The impact of the credit crisis on the global economy continues to play out and amidst this turbulence local economic conditions have become significantly more challenging. Current economic data and news headlines provide a somewhat bleak outlook and the latest information from Dun & Bradstreet (D&B) supports the evidence that conditions are tough.
Poor sales and profits results in the March quarter have sparked expectations that the September quarter will be particularly challenging. D&B’s Business Expectations Survey indicates that the coming quarter will bring a rapid slowdown in activity, with expectations for sales, profits, employment growth and capital investment having declined steeply to enter negative territory.
Trade Payments data from the March quarter shows that debtor days have hit their highest level since 2001. This means businesses are being denied access to their own cash for close to four weeks longer than the standard payment term.
D&B data also reveals a 12% increase in the number of debts being referred for collection – a clear sign that businesses are facing cash flow troubles.
On the consumer front we are seeing increased expectations that debt levels will increase and that consumers will rely on credit to cover otherwise unaffordable expenses in the coming months. Our consumer debt statistics support these findings, revealing an increasing propensity for consumers to get into trouble over debts of $400 or less.
It is clear that all of these factors are making it increasingly difficult for businesses to stay on top of their game. However the current economic turbulence has had one clear positive impact – risk aversion is now back with a vengeance. Executives recognise that credit risk management isn’t just a nice to have, it is a critical component in the ongoing survival of every business.
But understanding the need for credit risk management and knowing the best approach to take are two very different things. This issue is particularly pronounced for SMEs, who often have a niche area of expertise, however there are some key principles that SMEs can follow to ensure they effectively manage their credit risk:
Understand the company’s appetite for risk:
Companies and sectors often have varying appetites for risk – this in itself is not an issue however it is important that the threshold is communicated throughout the business. Executives should develop clear guidelines for accepting and declining new customers and although SMEs find it particularly difficult to turn away a sale they need to adhere to the threshold they set. The loss of a sale is more manageable than a persistently delinquent payer that impacts cash flow and spreads resources thin as the business seeks to recoup outstanding monies.
The timeliness of information is critical to effective decision making:
Make every effort to automate your credit risk management processes and ensure that you receive constant updates on all required information. We operate in a constantly changing business environment and cannot afford to make decisions based on outdated data.
Implement effective credit checking processes:
This process must begin at the outset of a customer relationship to ensure you have a thorough understanding of a potential client’s financial health, including their ability and propensity to pay on time.
Monitor the financial health of your clients:
Monitor your clients throughout the customer relationship to ensure that you are can address any potential issues before they become a significant drain on your business.
Be flexible:
To be effective, risk management processes need to be planned and flexible. Ensure that your evaluation process is continuous and that you are able to respond quickly and efficiently to changes in the economy and corporate strategy. This will it allow you to reduce risk and volatility and improve returns.
It is clear there are a number of issues globally and locally that have made the business environment a substantially tougher place than it was just 12 months ago. However the key to ensuring your survival and ongoing profitability in these challenging times is to get your credit risk management approach right.
You cannot afford to take the risk of doing business with an organisation whose financial stability is questionable. It is also important to remember that size and reputation don’t matter check all of your customers and prospects to ensure you remain in business and ahead of the game.