In the current economic climate, where companies are more aware than ever of the risk of bad debt, it may pay to help your customers improve their credit worthiness, according to Philip King, chief executive of the Institute of Credit Managers.
It is widely accepted that the financial crisis of the past 18 months will change the way that business is conducted in the future, especially in relation to credit.
While it was encouraging that, at a company-to-company level, businesses still managed to extend credit to one another, this same ethos did not permeate down to the major lenders who, despite their protestations, appeared steadfastly to hang on to their cash rather than lend it, in order to repair their balance sheets.
Although the economy is now officially out of recession, what might be termed ‘the real economy’ is still struggling significantly, and recovery is fragile at best. What is most alarming is that there will be a residual impact on business and especially business confidence, as the full extent of the crisis is revealed in black and white on the pages of companies’ annual reports. This in turn, will seriously impact credit.
Statutory information and accounts filed in the coming months are going to show deteriorating positions and trends for 2009 compared with previous years. This, in turn, will have a knock-on effect on limits that credit insurers are prepared to write and the credit ’scores’ calculated by various reference agencies.
Those credit managers that have previously relied upon, and trusted in, the efficacy of such information to make informed credit decisions, will find themselves in uncharted waters. The need for improved technical and analytical skills will be paramount in pricing and the management of risk.
Many within the credit industry have been calling for the greater sharing of financial information, with the loudest voices, perhaps, being among the credit insurance community.
But it is not just the insurers who will need more information to underwrite risk in the future; credit professionals themselves are going to have to demand more financial data from their customers in order to grant credit.
This shift in business culture – for a while at least – may sit uncomfortably with those who consider their financial information ‘private and confidential’. It will be essential, however, if they expect lines of credit to be kept open.
Of course, there are tools out there to help credit managers equip themselves for the challenges ahead. At the one level, there are training courses looking at the understanding of credit risk, company accounts, credit risk analysis, financial analysis, and business finance, all of which will be relevant moving forward.
At another, there are increasingly sophisticated financial ‘tools’ such as the recently launched CreditPal that will enable subscribers to access summarised management accounts and up-to-date credit recommendations for a company’s customers on a monthly basis.
