A large part of a company’s sales depends on the amount of credit granted to its clients, which enables the management of cash flow. Quite often, the evaluation of a client’s creditworthiness indicates that credit granting is viable, however, some time after the approval, default-related problems start to appear.
But why does this happen? How to identify if clients are facing financial difficulties?
The first step towards the identification of the financial situation and liquidity of a client-company is the definition of a credit policy containing the most comprehensive set of data possible on the respective profile, which when evaluated in an integrated manner will enable the identification of the economic situation of the company, its liquidity capacity, and perspectives for the situation to be maintained in the coming months.
The application of a balanced credit policy further depends on the participation and collaboration of the commercial area in the credit risk management process.
Another method for identification of the clients’ liquidity risk is the monitoring of their business behavior internally, through management reports showing the historical liquidity ratio, the current payment status of outstanding receivables, the historical evolution of the return of merchandise, and other indicators that help us to understand the internal liquidity behavior.
Other sources of monitoring information are:
- The daily monitoring of information from credit bureaus, information obtained from consultation of Internet sources, like the Google, AltaVista and specialized websites of the segment where the client operates;
- monitoring of tax payment behavior through public sources (delay in the payment of taxes by a client could be a sign of liquidity problems, which require to be investigated);
- even information obtained from competing suppliers.
Risk monitoring should be strategically planned, and should be focused on key risks in terms of concentration and instability of payment behavior.
Companies that contract credit insurance count on a valuable risk monitoring source, as the behavior of all insured clients is monitored by the insurer. Whenever the insurer identifies the aggravation of a client’s risk, the insured company is advised and has the chance to take the measures required to mitigate the risk.
CredRisk Insurance is a broker specialized in credit insurance that can help you with the management of your policy and with your company’s risk mitigation planning. Learn more about all the advantages of contracting credit insurance by downloading our Definitive Guide!