Md.Mustakim Ahmed 🧙‍
Jasbir Singh
Ajay
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Customer risk management: how to operate efficiently?

Customer risk management: how to operate efficiently?

Summary:

  1. What is customer risk?
  2. What are the main customer risks?
    1. Late payments
    2. Unpaid bills
    3. The customer’s receivable
  3. How to prevent customer risk?
    1. The history
    2. The financial situation
    3. Payment terms
  4. How to automate customer risk management with collections?

 

The financial health of a company depends first and foremost on good cash managementof its inflows as well as its outflows.

This includes the control of payment deadlines to ensure that each customer receivable is paid within the time limits and thus avoid possible unpaid invoices.

However, every day, there are still forty or so small and medium-sized businesses that cease their activity because of an unpaid customer. This accounts for nearly a quarter of all business closures each year.

This situation was exacerbated by the COVID-19 crisis. Some companies have faced revenue losses, downsizing and failures. And the customer risk has therefore increased.

The issue of collection remains paramount for companies that wish to preserve their financial financial health.

 

What is customer risk?

The customer risk is the risk of financial loss incurred by a company due to the failure of a failure failure of a customer to meet its financial obligations.

Customer risks may include delays or defaults in payment. payment defaultsfraud or defaults to contracts.

The customer risk management is a strategy to reduce risk related to the relationship between a company and its customers. It aims to protect the company against possible financial losses.

Upstream, the customer risk management involves, for example, monitoring the budgetary health of its new client. This is to ensure the solvency of the company. Downstream, this management implies a particular attention to the possible delays in paymentand even unpaid.

The objective of this management is to build sustainable, stable and stable and profitable business relationships.

What are the main customer risks?

Late payments:

The late payment is a breach of a payment obligation. This means that the client is not able to pay an invoice on time. There are several reasons for this delay:

  • The customer forgets to unintentionally the payment term,
  • The customer forgets voluntarily the payment term,

By using the late paymentthe customer prioritizes the health of his cash flow to the detriment of that of the company with which he has a commercial relationship.

Delinquencies:

L’unpaid is a unpaid debt by a customer. This is the result ofa delay in payment or a payment default.

Unpaid debts are often motivated by fragile financial situations that prevent the recovery of the debt.. More rarely, they are also the result of a conflict between the company and the customer. In this case, we speak of litigation.

The company therefore contracts a customer receivable.

The customer receivable :

The customer receivable, or thecustomer’s outstanding balance, is an amount due by a customer to a company. It should not be confused with the customer credit. Which is granted to a customer to allow him to settle the amount at a later date. In this case, the payment is governed by a payment term.

Any customer receivable has an impact on a company’s cash flow. It can lead to a decrease in liquidity as well as a decrease in profits.

It also requires creating a cash flow gap and incurs additional costs to collect.

Let’s take a look at how to prevent trade receivables.

How to prevent customer risk?

Start a new customer relationship on a good basis means first of all taking an interest in your customers. To conduct an internal investigation to prevent possible surprises along the way. Therefore, pay particular attention to the solvency of the companyas well as its reliability.

There are some good habits to adopt concerning thehistory and the budgetary situation of your new clients.

The history

The history allows us to approach the administrative and judicial part.

With the help of a K bis extract (Infogreffe) you are able to verify :

  • The date of creation of the company,
    • Is the company new? Where does it have seniority?
  • Possible judicial elements,
    • Is the company inreceivership? A liquidation of assets? Any unpaid bills? NSF checks?
  • The background of the company’s manager,
    • Is this his first company? Where has he already created other companies? What was their outcome?

To refine your research, we advise you to consult the register of protests as well as the register of general liens.

With the help of professional social networks (LinkedIn and Google Business), you can determine :

  • The number of employees?
    • Is the company in growing? Or on the contrary, has it undergone many layoffs?
  • Customer satisfaction?
    • Are customers overall satisfied with the behavior and service?

 

The financial situation

This step makes it possible to determine the health of a companyand therefore its solvency.

To decide on its health status, you need to set up some financial ratios:

  • The Gearing ratio is an indicator that measures a company’s level of debt in relation to its capital. It is calculated by dividing the company’s debt by its capital.
    • The higher the Gearing ratio the higher the company’s debt.
  • The
    DSO
    is an indicator that measures the number of days it takes for a company to collect its invoices. It is calculated by dividing the total amount of unpaid invoices by the total amount of sales over a given period.

    • Plus the DSO the longer it takes for the company to collect its invoices.
  • The DPO is an indicator that measures the number of days it takes a company to pay its bills. It is calculated by dividing the total amount of unpaid invoices by the total amount of purchases over a given period.
    • Plus the DPO the longer it takes for the company to pay its bills.
  • L’EBITDA is an indicator that measures a company’s profit before adding interest, taxes, depreciation and amortization. It is considered an indicator of the operational performance of a company.

 

Payment terms

A payment term is the amount of time a company allows its customers to pay the amount due. Payment terms are generally defined in the contracts and vary according to the type of product or service provided.

However, four types can be defined in credit management:

  • The cash payment,
  • The payment on receipt of the invoice,
  • The payment period in calendar days,
  • Payment “X days after payment of the invoice, end of month“,

There are no universal rules to apply regarding the choice of time. It is the understanding of your cash flow that will guide you in choosing the most appropriate solution. Here are some things to consider:

  • A long delay implies a WCR and conversely a short lead time is suitable for a low WCR.

You must therefore analyze in parallel your Working Capital Requirement and the budgetary health of your customer to adjust the payment term.

How to automate customer risk management with collections?

Aston ITF is a collection software that allows you to improve your customer risk management. This SaaS platform facilitates the work of your teams. They acquire business expertise and benefit from a personalized approach.

The collection solution offers a dynamic dunning portfolio to prevent receivables, settle overdue payments and manage late payments. You benefit from a dashboard to follow the financial situation of your company, the history of your commercial relations as well as the payment terms granted to your customers.