Recession-Proofing with Credit Management Best Practices

29 October, 2018
3 min read
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What you'll learn

  • Understand how to safeguard your Cash Flows against recession.
  • Examine efficient tactics to cut Credit Risk Exposure.
  • Learn about the tools that help the credit team in A/R space.
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The Great Recession in the United States saw a drastic fall in the economy. The bankruptcy filings increased by 31% and late payments hit all-time highs wreaking havoc in every company’s working capital calculations.

Seeing the steady economic growth and lowering of the unemployment rate, it is tough to believe that we could be facing another economic dropdown soon. However, some experts have predicted that one will strike in mid-2020, but any data or analysis cannot precisely predict the exact time when it will hit.

It is of utmost importance to recession-proof your business regardless of the state of the current economy. Even among the finance teams credit teams have a critical role to play as they control one of the primary levers of working capital, DSO.

This blog examines the role of credit management in recession-proofing companies.

Watching over free cash flows

Expenses can largely be predicted as any firm is in control of how much they buy or how much inventory they wish to hold, so the cash flowing into your business has the most uncertainty.

The best way of safeguarding your cash flow is to promptly send out invoices and have a regular check of your receivables. Your accounts receivable team must be competent enough to maintain records of all customers for their payment behavior and perform any action if they notice a consistent delay in payment.

When a downturn happens, a normal 30-day receivable period extends to 120 days. Credit teams should be able to predict cash collections at any given time-frame. Artificial intelligence-led automation could be a great help for your business in this department; in this video, we explain how accounts receivable could be radically transformed by 2020.

Easy to Implement Tactics to Cut Credit Risk Exposure

While we just discussed the importance of cash flows, there are a lot of moving parts in credit and accounts receivable that complicate tracking this. Proactive credit management that includes due-diligence during the customer onboarding process and periodic credit reviews could mitigate the receivables risk to a large extent. Automation tools for credit not only allow teams to check for credit and bank references but also send proactive reminders for upcoming reviews.

The other aspect of credit management is a periodic check on the credit scoring model itself, as the model that was in use a couple of years back might not be relevant anymore. To give an example, a manufacturer of displays would have considered Nokia to be a low-risk company in 2006, but we all know what happened a few years down the line with the onslaught of the smartphone market.

Accurate and timely reviews result in the lowering of bad-debt and eventually protecting you from any financial risks. Here is a comprehensive ebook on the top 15 variables that every credit scoring model should have.

Along with strengthening internal operations, credit managers also need to monitor the financial performance of their customers to make sure that there are no surprises. Integration with credit bureaus and agencies makes this process scalable. Systems are now able to trigger workflows based on notifications from credit agencies on rating downgrades and bankruptcies. Maintaining regular contact with customers to discuss collections, payment terms, and deductions could also help you improve customer experience and better predict risk. The best performing credit teams collaborate with buyer A/P teams every quarter to discuss all things credit and A/R.

The Robin to your Batman

It is not wrong to say that the credit and accounts receivable teams are the superheroes for securing working capital as they deal with one of the largest assets on the balance sheet. However, is there a reliable sidekick that could help them? Order-to-cash automation could very well be the answer and help you with

1) real-time visibility

2) analytics and

3) credit risk assessment.

See how ResMed acquired automation to increase their efficiencies.

How ResMed leveraged technology to improve multiple credit-to-cash processes while enhancing A/R team productivity to support growing business needs

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Automate invoicing, collections, deduction, and credit risk management with our AI-powered AR suite and experience enhanced cash flow and lower DSO & bad debt

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HighRadius Credit Software automates the credit management process, enabling credit managers to make highly-accurate credit decisions 2X faster and enable faster customer onboarding with 4 primary components: configurable online credit application, customizable credit scoring engines, credit agency data aggregation engine, and collaborative credit management workflow. Along with that, there are a lot of key features that should definitely be explored some of which are online credit application, credit information aggregation, automated credit scoring & risk assessment, credit management workflows, approval workflows, and automated bank & trade reference checks. The result is faster customer onboarding, better internal collaboration, higher customer satisfaction, more targeted periodic reviews, and lower credit risk across the company’s customer portfolio.

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