Credit Reports Risk Assessments Cape Town
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Article: Risk assessment in trade (commercial) credit.
Introduction
No credit manager ever takes anything at face value – it is part of his or her role to look behind the obvious, verify the facts and take informed decisions based upon careful analysis of the results. The impressive premises, complete with the fish tank in the reception area and the flagpoles in the car park, may hide a company with severe financial problems, weak cash flow and a reputation for failing to pay suppliers.
Credit Managers
Credit managers always look behind the façade, – and certainly never enter into any risk environment without having first weighed up all the relevant and available facts. Hundreds of businesses close down across Europe every day, their insolvency leaving suppliers and others unpaid. Often those who have supplied without proper checks beforehand seem surprised when failure occurs, never thinking that this could happen to them. Keen to sell as much as possible with eyes focused on volume rather than net profit, such suppliers themselves often pay the high price of failure in turn.
Risk Assessment
Those who have undertaken proper risk assessment, calculated the risk of slow payment and even non payment, enter into transactions with the knowledge of the amount of risk involved and can adjust their terms, collection policy and procedures and their collection activity accordingly. The simple fact for all to understand in any selling organisation, be they CEO or Sales Manager, is that credit means trust. For trust to have any real value or meaning it requires knowledge, which encompasses all the seller needs to have to make the informed decision. The seller can ask himself three fundamental questions in respect of the granting of credit:
Questions:
1. Is the customer about to fail? (the solvency risk);
2. Can the customer pay our account on time? (the liquidity risk);
3. Is the customer growing or declining? (the volume risk).
Structural and Logical
Risk assessment should be both structured and logical, with a sequence of events established at the outset. This can be followed by both credit and sales personnel in order to define, from the earliest point in the relationship with the customer, the manner in which such a relationship will be conducted.
• The sequence begins with the Credit Application Form: this is the customer’s request to borrow the supplier’s money.
• The process of checking on creditworthiness follows on. The depth of that check will of course depend upon the order value and the extent of the risk exposure envisaged going forward.MACM provides pertinent data and information on entities registered in Malta with which a seller can evaluate the creditworthiness of the customer requesting credit.
• From both the application form and subsequent credit report, a quantified decision can be made as to credit rating (limit) and/or risk category. In other words how much can be allowed and what the perceived level of risk may be.
• From enquiries undertaken, the status of the potential buyer will dictate what credit terms will be applied, standard or special.
Credit Reports Risk Assessments Cape Town
Many a credit manager has the motto ‘ a sale is not a sale until it is paid for’ engraved on a plaque on the desk as well as on the heart. That could be seen as negative – better would be ‘a sale is only a cost to us until it is paid for’. Perhaps the two mean the same thing, the latter, however, has more of a positive ring to it which sales managers could understand. The really positive motto for all professional credit managers should be ‘my job is to look for a way to accept every possible profitable order’. In other words, the true role of the credit manager is to seek the highest volume of profitable sales over the shortest period of time with the minimum of bad debt.
Credit Management
Credit management is as much concerned with identifying good sales prospects and cultivating strong relationships as it is with standard collection actions and ledgerkeeping. The credit manager should be seen by other staff as responsible for the credit policy2 being carried out, applying commercial sense to resolving customer problems. Risk control does not mean saying ‘no’ to poor risks, just because the policy allows this. It means looking for ways of saying ‘yes’ – in other words a constructive attitude which may include various alternatives, such as part deliveries, special credit terms, instalments, discounts, deposits etc.
Risk assessment should begin with all prospective customers being passed to the credit manager to assess for credit. The expense and effort may be wasted if orders do not materialise, but delays are avoided when they do. The credit manager attends Sales Planning Meetings when names of prospective customers are being discussed. He may already know them, and in any event is in a position to move quickly to check them. This involvement can help direct sales plans to the right customers. A joint visit by the credit manager with the sales or marketing person, before the business becomes firm, provides a good opportunity of assessing the people and the premises. This can help in two ways: it adds depth to the written credit reports; and it is the chance to start building strong personal contacts for future collections.
It is of the utmost importance for customers to see sales and credit as a united and money-conscious team, and it is equally important for personnel throughout the selling company to recognise that too. When this team approach is not promoted, the wrong kind of customer can easily play one function against the other in future negotiations, for example, alleging concessions and ‘old’ agreements….
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Credit Reports Risk Assessments Cape Town
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