Covering credit risks: more than one road leads to Rome
To maintain a successful business and keep it running, various factors are important. These factors include customer retention, cash flow and the company’s capacity to distinguish itself. If a company cannot distinguish itself, customers may well decide to look towards other competitors. And when customers take their business elsewhere, it greatly impacts cash flow. According to a recent newspaper article, the number of companies declaring bankruptcy is increasing. This is, of course, the biggest fear of business people and company directors. Can negative cash flow or, even worse, bankruptcy be prevented? In this blog, Bert van der Zwan, CEO of Onguard, and Remco Beuvens, CDO of Aon, talk about what measures businesses, and particularly credit management departments can take to keep risks to an absolute minimum.
Optimise the Order to Cash process
Every organisation has to accept that not all invoices will be paid on time. Not all customers pay their invoices on time. Naturally, unpaid invoices or accounts that are paid late impact cash flow. Therefore, it is imperative to avoid negative cash flow as much as possible. There are various reasons customers do not pay their invoices (on time). The organisation could be at fault; too many articles on the invoice or a discount that has not been applied.
Alternatively, the cause could also lie with the customer; he may have overlooked the invoice or has financial issues. „In order to prevent errors on the organisation’s side, it is important to examine the Order to Cash process“, explains Van der Zwan. „Analyse the steps that are part of the process, for example invoicing, and find out where it’s going awry. You can then optimise the process and make errors a thing of the past. This will minimize fault on the organisation’s side. Some of the responsibility, however, lies with the customer. Has the credit manager noticed that the invoices are still unpaid? If so, that is the time to pick up the phone and find out whether something has gone wrong.“
“The credit management department often has a treasure trove of data that could be very valuable for the sales department. This could include figures about creditworthiness and the actual DSO per customer.”
Working with sales
Credit managers are tasked with limiting credit risks as much as possible. They know that this can have an impact on sales and the organisation’s turnover. Van der Zwan adds: „This is a well-known struggle between credit management and the sales department. When we’re talking about customer acceptance, it’s important to refrain from dismissing them as soon as a potential risk is detected. The credit management department often has a treasure trove of data that could be very valuable to the sales department. This could include figures about creditworthiness and the actual DSO per customer. If the credit management department can enlighten sales with this information, sales can propose customised solutions to ensure the customer pays. This could include adjusted payment terms, supply conditions or credit risk insurance.“
Let insurance cover the risk
Providing customised solutions is one of the options businesses use to ensure their customers pay. Another option is protecting the financial position by means of credit insurance, particularly if a company has many customers. Remco Beuvens, CDO at Aon, explains the advantages of credit insurance: „When customers can no longer fulfil their financial obligations, credit insurance offers a solution. The insurance company pays the outstanding invoices as and when, for whatever reason, the customer can’t pay. This means that the costs associated with lost customers are eliminated and that profitability is maximised. In short, credit insurance contributes to the organisation’s continuity.“
Onguard recently announced the development of credit insurance software exclusively for Aon. With this, the businesses are taking their collaboration to the next level. The newly upgraded PolicyManager software enables Aon’s customers to quickly obtain information about insurance options and premium consequences. PolicyManager also offers other advantages:
- it saves time;
- it helps employees avoid overlooking information;
- and automates the administrative actions involved in a credit insurance policy, such as the policy application and the management of credit limits.