How to Slash Your Credit Exposure

The downturn gives companies an excuse for demanding that customers share more financial information, to keep on top of clients' ability to pay and stay viable.

Krank further suggests that companies require all customers — new and old — to fill out a one-page credit profile every year. The sheet should include the company’s cash position and the most up-to-date contact information.

To be sure, if there’s any good news to be had during this economic downturn, it’s that most everyone is in the same boat. Chances are your customers are asking their customers for more financial information. “If you haven’t asked before, it’s perfectly acceptable to ask now because everyone is being scrutinized by every supplier,” Pontin says.

If it’s impractical to demand financial information up-front, then come up with a triggering number for when your company will demand it. For example, Krank’s firm uses a $250,000 threshold; clients that owe more than that amount must provide their trade creditors with their financial statements. This type of threshold can vary across industries, from $25,000 to as much as $2 million, says NACM’s Beckel.

Another way to improve your credit-risk management is by calculating each customer’s probability of default and pricing your services accordingly, says Krank. “Cash is so critical right now, but many companies have no idea who they’re selling to, never mind who owns the company or their cash position,” she adds.

Moreover, suppliers can no longer rely on traditionally held views that big-name companies are safe from sudden and dire financial problems even if they don’t have strong cash flow. “Companies can have negative cash flow and positive net worth if they’re sitting on a bunch of land or buildings that no one’s willing to buy. And they can end up going bankrupt,” Krank says. “But they won’t be able to pay you with those buildings.”

Experts also suggest sales and credit departments improve their communications between salespeople and the collections side. Don’t allow salespeople to grant extended payment terms before checking in with their credit counterparts, Krank recommends. Companies should use these negotiations to get more financial information out of their privately held clients and reprice future services if possible, she adds.

Moreover, salespeople may be able to offer the credit department more insight into a customer’s financial situation, as NACM’s Beckel has found in his nearly 20 years as a credit manager at homebuilding manufacturer MiTek Industries. Still, he acknowledges that a larger sales staff “may not have the influence or the time to actually get involved in credit and collections questions.”

 

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