Posts Tagged ‘accounts receivable’

Credit management – Do you know your current risk level?

May 7th, 2009 Comments off

     Working at a smaller company, there are the inherent benefits of being able to quickly adapt to changing market conditions, implement changes quicker, as well as having a more direct line of communication with your account base.  At the same time, however, there is the probable loss of information tools you may have had access to before. For our company, which is a footwear company based in the Action Sports industry, we are typically dealing with the “Mom & Pop” retailer who typically have only 1, or a few locations. Having the most current financial profile on these folks is typically unlikely, any reliance on D&B info is sketchy at best, and the possibility of credit insurance is unlikely considering the customer profile. So how do you handle the credit granting decisions with a hand like this dealt to you?

     At one of the previous companies I was at, we dealt with larger, capital-intensive projects with blue chip accounts where accurate financials were a google search away. These were also accounts that were seldom turned down by our credit insurance company Coface. Although at times I questioned the need to pay the high annual premiums to insure our credit portfolio, it would have only taken a single job to go sideways to make up for years of paid premiums. I would bet that in 18-months since I left that their credit insurance was tapped on a few occassions considering the primary customer profile was in the financial services sector. But then again, these guys were solid…right? But alas, my Coface coverage was a tool that can’t be applied to the customer profile that I am dealing with now.  On to the next move….

     In consideration to all the D&B reports that I have pulled, I have found, in general, that this information is not typically reliable at the corporate level and often lags in getting the information updated. Sometimes over significant periods of time. I would NEVER make credit decisions based on Dun & Bradstreet information alone. It’s merely a single factor in the consideration of approving a new account or keeping tabs on a existing account. Ok, what next….

     I am a huge advocate of trade groups and their ability to gather and share information at more of a “street-level” application.  But from a financial perspective, I have found that trade groups within the Action Sports industry are somewhat non-existent. There’s fantastic trade groups at the Retail level, Environmental level, Manufacturer level, but I have not found one that focuses on the financial side.  Maybe an opportunity here?  I was recently contacted to become part of Footwear Industry Trade Group. The concept is in its infancy, but we went through a demo and reviewed the available tools. Really a solid approach and has great promise. However, in reviewing some of the companies they have participating, they are not in our peer group. Any sharing of information would be of no benefit to us. The companies that are currently signed up are not sold through our typical account profile. I tentatively committed to our participation in the group, but only if they successfully signed more of our peers. So what am I left with…?

      I’m left with the key element that is driving the current growth in our business and allowing us to post numbers higher than last year….the relationships that we have with our accounts and the collaborative approach we take with them.  We take a sincere approach to developing partnerships with our account base and supporting them in whatever way we need to, so long as it also makes sense for us as a business. Whether that’s international or domestic. Whether that means sending out an email myself on a past due invoice, calling them directly to discuss a paymet plan, or to just discuss their general outlook. I believe it’s that approach that has allowed us to mitigate our credit risk and realize a bad debt expense percentage that is far below industry standards.  While there’s always the unforeseen risk that might always catch us by surprise, I do everything I can to minimize that risk and maintain a keen focus on our collections activity in this environment. Do you know what your current risk levels are?

Thanks for reading. . . .

Jeffrey Ishmael

Do you know the financial strength of your customers?

July 30th, 2008 Comments off

     I’ve posted a number of commentaries regarding Working Capital and the necessity in managing this portion of your financial portfolio. A significant element is obviously the management of your receivables and ensuring that your DSO metric is maintained at a healthy level. One of the largest areas of focus each month is the top receivables outstanding and the aging report. Within this report there are always those names that we quickly recognize since we have been doing business with those customers for years, and in some cases, decades. However, in the current economic environment, do you know the current financial strength of your customers?

     We all played a role in defining the credit policies that our staff employs for the approval of new customers and the credit levels assigned.  On an ongoing basis, there’s usually no need for concern so long as the customer is paying within normal parameters. However, what happens when those payments start slipping a bit and there’s perhaps been some turnover in staff, and they’re not quite up to speed on the history of the customer?  When is the status of the customer elevated to you for further decision making? At what point do you start asking for updated financials from your customer? At what point do you track the commercial successes or failures of your key customers?  The answer to these should be that your tracking this information on an ongoing basis.

     The financial partnerships that we develop with our customers should not be centered around the initial credit approvals or the periodic payments received.  For significant customers, that partnership should be an active one and it shouldn’t be unusual or viewed as intrusive to be contacting our financial peers at our customers to request this updated information.  For customers losing significant contracts, ending strategic partnerships, or other material events, these would be a significant enough events to revisit the credit decisions made on the account and whether the original credit decision should be reaffirmed or reduced.  It’s the continued maintenance of your customer relationships that may aid you in prevention of significant bad debt exposure.

Thanks for reading . . . .