Credit Risk Analysis & the Courtship of New Customer Relationships

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I liken Credit Risk analysis to the dating process. Ask anyone if they would marry someone without dating them first and 99% of people would probably say no.  Dating allows you to get to know someone, understand their behaviors, likes and dislikes and most importantly, if you’re compatible.  Credit Risk Analysis provides the same insight […]

I liken Credit Risk analysis to the dating process. Ask anyone if they would marry someone without dating them first and 99% of people would probably say no.  Dating allows you to get to know someone, understand their behaviors, likes and dislikes and most importantly, if you’re compatible.  Credit Risk Analysis provides the same insight into fledgling customer relationships and I am surprised when I speak with companies that simply don’t recognize the value of using a credit risk process.

There are plenty of resources available on the market that can help companies minimize credit risk with scoring models, summary reports, complete customer histories, etc.  I’ve set up quite a few credit risk analysis programs over the last few months and they’ve proven to be an effective method to reducing bad debt exposure.

So why do some companies avoid the credit risk analysis process altogether? From what I am told when I ask that very question, “sales drives the process”.  So if the sales team wants to sell to a customer, they get credit, no questions asked? Others just have a blanket credit limit that every customer gets, no matter how much risk they may pose.  Now I’m not going to say that it doesn’t work in every case, and yes there are companies that are lucky enough to have a unique customer base that allows them some freedom to be casual about credit risk analysis.  But many of these companies share common problems; high DSO, significant percentages past due, large bad debt reserves, and excessive collection agency placements.

When we start analyzing credit, we learn pretty quickly what’s under the hood, so to speak.  Here are just a few of the common risk elements discovered over a 90 day period for a client in the distribution industry:

  • 35% of the customer reviewed paid greater than 5 days beyond terms
  • 50% carried debt over 60 days old
  • 23% had liens placed against them by other creditors
  • 31% were in collections due to unpaid debt
  • 4% had a prior bankruptcy

This client previously adopted a blanket credit limit for all customers requesting credit. Had they not gone with Capgemini’s credit risk analysis solution, the potential exposure would have been hundreds of thousands of dollars in product sold without payment. In the case above, credit risk analysis didn’t impede the sales process, it only enhanced it. After all, a sale isn’t truly a sale until the invoice is actually paid.

 

 

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