At a minimum you should have a traffic light system, where red is high risk, amber is medium risk and green is low risk. How you decide on these categories should be a combination of financial, trading and other information.
At the start you could get a report on the company from an agency like D&B, you could ask for up to date management accounts, you could get a number of trade references, you could subscribe to a payment performance system to establish how well your customers are paying their other suppliers, you could look at the prospects for their sector, you could look at how long they are in business, you could look at your own payment performance or a combination of factors to give you a true picture.
How you manage your accounts could depend on their risk category. For a low risk you might be prepared to supply goods two or three weeks beyond the agreed payment date, amber one week and red would have to be paid on the agreed day to maintain future supplies.
You could build in revision limits and for red customers who hit their agreed line of credit mid month; a payment has to be made to maintain the account.
I could spend two whole days explaining the ins and outs of risk assessment and if you are interested we have developed a number of tools in this area to help you.
We are living in a fast moving and ever changing business environment and to be successful you really have to put the resources into credit to make sure you know the full picture at all times and make decisions and take appropriate action at all times, the essentials are: access to timely and accurate information, the ability to know what to do with that information when you get it and your communications skills to notify all interested parties in a clear and unambiguous way in a timely manner.
The job of collecting what is owed, when it is owed should never be an accident of selling, it has to be planned and executed by trained and educated professionals who know the signs to look for and know the correct action to take at the right time, anything less and you are at risk of increasing bad debts in these most difficult times.
Would you give thirty days credit to a company that was going to go out of business next Friday? Of course you wouldn’t, but you have!
If you are interested in finding out more about this important and often overlooked function we have a one day training course on the topic and Risk is one of the modules in the excellent Certificate in Credit Management or it can be completed as a single module leading to the award of Qualified Risk Analyst.