Managing debtor risk

As an entrepreneur, you face many challenges and opportunities to grow your business. However, one aspect you need to be careful with is debtor risk. It can pose a serious threat to your cash flow and bottom line if customers do not pay on time or at all.

What is debtor risk?

As a business owner, you want to focus on growth and success. The last thing you want is for customers to fail to pay or pay late. This financial risk is called debtor risk. It means that customers may not pay on time, only partially, or at all for services or products delivered. Especially if you deliver on credit or invoice late, you are automatically exposed to debtor risk. This negatively impacts your cash flow and your bottom line.

Why is it important to reduce debtor risk?

High accounts receivable risk leads to severely reduced cash flow, which affects your operations. Planned investments are delayed, growth is hampered, and you struggle to meet your payment obligations. It is therefore crucial to mitigate this risk and ensure that your customers pay on time and in full.

What types of debtor risk are there?

There are three main categories of debtor risks you may face as a business owner:

1. Payment risk

This risk arises whenever you deliver goods or services and only invoice later. Customers pay late, which disrupts your cash flow. In the worst case, a customer does not pay at all, for example because of 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 large customer or a select group of customers representing a significant part of your turnover. If one of these major customers fails to pay, it has a significant impact on your cash flow.

3. Country risk

If you do business internationally, you will 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 your business environment and impact your cash flow.

Steps to manage your debtor risk

Good debtor risk management is vital to protect your cash flow and business results. For any business, the following steps are a good guide to managing debtor risk:

1. Identify debtor risk

When establishing business relationships with new customers, it is essential to conduct a thorough credit check. This check allows you to get a good idea of the customer’s financial position and payment history, allowing you to determine whether it is wise to deliver on credit. To carry out this process successfully, there are several steps you can follow.

First, you start by gathering basic information about the customer, such as the company name, address, contact details and Chamber of Commerce number. Next, visit the Chamber of Commerce website to look up the client’s company profile. Here you will find important details such as the incorporation date, legal form, business activities and names of directors.

A next step is to consult trade information bureaus. These agencies provide detailed credit reports and financial information on companies. This will give you insight into the customer’s creditworthiness, payment history, financial statements and any risk indicators.

Another important source of information is the company’s financial statements. Ask the client to provide their most recent financial statements. These documents provide detailed information on the company’s financial position, including turnover, profit, balance sheet and cash flow.

With all the data collected, 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 on whether to deliver on credit to the customer.

2. Analyse debtor risk

Assess after the customer’s creditworthiness and the potential impact on your 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 by analysing your own cash flow to understand the dynamics of incoming and outgoing cash flows. You should 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 jeopardise your cash flow.

Next, define clear payment arrangements. Consider options such as prepayment, payment on delivery, or specific payment terms after invoicing. Here, consider your own financial obligations and strike 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.

In doing so, keep monitoring the customer constantly to react to any changes in a timely manner. This provides an 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 problems and reduce defaults.

3. Establish a proactive plan

Establish a plan for evaluating and granting credit to all your customers. Define credit terms and discuss them in advance with new customers. Keep regular track of your outstanding receivables to minimise risks.

4. Cover debtor risk

Consider credit insurance to protect your business against unpaid receivables. Credit insurance provides additional security and insight into your customers’ creditworthiness. This allows you to make more informed decisions about granting credit.

Reduce your debtor risk with good credit management from Payt

At Payt, we understand how important it is to manage your debtor risk. With our advanced software, you can set up debtor management efficiently and effectively. By automating the invoicing and reminder process, providing insightful reports, and establishing clear and consistent policies, Payt helps you optimise your cash flow and minimise your debtor risk. Contact us today to find out how Payt takes your accounts receivable management to the next level.