1. Correctly assessing risks and preventing defaults on payment
Scoring is an important tool when it comes to correctly assessing risks. You can use the score to help you decide whether or not you wish to do business with a particular customer, and if so, under what payment terms. In order to illustrate just how costly it can be if you fail to correctly assess risks and one of your business partners fails to make payment on one occasion, here is a short calculation example.
Your customer purchases goods from you at a value of 10,000 euros. The trade margin is 2 percent. Instead of checking your business partner's score, you go with your gut. The worst-case scenario comes true. Your customer does not pay the 10,000 euros. They default on payment. The key question here is: How many times do you have to achieve the 200-euro margin in order to make up for the loss of 10,000 euros? The answer: You need to achieve this margin 50 times over. This corresponds to sales of 500,000 euros. So, in order to make up for the defaulted payment of 10,000 euros, you must accumulate sales of 500,000 euros. A huge sum.
Scoring can provide you with crucial support when making credit decisions. The example provided above highlights just how important it is to evaluate risks using valid data. The fewer losses you incur due to defaults on payment, the more you contribute to your company’s growth.
The D&B Score from Dun & Bradstreet shows how likely it is that a business will be forced to file for insolvency within the next twelve months. You can use the score as an early warning indicator. The D&B score incorporates data from the real life of a company. For example, the D&B payment index (Paydex) measures a company’s real payment habits towards its suppliers. You can calculate risks on the basis of this data and make targeted decisions for continued growth.
2. Correctly evaluating individual value adjustments to generate more profits
Companies are legally obliged to show the true value of their receivables on the balance sheet. In the past, a flat-rate approach was often used to determine value adjustments for this purpose. The age of the receivable played a key role in this: The older the receivable, the more its value was adjusted, for example. For a receivable that was five months old, a comparatively high amount was written off in the receivables valuation. But the age of the receivables alone rarely provides an adequate basis for assessing the likelihood of default. Excessively high value adjustments are often made, resulting in profits being wrongly reduced.
If, instead, a company values its receivables using well-founded default probabilities based on a statistical score, practice has shown that often significantly lower individual value adjustments had to be recorded. The benefit: active working capital management. You can use freed-up funds to conduct further profitable business and therefore drive your growth.
Practical examples back this up. If, for example, a company’s average receivables volume is around 15 million euros, even just a 5-percent correction of the individual value adjustments would increase your profit by up to 750,000 euros.
“This is growth through scoring. This is why it's worth switching from flat-rate value adjustment to individual, score-based value adjustment," says Carsten Ettmann, Senior Business Consultant at Dun & Bradstreet.
3. Taking risks whilst increasing profits with risk-adjusted pricing
The score does more than just help prevent inaccurate value adjustments. The score also helps you to choose the people with whom you wish to do business, and under which terms. By using the score, you can determine which business partner you require a risk surcharge from if there is a high probability that they will not pay or will not pay on time.
This process is called risk-adjusted pricing. Each company determines for itself which score will mark the cut-off point from which a price surcharge will be required.
Global economic crises, globalization, inflation or recession have an impact on country and company risks. By using the D&B Country Risk Indicator, you can assess the risk of your business activities abroad and select accordingly which suppliers you wish to do business with, in which country, and under which payment terms.
“This allows you to monitor your risk internationally at all times and to drive growth based on valid data,” says Ettmann.