Customer Risk Management: How to Manage It Effectively?
Contents :
- What is customer risk?
- What are the main customer risks?
- Late payments
- Unpaid bills
- Customer receivables
- How do you prevent customer risk?
- History
- Financial situation
- Payment Terms
- How can you automate customer risk management with collections?
The financial health depends first and foremost on good cash managementits inflows as well as its outflows.
This involves controlling payment deadlines to ensure that every customer receivable is settled within the payment deadlines and thus avoid any unpaid invoices.
Yet every day, some forty SMEs go out of business because of an unpaid customer. This accounts for nearly a quarter of all business closures every year.
This situation worsened with the COVID-19 crisis. Some companies had to cope with loss of income, downsizing and insolvency. And the customer risk increased.
The question of collection remains of paramount importance for companies wishing to preserve their financial health. financial health.
What is customer risk?
The customer risk is the risk of financial loss incurred by a company as a result of the default of a customer to honor its financial financial obligations.
Customer risks may include late or non-payment payment defaultsfraud or breaches to contracts.
Visit customer risk management is a strategy designed to reduce risk related to the relationship between a company and its customers. It aims to protect the company against potential financial losses.
Upstream customer risk management involves, for example, monitoring the budgetary health of its new customer. The aim is to ensure the company’s solvency. Downstream, this management involves paying particular attention to possible payment delaysor even unpaid.
The aim of this management approach is to build stable and profitable business relationships.
What are the main customer risks?
Late payments:
Visit late payment is a breach of a payment obligation. This means that the customer fails to honour an invoice on time. There are several reasons for this delay:
- The customer unintentionally unintentionally the payment deadline,
- The customer deliberately deliberately the payment deadline,
By using late paymentcustomers prioritize the health of their cash flow over that of the company with which they have a commercial relationship.
Unpaid bills :
L’unpaid is a unpaid debt by a customer. This is the result of late payment or payment default.
Unpaid invoices are often the result of fragile financial situations that prevent debt collection. recovery of the debt.. More rarely, they are also the result of a conflict between the company and the customer. In this case, we speak of litigation.
The company therefore contracts a customer receivable.
Customer receivables :
Customer receivables, orcustomer work-in-progress, are amounts sum due by a customer to a company. It should not be confused with the customer credit. Which is granted to a customer to enable him or her to settle the amount at a later date. In this case, payment is subject to a payment terms.
All customer debt has an impact on a company’s cash flow. It can lead to lower liquidity as well as lower profits.
It also involves creating a cash flow gap and incurs additional costs for collection.
Let’s take a look at how to prevent trade receivables.
How do you prevent customer risk?
Start a new customer relationship on the right footing means first of all taking an interest in your customers. Conduct an internal investigation to prevent any surprises along the way. Pay particular attention to the solvency of the companyas well as its reliability.
There are a few things you should know about thehistory and budgetary situation of your new customers.
History
The history allows us to tackle the administrative and legal aspects.
With the help of a K bis extract (Infogreffe) you can check :
- The company’s creation date,
- Is the company new? Or does it have a long history?
- Any legal information,
- Is the company in receivership?Liquidation of assets? Any unpaid bills? Bounced checks?
- The company manager’s career path,
- Is this his first company? Where has he set up other companies? What was their outcome?
To refine your search, we recommend that you consult the register of protests as well as the register of general liens.
With the help of professional social networks (LinkedIn and Google Business), you can determine :
- Number of employees?
- Is the company growing? Or, on the contrary, has it undergone layoffs?
- Customer satisfaction?
- Are customers on the whole satisfied with the behavior and service?
Financial situation
This stage determines the health of a companyand therefore its solvency.
To decide on its health, you need to set up a few financial ratios:
- The Gearing ratio is an indicator that measures a company’s level of debt in relation to its capital. It is calculated by dividing the company’s debt by its capital.
- The higher the Gearing ratio the higher the company’s debt.
- Visit DSO is an indicator that measures the number of days it takes a company to collect its invoices. It is calculated by dividing the total amount of unpaid invoices by the total amount of sales over a given period.
- Plus the DSO the longer it takes to collect invoices.
- The DPO is an indicator that measures the number of days it takes a company to pay its invoices. It is calculated by dividing the total amount of unpaid invoices by the total amount of purchases over a given period.
- Plus the DPO the longer it takes the company to pay its bills.
- L’EBITDA is an indicator that measures a company’s profit before adding interest, taxes, depreciation and amortization. It is considered an indicator of a company’s operating performance.
Payment Terms
A payment term is the time a company allows its customers to pay the amount due. Payment terms are generally defined in contracts and vary according to the type of product or service supplied.
However, four types can be defined credit management:
- Visit cash payment,
- The payment on receipt of invoice,
- Visit payment period in calendar days,
- Payment “X days after invoice payment, end of month“,
There are no universal rules to be applied to the choice of choice of deadline. A clear understanding of your cash flow will guide you in choosing the most appropriate solution. Here are a few points to bear in mind:
- A long delay implies a WCR and conversely a short lead time is suitable for low WORKING CAPITAL.
You therefore need to analyze your working capital requirements and your customer’s budgetary health in order to adjust your payment terms.
How can you automate customer risk management with collections?
Aston AI is collection software that helps you improve customer risk management. This SaaS platform facilitates the work of your teams. They acquire business expertise and benefit from a personalized approach.
The collection solution offers a dynamic dunning portfolio to prevent receivables, settle overdue receivables and manage late payments. You benefit from a dashboard to monitor your company’s financial situation, the history of your commercial relationships and the payment terms granted to your customers.
