Credit Risk Assessment: How Do You Know How Much Bad Debt You Really Have?

Written by Jeff Fluty

April 6, 2011

It seems like a straightforward enough question. Any receivables manager should be able to answer it with a quick glance at a report or two. Unfortunately, the number at the bottom of the page is a lot like the tip of the iceberg. It’s what you don’t yet see, that may end up doing the most damage.

During this recession, you’d be hard pressed to find a company not taking a long hard look at their credit and collection policies, and for obvious reasons. Shorter terms, lower balances, additional and more thorough credit references are just a few areas we’ve all tightened up on the front end. Working accounts sooner, with a more uniform and accelerated escalation process is becoming a new doctrine for collection managers on the back end.

Recently, a client of mine in the petroleum equipment industry was recounting to me how, in the past, his company was quick to ship substantial product orders to new customers with little more than a phone call and an order form. Obviously, this was a policy of the past for this particular company. But this practice, while in the past, wasn’t that long ago for many.

So if we’ve tightened up requirements on the front end, and we’ve taken in some slack we previously extended to our slow payers, where should we look now?

Even the most diligent credit manager or analyst would be hard pressed to consistently and accurately read the future. Your best customer two years ago could very well be succumbing to the same financial hardships so many others have. And unlike the one time, hit-and-run customer, your instincts will likely be to extend some leniency their way if they do slide a little. Unfortunately, the slide could be more rapid than anyone expects. So instead of relying on a credit application from ten years ago and a previously solid payment history, why not take an additional step to protect your interests?

An annual credit risk assessment of your active customers can provide insight and allow you to make
more informed and appropriate decisions based on their current financial health. I have some clients who run a complete portfolio analysis for all customers annually and even run their "B" and "C" tiers of customers quarterly. On more than one occasion, the trending information they’ve received has allowed them to probe a bit further before green lighting a large order. And in some cases, the order size or terms can now be adjusted to reflect the updated potential risk factors.

Accessing the various databases and information needed to come up with useful results would likely be cost prohibitive for most companies to do themselves. However, in some cases, the cost of programs such as these can be zero. As a courtesy to my clients, Brown & Joseph, Ltd. performs credit risk assessments at no charge as part of our standard service offering. The same courtesy is extended to anyone interested in a complimentary review. More often than not, the results hold at least a surprise or two. Contact me today for any questions or a complimentary review.

For more information, please contact:

Jeff Fluty

Vice President Business Development
Brown & Joseph, LTD
Direct: (214) 295-8824
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.