Image: iStock.com/ridvan_celik
Business
credit is
looser than
it’s been in a long time, and the associated risks aren’t easily identified.
Proactive risk management, however, is key to ensure businesses are taking on
the right level of risk.
Business
delinquency rates are rising even amid a decline in business failures,
according to Dun & Bradstreet’s ”
Q4 2018 Industry Delinquency and Failures Report.” Notably, according to another D&B
report,
monitoring organizational
risks within the customer, supplier, or partner base is considered the biggest
risk facing finance leaders today. Another concern is the decline in the
Overall Business Health Index, which tracks D&B’s standard risk scores.
These
signals point to the possibility that companies might be extending an
excessively risky amount of credit to their customers. And excessive late
payments on those lines of credit could pose a significant problem, especially
in the event of a recession. In February, a majority of
economists predicted that
the U.S. will be facing a recession by 2021, according to the National
Association for Business Economics.
If a
recession hits, you’ll be thankful you have plans in place to manage risks
created by loose credit and take advantage of opportunities.
Expect
the Best; Prepare for the Worst
Companies
can get ahead of a recession with risk strategies focused on long-term
financial health. This proactive defense keeps the organization running should
delinquencies on one end put some of your own accounts at risk of
default. It’s obviously easier said than done, but these are a few steps
to get there:
1.
Forget everything you know.
The biggest
mistake companies make when implementing a solution to manage risk is putting
Band-Aids on broken arms. If revenue is short, push the sales team, right?
Wrong. Short-term
fixes to individual processes only address the symptoms while the actual operational
issue potentially remains unsolved. It’s no longer the way of business to
conform to traditional standards. The new guard disrupts industries and forces
change.
Finance
teams need to be ready to research actual problems with a proactive risk analysis
based on customer, supplier, and partner portfolios. By comparing this internal
data to external industry trends, the real risks start to surface.
2.
Automation is mandatory.
There is so
much data to work with, and companies that succeed in this environment leverage
this data to make effective decisions. Businesses still running manual
processes while everyone else in the industry automates will struggle in 2020
and beyond.
Research
from KPMG and Gartner consistently shows the importance of automation in
business. It’s a prerequisite for other modern technologies like artificial
intelligence, blockchain, and more. And these technologies aren’t just
buzzwords; they’re helping businesses drive more sales, reduce errors, and
operate much more effectively.
From the
supply chain to operations and even customer contact, automation frees up time
to focus on pressing business needs.
3.
Focus inward to be outside-in.
Each
business unit within an organization has a role, and its performance often directly
impacts other units. The sales force drives revenue, the finance team manages
income, and both are equally important.
Data is
the key to understanding why your finances might be drying up. Sales might be
steady, but if those accounts aren’t being paid, liquidity can easily freeze.
Being aware and proactive in advance can prevent these hiccups so you’re not
playing a continual game of catch-up with bills.
Insights
like this come from constantly researching market and global trends and
applying new techniques to risk management. It’s an outside-in perspective that
builds a direct path from the solution to the problem.
Risky
Business
Lending
money is always risky, but it’s not uncommon in the business world. Net 60 and
longer terms are often given to suppliers for invoices for business-to-business
goods and services. A sale today might not actually be due until three months
from now, and collection efforts will take time.
There’s a
fine line between cash in hand and accounts due, however, and walking that line
is essential for creating a proactive credit strategy. Banks and financial
companies are known for this, but it should be a part of any organization’s
risk management, large or small.
You never
know when a company that owes you a lot of money will default on its payments
and leave you short-changed to pay your own bills.
It’s best
to avoid the situation entirely.
Andrew Hausman is
president and general manager of trade credit and finance solutions at
Dun & Bradstreet, the global leader in commercial data, analytics, and
insights for businesses. Andrew’s specialties include fintech PE, business
management of data, electronic trading and portfolio analytics in FX, fixed
income, energy, and futures.
Read Next
