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Avoiding the “bad debt multiplier effect”: how to manage your company’s credit risk

The management of risk should be a key performance indicator for any business – a poor decision or mistake in this area could prove very expensive.  So up-to-date business information has a vital role to play in minimizing risk and supporting more accurate business decisions.

In a trade credit environment where supplies are made to customers on short-term credit of up to 90 days, the supplier company should always view a credit report on the target company to assess the potential risks. This could range from verifying the legal name and address of the company for invoicing, to providing an expert third party credit limit on the financial strength of the company.

As an example, supplying £50,000 of goods on normal payment terms to a customer is the same as supplying unsecured goods for up to 3 months. If the customer was to default on payment in this period through insolvency, then a bad debt of £50k will be incurred automatically.

However, if your profit margin is 10%, you will have to create turnover of a further £500k to get back to status quo; this is the “bad debt multiplier effect” and it can be a highly damaging unforeseen loss for a business.

You can minimise this risk by utilising an online business information and credit reporting facility, updated daily to enable the most accurate risk decision before you supply any goods to your customer. The company will be scored between 1 and 100 (with 100 being lowest risk and 1 being highest risk) and a credit limit will be recommended indicating a level of credit the target company has the financial strength to service.

But this will not be enough. The next key element is to monitor each customer going forward so that you will be notified, on a daily basis, of any changes in the status of your customer, such as credit score or credit limit, any change in directors, change of address, name and any defaults on payments. Pro-active monitoring will help you continue to make accurate business decisions and ensure you maintain a profitable customer portfolio.

To find out more about how Jordans Business Information services could help you minimise your business risk, please get in touch.

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