While small businesses generally remain somewhat optimistic about the future, there are some warning signs in the economy. The Small Business Delinquency Index (SBDI) rose steadily throughout 2023, hitting its highest levels since September 2020. Similarly, the Small Business Default Index (SBDFI) rose to its highest level since early 2021.
With concerns remaining about inflation, interest rates, and changing consumer behavior, business owners need to keep a close eye on the financial health of their clients and customers to avoid putting their own businesses at risk.
What Is Account Monitoring?
When you extend credit to a client or customer, you are taking a calculated risk that they will pay you back what they owe on time. Account monitoring is the process of tracking and analyzing the financial health of your active accounts to identify any changes that might impact their ability to pay.
Things can change quickly in business, so making sure your account portfolio does not expose you to unnecessary risk is essential.
Key components of account monitoring include:
- Credit score tracking: Keeping an eye on fluctuations in business credit scores to assess risk levels.
- Repayment history review: Monitoring payment patterns to detect any delays or defaults.
- Public record filings: Checking for any legal filings, such as bankruptcies, liens, or judgments, that could affect a client's ability to meet their financial obligations.
While you should conduct due diligence before extending credit and onboarding new clients, you also need to track financial performance over time.
The Benefits of Account Monitoring
Account monitoring and control produce several key benefits, especially for small and mid-sized businesses. The three biggest benefits of account monitoring are:
Timely Alerts to Changes
Regular monitoring can alert you when there is a substantive change in one of your customer’s business credit scores. For example, a sudden drop could be an indicator of financial trouble. With an early warning, you can manage your credit proactively before it impacts your cash flow. You can also be alerted to troubling patterns of repayment, such as your client suddenly going past due on invoices from other businesses.
Account monitoring and control can alert you in case of an adverse public record filing. You will want to know about any new liens, judgments, or bankruptcies that might affect your relationship.
Enhanced Credit Management
It is always best to act before there is a problem. When you can identify potential issues early with account monitoring, you can address them before having to turn bills over to collections.
You could cap credit, adjust credit limits, or request deposits upfront to reduce your risk. In other cases, you could work with your clients or customers to enter into a formal payment plan to ensure you get paid back what you are owed to increase your odds of recovery.
Mitigating Risk
By continuously assessing the financial health of your clients, you can reduce the likelihood of bad debt. Effective account monitoring helps protect cash flow, ensuring you remain financially stable even in challenging economic conditions.
Best Practices for Implementing Account Monitoring
Businesses should have a formal process for account monitoring that goes beyond periodic reviews of outstanding invoices and aging.
Regular Account Reviews
Some organizations adopt quarterly reviews of client business credit reports to identify signs of potential problems. However, this can provide you with a false sense of security. Changes may not be obvious from quarter to quarter.
Implementing an account monitoring solution can streamline the process and provide real-time alerts for pre-set thresholds. Rather than waiting 90 days for your next quarterly review, for example, you can be notified immediately when there is a measurable change to your client or customer’s financial health. This is especially important if there is a significant event such as a bankruptcy. Waiting to provide proof of a claim in a bankruptcy filing can put you at the end of the line when assets are dispersed.
Setting Collection Strategies
Organizations should also align account monitoring and control with their collection efforts. Regular updates from monitoring should shape collection strategies and priorities.
Creating a Response Plan
It helps to have a response plan in place when there are adverse changes to a client’s business credit report. A thoughtful approach with phased collection efforts can help to negotiate faster payments and document efforts in case legal action is necessary.
Command Credit’s account monitoring solution automatically monitors your client’s business credit report and alerts you to significant changes in credit scores, repayment history, and public record filing. Portfolio scoring can set a baseline for risk tolerance and identify clients that may be facing a downturn. Contact Command Credit today for a demo of account monitoring and alerting.