to higher costs (collection, interest) and, in the worst case, companies collapse due to working capital shortages. For companies, this trend should be an alarm bell. Is the accounts receivable policy in order?

Roughly speaking, three types of debtor risk can be distinguished: 

• Payment risk: the probability that a customer does not pay the invoice. 
  

• Concentration risk: providing high credit to one large customer or a select group of customers representing a significant proportion of sales. High concentration risk makes companies vulnerable because the loss of one customer has an immediate and large impact.
  

• Country risk: the risk companies face when doing business internationally. Country-specific debtor risk is affected by fluctuations in exchange rates, economic or political instability, the likelihood of trade sanctions or embargoes, or other issues.

The Credit Manager plays a key role in minimising debtor risks and protecting a company's cash flow and working capital. For example, through effective credit analysis, monitoring, collection procedures and sound risk management.  A healthy debtor base is crucial for a company's financial stability and operational efficiency. By taking a proactive approach to credit management, using technology and maintaining good customer relationships, the Credit Manager contributes to the company's overall financial stability and growth.

Determining a sound risk profile of a customer or prospect requires a systematic approach that integrates both quantitative and qualitative data. Many factors come into play. Apart from the customer's financial health, industry-specific information is also crucial. What are risks inherent in the debtor's field, such as economic cycles, competition and regulations? In addition, the track record of the management team comes into play. Is the incumbent management capable of running the company effectively? Geopolitical developments should also be closely monitored. Look at how a war in Ukraine or a conflict in Gaza has far-reaching implications for global trade.    

The rise of new technology gives the appearance that the Credit Manager's work is almost completely automated. This is indeed appearance. The human factor is invaluable and is also indispensable. The combination of technology and human skills ensures optimal credit management. Data analysis offers undeniable insights, but it is only on the basis of the judgement of the experienced Credit Manager that the company can make decisions. The human ability to understand context and nuances is decisive in complex credit assessments.

Not for nothing is an important attribute for Credit Managers the ability to listen well. No matter what the customer says, "why" is always heard in the back of the mind. The Credit Manager must be able to connect with any customer type and build a sense of mutual trust. Then you will get companies to be willing to share not only bad news with you but also the measures they take to stay ahead of this bad news.