Finance

Credit Risk Management: An Outlook on the Best Practices and Methods

Credit Risk Management: An Outlook on the Best Practices and Methods

Good cash flow is the oxygen that every business needs to keep it running and allow it to trade efficiently as well as plan for the future, which is why you need to have excellent credit risk management practices in place.

Managing risk is an integral aspect of running a business and if you don’t have robust procedures and a set of rules that you are guided by in what you do on a daily basis, it could soon spell trouble for your business.

Here is an overview of some of the best practices and methods to adhere to if you want your business to enjoy a healthy flow of cash.

Stay in the present

How well do you know the present financial state of all of your customers?

You may have been doing business with someone for many years without any problems but things can change and unless you monitor your customers for changes in their behavior and risk profile it could leave you exposed to a potential loss.

Credit checking new customers is an obvious thing to do if you want to avoid a potential bad debt situation, but you should also be proactive in monitoring the financial health of your existing customers so that you can spot any red flags before it’s too late.

All in this together

There is often a sense of division between different departments within a business when it comes to managing credit risk.

Understandably, sales teams want every order to be processed without questions being asked, and there is often frustration when the credit department points out that the customer is late paying their last invoice and orders are on hold because of this.

The best practice is always to try and encourage a holistic approach to credit risk management that involves everyone within the business taking responsibility for keeping the orders and the cash flowing efficiently.

This means ensuring that there is always a good line of communication between departments so that potential issues get resolved quickly and efficiently.

The supply chain is just as important

It is easy to concentrate your focus on orders and customers but unless your supply chain is working efficiently it could create a problem.

Good credit risk management also involves ensuring that you consistently vet and monitor your suppliers so that any potential changes or problems are identified quickly so that you have the ability to fulfill orders and maintain cash flow.

Keep a close eye on exposure

Finally, another aspect of risk management that is often overlooked is your ability to structure your payments in a way that minimizes your exposure to potential cash shortages.

If you have a large order to deal with, for instance, it might be prudent to arrange extra funding in order to ease the financial burden on your cash flow that could be caused by higher costs than usual.

All of these practices are based on solid foundations and pure common sense, but sticking to these self-imposed rules could make all the difference to the financial health of your business.

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