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How to reduce credit risks

By Bill McCouch | April 9, 2020
If you are still using paper-based manual processes in your accounting department, you are exposing your business to unnecessary credit risks. Here are some ways to limit those risks.

Originally appeared in Fleet Owner

If you are still using paper-based manual processes in your accounting department, you are exposing your business to unnecessary credit risks.

An automated billing solution which provides real-time visibility and real-time analytics, coupled with a way to gauge credit worthiness, will help eliminate credit risks.

When you automate all of the steps in your accounts receivable process you gain accuracy while streamlining your operation.

A cloud-based automated billing solution adds even more benefits by helping to shorten Days Sales Outstanding. When you have real-time visibility into invoice payment status, you can better manage your working capital. You are also able to identify credit risks sooner.

Most businesses use a credit bureau to check the creditworthiness of a prospective customer. These reports typically consist of the company’s past payment history, revenue and outstanding financial obligations.

While this information is beneficial and can help you determine whether to extend credit, it cannot predict the future. What you end up with is an understanding of how the prospect behaved in the past, but the past is not always a predictor of the future.

And what about your existing customers? Does your current manual process allow you to identify minor shifts in their payment habits? Subtle changes in the timing of payments can be a harbinger of bigger problems ahead. An automated system may allow you to spot those changes earlier.

You can choose to outsource your billing to a firm that will take on credit risk analysis for you. An outside provider can take customer payment patterns and add in current payment behavior to identify small shifts of even a few days change in payment.

If the outsourced provider identifies someone they think might be becoming a risk, you can look at the data yourself and add in what you know about the customer. Perhaps there was a problem in a given month that resulted in the payment being a little late and you can simply continue to watch the payment pattern of that customer over the next several billing cycles.

If you are not aware of any existing problem, you can call the customer to ask if there is a problem indicating that you noticed they have taken a few extra days to pay. Depending on what you hear, you can take appropriate action in the future.

No business is risk free, but automation can help you reduce credit risks.

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