Risk-aware Trade Credit Intelligence: The Key to B2B Certainty

On average, accounts recoverable represent more than a third of a business-to-business (B2B) company’s assets. Everyone knows the value of customer retention versus the cost of new customer acquisition. Yet, the rates of companies’ bad debt, at one time averaging 0.5% to 0.7%, have increased to an average of 1%, depending on the industry and location. Across Europe more than 25% of business failures are the result of customer defaults. This makes protecting customer recoverables every B2B company’s greatest opportunity and its biggest risk.

Meanwhile, economic and political instability throughout the EU has the potential to directly impact a B2B customer’s ability to pay, threatening balance sheets, treasury cash flow and limiting growth. At the same time, such uncertainties bring pressures for new opportunities internationally, as companies explore exporting into untapped, riskier markets such as Asia, South America and Russia. 

As late payments and defaults have increased over the past few years, heightened competition and tighter profit margins have limited the ability of companies to pass the resulting costs of risk on to their customers – with the outcome being missed targets. Shareholders, tired of surprises and unexpected news, are calling for tighter controls and better corporate governance. 

All of these factors put credit risk management at the top of the strategic agenda for chief financial officers (CFOs) and chief executive officers (CEOs) of small and large businesses, whether or not these businesses carry credit insurance. 

Establishing Trade Credit Governance

The safest way B2B companies can prepare for both today and tomorrow is by identifying and analysing risk wherever and whenever possible. To do so, business leaders need to be proactive about credit risk management. This means having detailed intelligence on the financial health and credit worthiness of all buyers and the right tools to assess their individual and collective impact on the balance sheet. 

Every B2B CFO and CEO needs to know the answers to the following questions, both in real time and at any given moment: 

  • Outstanding per risk category.
  • Overall per risk category.
  • The cover rate of total outstanding customer debt.
  • The 10 largest outstanding accounts per risk category which are not covered.
  • Overview of the 10 largest accounts per risk category. 

The CFO should be able to easily assess the relative security of recoverables by company, group and country. Credit scoring should take into account each customer’s downstream and upstream risks. Ask yourself the following questions: 

  1. How much do outstanding trade debts count as an asset on your company’s balance sheet? Are they secure?: A risk-aware balance sheet means more than tracking days sales outstanding (DSO) and can be leveraged to guarantee bank credit and reduce borrowing costs. 
  2. How does your company make credit assessments today?: Single source reporting is not enough. And it can take days or weeks to collect information and make thorough credit assessments manually, by which time, the information is already outdated. A risk-aware assessment process takes into account industry risk, country risk and customers’ financial health and credit history; all of this information is gathered, integrated and analysed from various sources around the world.
  3. How integrated is credit management throughout your organisation? Are you able to enforce a credit governance policy across locations and business functions?: Too many businesses still operate with siloed sales and credit processes that vary from office-to-office, country-to-country. This leaves these companies vulnerable to risk and their management lacking real intelligence with which to make strategic business decisions.
  4. How much visibility do you have into your buyers’ financial health and credit worthiness? What’s behind the scenes of current or potential buyers’ businesses?: Today’s economic climate can even impact customers with a strong credit history and historically good financial health. Every B2B firm, no matter what its size, needs timely visibility into current or potential customers’ businesses. It needs to know, and be able to track, customers’ supply chains, the nature and source of their debts and what factors make them able to pay or likely to default on credit. Visibility into the current financial health of customers lets companies understand their exposure instantly as ‘very good risk’, ‘low risk’, ‘average risk’ or ‘high risk’. 
  5. Are you looking to expand into new markets? What level of risk can you tolerate?: As more European-based companies look for growth in new, unfamiliar markets in Asia, South America and Russia, so risk increases. Companies have to be able to determine the credit risk of potential buyers operating in these areas based on ‘on the ground’ intelligence. 

The Payoff of Risk-Aware Credit Intelligence

Risk-aware credit intelligence improves corporate performance, by providing superior control over customer credit exposures in existing and new markets. Companies secure their trade debts and their treasury departments improve their liquidity, working capital, credit management processes and growth position. For these companies, the pay-offs are strategic, operational and financial.

Strategic Payoff: Immediate visibility into the current financial health of customers lets B2B businesses understand their exposure instantly; so if one customer slips from low or average risk to high risk, businesses can adjust credit limits until their financial position improves. When companies can accurately qualify, assess and monitor the credit worthiness of customers and prospects, they are able to grow safely and pursue export markets.

With real-time intelligence about trade debts and improved decision making about credit, enterprises can manage risk according to their risk appetite—for each account and aggregate risk on their entire accounts receivable (A/R) portfolios. They are then better able to hold the value of customer debts, sustain cash flow, and improve the accuracy of forecasting. Ultimately, when recoverables are strong, with fewer days outstanding and fewer customer defaults, they’re worth more to banks and credit insurers. 

Operational Payoff: Bridging the gaps between back-office financial systems like enterprise resource planning (ERP), A/R and front-line customer relationship management (CRM) systems ensures that everyone involved with customer acquisition and management works with the same information; from lead generation and closing a sale, to follow-up throughout the entire order-to-cash cycle. With an integrated credit risk management process in place, businesses can control and enforce credit authority levels (persons who decide credit policy), customers’ creditworthiness and credit limits, workflows for credit approvals and on-going monitoring of customers’ orders, payments and credit status. 

Financial Payoff: According to a 2011 Aberdeen Group report, authored Scott Pezza and entitled ‘The Order-to-Cash Cycle: Enhancing Performance with Process Automation’, companies that have implemented just a common repository for customer risk information lowered past due A/R by 10% and are 31% less likely to cite customer non-payment as a top pressure affecting their business. Companies that regularly score their A/R portfolio, experience 28% lower past due trade debts than companies not scoring their entire A/R portfolio. 

With strategic risk awareness, marketing can purge high-risk companies from campaign lists, thereby saving money on campaigns, eliminating follow-up to responses from high-risk companies, and earning a higher return on interest (ROI) from marketing initiatives. 

Sales can focus their efforts on the strongest, high-value opportunities that will actually deliver fast, full revenue recognition. This will show up on the company’s balance sheet not only as higher assets (revenue and low-risk A/R), but possibly a lower debit (cost of sales) because sales teams will be tangibly more productive. 



Related reading