Among the risks that threaten a company’s financial equilibrium, and in particular its cash flow, is customer risk. Poorly managed accounts receivable can lead to a company having too much cash on hand, making it difficult to pay its own suppliers, staff and investments. On the other hand, well-managed accounts receivable can reduce the risk of late payment, and therefore bring in cash more quickly. So how do you manage customer credit risk? Here are 5 best practices to help you manage customer risk effectively.
Assessing the creditworthiness of at-risk customers
The first step in reducing customer risk is to assess the creditworthiness of your customers. This involves analyzing their financial situation when you first start working with them, using publicly available documents (annual accounts, Sirene certificate, etc.). Based on this information, you can categorize customers according to the risk of non-payment they represent. The use of debt collection software with scoring and segmentation functions is a real plus. Each customer is assigned a score that can evolve over time, depending in particular on his or her behavior (faster or slower payment terms, DSO, payment incidents, etc.). This will enable you to adapt contractual payment terms and conditions, such as payment methods and deadlines, as well as personalize customer reminders in the event of late invoicing.
Setting credit limits
Credit management also involves drawing up a clear, coherent credit policy. It must be adapted to your business, your cash flow requirements and your customers’ profiles. Having a relevant credit policy enables sales staff to offer the right terms to each customer, according to their risk profile. This reduces the risk of late payment and non-payment. For example, a new customer will benefit from shorter payment terms than a loyal customer who has never had a payment incident. Similarly, a customer who has had several late payments may see his credit limit reduced in amount. The credit policy must also be clearly communicated to customers, to avoid any subsequent disputes. It is also essential to regularly review customers’ credit limits. Their financial situation can change, as can your business relations. It is therefore essential to ensure that the payment terms applied always correspond to the actual situation.
Draw up quotations, invoices and contracts correctly
Transparency towards your customers ensures that you reduce the risk of misunderstanding and dissatisfaction. These are the main reasons for late payment. By ensuring that your contracts, quotations and invoices are properly drafted, you also ensure that your customers have all the information they need to pay their bills on time. Don’t hesitate to specify on each of these documents:
- means of payment accepted ;
- payment terms granted;$
- penalties for late payment.
Monitor payments
Anticipating the risk of non-payment is not enough for good customer risk management. You also need to monitor payments closely. To achieve this, you need to set up a payment management process. This can take a number of different forms. For example, you can offer the option of paying invoices directly online by credit card, but you can also track invoices as they fall due. Responsiveness is one of the keys to a successful debt collection process. In fact, the earlier you react, the greater your chances of quickly recovering the sums owed. DSO then remains at an acceptable level, without jeopardizing the company’s cash flow. Setting up late payment alerts is certainly the most effective procedure. Finally, it is essential to take the necessary measures in the event of non-payment. Whether it’s a simple reminder, formal notice or legal proceedings, there’s a solution for every situation.
Using a debt collection software
To manage customer credit risk effectively, there’s one tool that makes all the difference: debt collection software. Choosing the right collection software for your business means you can :
- easily calculate customer scoring ;
- adapt collection strategy according to customer profile;
- be notified in real time of unpaid invoices;
- apply collection policy effectively;
- consult dashboards updated in real time;
- calculate customer provisions.
Conclusion
Customer risk has a direct impact on a company’s finances. The greater the customer risk, the greater the impact on cash flow, and vice versa. To effectively manage your customer risk, you need to adopt good practices such as assessing creditworthiness, following up on payments, etc., but you also need to be well equipped. Using collection software will not only save you enormous amounts of time, but also make your debt collection process much more efficient.
