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What credit limit can we offer our new supplier? Which customers in my portfolio make payment on time? And which suppliers are on the brink of insolvency? Anyone wishing to minimize business risks, should take a close look at their customers and suppliers and regularly check their credit-worthiness.
The Schmidt organization has been working with a plastic manufacturer from Thüringen for three years now. It has been more than two years since the last credit check on their business partner was carried out. “We see no need to be pro-active in this regard. After all, we audited the company right at the very start,” explains the company’s credit manager. But Daniel Schneider, Senior Business Consultant at Dun & Bradstreet, knows that this is not at all the case.
“Many companies focus primarily on checking their new customers. This is a good thing to do, and important. But it is just as important that they also perform regular credit checks on their existing customers. Because today's information will already be outdated by tomorrow,” says Schneider.
He recommends segmenting the entire portfolio based on risk and assigning all customers and suppliers to a green, yellow or red category using a simple traffic light system. Business partners who pay on time and have a good credit score are placed in the green category. Companies with a poorer payment record are yellow. And businesses classified as especially vulnerable are marked red. The risk of insolvency is greatest among the yellow and red business partners in particular. In these cases, credit managers should regularly review the development of the most important key figures, so that they can take countermeasures at an early stage. A credit policy should also specify the intervals at which checks are to be carried out on green, yellow or red business partners.
Companies should make use of external data such as that held by Dun & Bradstreet when classifying new customers. During this process, credit managers should focus on more than just financials like cash flow or equity ratio. “Soft factors such as the year in which the company was founded, its legal form, corporate linkage or turnover within management are also crucial to a well-founded analysis. If, for example, a company has successfully existed in the market for the past 50 years, then it is given a better classification than a business that was founded just a few months ago,” says Schneider.
When classifying existing customers, credit managers should use both external and internal data. How reliable is the company when it comes to making payment? How long has the business relationship existed? Is there perhaps insider information from the sales department about the company's business development? All these factors should also be taken into consideration when making an assessment.
“The ideal way is to work with a scorecard combining internal and external information. This provides you with a good overview of your entire portfolio.”
Once all the information about the business partner is available, the individual parameters must be weighted in view of the corporate objective. Each company defines for itself how each factor is to be weighted during a credit check. The result is a standardized scorecard. “For many companies, equity ratio is especially important. Others place particular value on sales. In workshops with our clients, we first carefully analyze the current situation and then outline appropriate solutions.”
Especially when building a scorecard, it is important to test it. To do this, credit managers should use a company with a particularly good credit rating and another company with a poor one. “This allows you to check how reliable your risk assessment is,” states Schneider.
To allow you to work as efficiently as possible, it is worth using credit management software or an interface to Dun & Bradstreet. Through these systems, users are automatically notified, for example, as soon as there is a change in the credit-worthiness of a business partner. Dun & Bradstreet's partners in this area include well-known companies in the industry such as Prof. Schumann, Serrala, SHS VIVEON, SAP and SOA PEOPLE AG.
D&B Finance Analytics from Dun & Bradstreet also allows companies to personalize their risk management by combining accounts receivable data with Dun & Bradstreet's industry-leading data and analytics for smarter decisions. “By importing your data into the solution, D&B Finance Analytics provides an overview of the total receivables in your portfolio. This is then combined with Dun & Bradstreet’s predictive information to provide you with an assessment of the risk within the portfolio,” explains Schneider.
D&B Finance Analytics provides a clear and complete picture of the portfolio and customer relationships by matching, cleaning and integrating Dun & Bradstreet data across all accounts.