Winning business is a great feeling! Every business loves the positivity a new client brings. You can see more revenue hitting your bottom line, progress is made towards your targets and it feels like a validation of your company.
Many businesses have sales teams chasing new business that are not connected to the finance department. Therefore, the business they win is probably not underpinned by any credit management decisions. How do they know that a new client is creditworthy?
Know your customer and win more business! The sad fact is all customers are not going to be good customers! It is therefore essential that you know your customer if you need to provide them with a credit line. That means you need a process to determine whether credit should be granted and how much you should be prepared to give.
Know Your Customer
Credit management begins with a process known as ‘know your customer (KYC)’. This requires that the business verifies the identity, suitability, and risks involved maintaining a business relationship. In the case of a small business, this might be the role of the business owner, and in bigger companies the onus might be on the finance department. The level of credit required in most cases will determine who has the final decision on whether the customer presents an acceptable level of risk. This process will also form compliance with Anti-Money Laundering (AML) regulations.
When assessing risk, we suggest you follow our 4-Step Process:
• Do your research – use a credit reference agency.Find out when accounts were last published, how solvent the business is, how quickly they pay suppliers and debtor days as key indicators.
• Apply information effectively – you will need to create your criteria for underwriting customers based on the amount of business they want to transact with you. Use that criteria utilising the information you gather to make careful data-driven decisions.
• Review the right information at the right time – You will save time and money if you set up a process of checks at the right touchpoints of your business relationship. Pre-sales checks are very useful, carry out your credit process at each sales stage and keep monitoring existing customers.
• Use tools to manage and monitor your customer – you can automate credit risk processes and employ tools to monitor the ongoing credit strength of your customers. Undertake an annual credit review for each customer so you can analyse each credit limit, whether more is needed and if you are happy to extend it. It is essential that you put this into practice.
Let us next look at how best to manage each step.
Do Your Research
The first step is to look at the customer’s past and present credit status. By completing this task, you assess the risk they place on your business now and in the future. Research your customer’s previous credit history. You can ask for bank or supplier references to add more validity to this check in addition to those we highlighted above.
The main areas of research you should complete are:
• Who are their debtors and creditors?
• What is their industry? – Is the industry under pressure at present? Hospitality is a typical example in the current climate.
• Is their business affected by seasonality?
• Obtain copies of credit data and management accounts.
• Who are the Directors of the business and what are their liabilities? If a sole trader, get permission to complete a personal credit check.
• Identify Group exposure – make sure you know if your business is dealing with related companies and treat them all under one umbrella.
• Assess credit insurance.
• Do they use invoice finance?
• Have they taken advantage of Government-backed loans and deferments?
• Understand your customer’s supply chain – what vulnerabilities exist that could influence their expenditure or ability to produce goods for their customers.
To ensure you have all the information you need to produce a robust, objective decision every time, put in place a well-designed, repeatable process for every future customer. This will ensure that you gather the data outlined above. To do this, create a checklist that covers data required from the following sources:
• Credit application form – even if a cash sale
• Credit reference agency check
• Company website details
• Companies House information
• Full set of up-to-date accounts if not available from Companies House
• Monitoring – internal and external
Request information and permissions directly from your customer or prospect to ensure they understand what you are doing and that you receive the right information.
Apply Information Effectively
When you have collated all the information, the data you have will be the keystone to making the right decision and understanding any challenges you may face. Remember, informed decisions equals justified actions.
If your customer is a late payer, calculate what this would mean to you based on average monthly spend. If they have not published accounts, find out why. If you have questions about their financial data, speak to the business owner or a senior finance contact to dig more deeply. You may find these are explicable and that your concerns can be allayed.
Whatever happens, understand what your criteria are for underwriting customers based on level of exposure. What credit score does a customer need to get a credit line of £100,000, £1 million and so on. Make sure that just as you did in gathering the data, you have a checklist that ensures you have satisfied each key element of your underwriting criteria before you make a final decision
Review the right information at the right time
Carrying out pre-sales due diligence is an excellent way to avoid wasting a salesperson’s valuable time chasing a customer you cannot underwrite. Doing basic credit checks will give you a score indication that could immediately alert you that the customer does not meet your credit criteria.
Get your salespeople to do some of the background research covered in Step 1. Make sure they find out more about the customer’s clients and suppliers. Where are the opportunities for growth, where are their threats coming from, either economically or from competitors? Added to the agency data you will gather, this kind of intelligence can be powerful in helping to make a marginal decision.
Make sure account managers are tasked with gathering ongoing data about the business, so at annual review stage you can once again analyse their business updates with the credit data you collate.
Gathering the right data at each step will save your business a lot of time and money, improve your debtor days and cash flow and reduce bad debt significantly. Just follow the process diligently.
Use tools to manage and monitor your customer
Monitoring your existing customer portfolio is just as important as creating a robust process for underwriting new business. Segmenting your client portfolio into risk categories and adjusting your strategy accordingly, will help you know your customer better.
Companies with excellent credit ratings who pay on time do not need the same level of monitoring as those with borderline financials and occasional or regular late payers.
If a particular industry shows signs of universal challenges, put those customers you have in that industry into a higher risk segment.
Changing external factors will have an impact on your customers. Clearly a major event like a pandemic, Brexit, a credit crunch or the failure of a very large supplier or customer, can have serious implications. Monitor those situations carefully and review how they affect your customers’ finances.
It is essential that you monitor payments from each of your customers. Those who take longest to pay, need to be reviewed.
There are numerous ways to monitor, manage and know your customer, but it is important you design a system that works for you and where possible, includes automation to reduce the workload of your finance team.
If you put these four steps into action, you will have a sound base to drive your business forward. By creating a structured process, you will be able to make better decisions, target the right customers and improve cash flow.