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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 . . . .