As an entrepreneur, you face many challenges and opportunities to grow your business. One aspect you need to handle with care is debtor risk. It can pose a serious threat to cash flow and business results if customers do not pay on time or at all.
What is debtor risk?
As an entrepreneur, you want to focus on growth and success. The last thing you want is for customers to pay late or not at all. This financial risk is called debtor risk. It means that customers may not pay on time, only partially, or not at all for the services or products provided. Especially if you deliver on credit or invoice afterwards, you automatically incur debtor risk. This negatively affects cash flow and business results.
Why is it important to limit debtor risk?
A large debtor risk leads to a significantly reduced cash flow, which affects business operations. Planned investments are delayed, growth is hindered, and you may sometimes struggle to meet your own payment obligations. Therefore, it is important to limit this risk and ensure that customers pay on time and in full.
What types of debtor risks are there?
There are three main categories of debtor risks that you as an entrepreneur may encounter:
1. Payment risk
This risk arises whenever you deliver goods or services and invoice later. Customers pay late, disrupting cash flow. In the worst case, a customer does not pay at all, for example, due to financial problems or bankruptcy. In that case, you risk not being able to collect a large part of the outstanding amount.
2. Concentration risk
This risk arises when you grant a large credit to one major customer or a select group of customers who represent a significant portion of the turnover. If one of these important customers does not pay, it has a significant impact on cash flow.
3. Country risk
If you do business internationally, you face country-specific debtor risks. These risks arise from fluctuations in exchange rates, economic or political instability, trade sanctions, embargoes, or other national issues. Such factors affect the business environment and have consequences for your cash flow.
Steps to manage your debtor risk
Good debtor risk management is crucial to protect cash flow and business results. For every company, the following steps provide a good guideline for managing debtor risks:
1. Identify debtor risk
When entering into business relationships with new customers, it is essential to conduct a thorough creditworthiness check. This check allows you to get a good picture of the customer’s financial position and payment history, enabling you to determine whether it is wise to deliver on credit. To successfully carry out this process, there are several steps you can follow.
First, start by collecting basic information about the customer, such as the company name, address, contact details, and Chamber of Commerce number. Then visit the Chamber of Commerce website to look up the customer’s company profile. Here you will find important data such as the date of establishment, legal form, business activities, and names of directors.
The next step is to consult trade information agencies. These agencies provide detailed credit reports and financial information about companies. This gives you insight into the customer’s creditworthiness, payment history, annual accounts, and any risk indicators.
Another important source of information is the company’s annual accounts. Ask the customer to provide their most recent annual accounts. These documents offer detailed information about the company’s financial position, including turnover, profit, balance sheet, and cash flow.
With all the collected data, you then conduct a thorough risk analysis. Here you look at various indicators, such as the company’s overall financial health, payment history, and any outstanding debts. Based on this analysis, you make an informed decision about whether or not to deliver on credit to the customer.
2. Analyse debtor risk
Assess the customer’s creditworthiness and the potential impact on cash flow if the customer does not pay. Make careful considerations and decisions about granting credit and the payment arrangements you make with the customer.
Start with an analysis of your own cash flow to gain insight into the dynamics of incoming and outgoing cash flows. Then identify potential risks related to the customer’s financial stability, such as outstanding debts or past late payments. Based on this information, set a credit limit that does not endanger cash flow.
Then determine clear payment arrangements. Consider options such as prepayment, payment on delivery, or specific payment terms after invoicing. It is important to take into account your own financial obligations and find a balance between customer satisfaction and risk management. In some cases, it is advisable to take out credit insurance or obtain guarantees from the customer, especially for significant amounts.
Continuously monitor the customer to respond promptly to any changes. This provides the opportunity to take proactive steps if financial difficulties arise. Flexibility and communication are also important, with openness with the customer helping to resolve any payment issues and reduce default.
3. Develop a proactive plan
Develop a plan for evaluating and granting credit to all your customers. Determine the credit terms and discuss them in advance with new customers. Regularly keep an overview of your outstanding receivables to minimise risks.
4. Cover debtor risk
Consider credit insurance to protect your business against unpaid receivables. Credit insurance provides extra security and insight into your customers’ creditworthiness. This allows you to make better-informed decisions about granting credit.
Limit debtor risk with good debtor management from Payt
At Payt, we understand how important it is to manage debtor risk. With our advanced software, you can efficiently and effectively organise debtor management. By automating the invoicing and reminder process, providing insightful reports, and establishing a clear and consistent policy, Payt helps you optimise cash flow and minimise debtor risk. Contact us today and discover how Payt can take your debtor management to the next level.
