When you extend trade credit, you are exposed to potential losses if your clients or customers fail to live up to their financial obligations.
By implementing an ongoing system for monitoring business accounts, however, you can proactively identify and mitigate credit risks, ensuring stronger financial stability and fostering more transparent business relationships.
Understanding Business Credit Reports
Solid business credit management starts with business credit reports. These credit reports provide insight into the financial health of potential clients and customers. They are valuable when reviewing credit applications and onboarding new customers. Examining key components can help you make better initial decisions about extending trade credit.
Business credit reports provide an overall credit score, forecasting the likelihood of getting paid within terms; they detail:
- Payment history: How consistently a company pays its bills and whether payments are made on time.
- Credit utilization: The amount of available credit a company is using. This can indicate financial stress if the utilization is high.
- Public records: Information about liens, judgments, and bankruptcies that may affect a company's ability to repay debts.
- Company information: Basic details about the business, including its size, industry, and years in operation.
- Beyond initial credit decisions, keeping an eye on the financial health of your customers makes good business sense. Periodic reviews of the key accounts businesses track can ensure you stay on top of changes that might affect your cash flow.
Establishing an Account Management Tracking Software Solution
While you can pull business credit reports manually, this can be time-consuming and inefficient, especially if you are managing a significant number of credit accounts. Account management tracking software can streamline and automate the process of collecting and analyzing data.
Beyond periodic reviews, you can also employ continuous monitoring with automatic alerts when financial health changes. This provides an early warning of potential problems with your clients or customers, enabling you to be proactive in protecting your cash flow.
Benefits of Account Management Tracking
A comprehensive account management tracking system provides significant benefits, such as:
- Improved decision-making: With access to up-to-date credit information, you can make more informed decisions about credit limits, payment terms, and customer relationships.
- Reduced bad debt: By identifying at-risk accounts early, you can take steps to minimize potential losses.
- Enhanced efficiency: Automated monitoring frees up staff time for other critical tasks and ensures consistent tracking across all accounts.
- Better customer relationships: Proactive monitoring allows for timely communication with customers about potential issues—creating transparency and accountability.
Accounts Businesses Track
The accounts businesses track will vary depending on their size and volume of business. Key accounts, or those representing a large percentage of your revenue (or investment), should top the list. However, many businesses opt to track their entire credit portfolio to ensure alignment with their risk tolerance. You may prefer to track both individual business credit scores and implement portfolio scoring to assess overall risk.
Common accounts businesses track include:
- New customers that have not yet established a track record with you
- High-value accounts that have large outstanding balances or higher credit limits pose the biggest potential risk.
- Accounts in high-risk industries that are more prone to volatility or instability
- Customers with previous credit issues
- Strategic partners or suppliers that you depend on to prevent supply chain disruptions
Interpreting Changes and Alerts
With your account management tracking software in place, you can spot warning signs and respond to alerts effectively. However, you need to employ these best practices for credit risk management.
Understanding Context
A slight delay in payment from a typically punctual client might be less concerning than a similar delay from a customer with a history of financial struggles. Context helps prioritize which alerts require immediate attention and which need more monitoring.
For example, a company might experience a temporary cash flow issue due to a one-time large investment, which is fundamentally different from a consistent decline in financial health over several months.
Recognizing Patterns
Identifying recurring trends could indicate problems within an account or even an entire industry. For example, if multiple clients in the retail sector start showing signs of financial stress, it might signal broader economic challenges affecting that industry.
Assessing Severity
A sudden drop in a client's credit score should be a signal that you need to review their account, taking a deeper look at their payment history with other vendors to determine if you need to act now. An adverse public record, such as a lien or judgment should trigger a review as well. Large drops in business credit scores or bankruptcy filings should be dealt with immediately.
By carefully weighing these factors, you can make informed decisions about how to respond to the alerts and changes in your customer’s financial health.
Command Credit offers on-demand business credit reports, ongoing account management tracking software services, alerting, and portfolio scoring to help lower your credit risk. Contact Command Credit today to get started.