Andy Craven, product & marketing lead, risk management solutions, Dun & Bradstreet UK, argues that a collaborative, cloud-based approach is key to the future of credit risk management and looks at the main challenges faced by the credit risk department today, and look at how a new approach to credit risk management can help to ensure that cashflow, just as much as cash, remains king.
The new normal
The current market context makes this even more of a concern for business leaders, with credit remaining scarce for most businesses , and bankruptcy and late payment rates still much higher than their pre-recessionary rates.
In addition, many corporate clients have extended their payment terms in the last 12 months, from 30 to 60 or even 90 days .
The business environment has also changed, with many sectors having seen considerable consolidation during the boom period. Indeed, 2010 saw the beginnings of an M&A revival in the UK. Even if nowhere near the same levels as the 2008 peak, the apparent return of consolidation might leave some companies significantly more exposed than they realise to risks from certain quarters of the market.
The importance of living insight
The consequence of these trends is that keeping tabs on the totality of credit risk to your business is an increasingly complex challenge, but even more of a necessity to maintain healthy cashflow. How do you make those vital, everyday business decisions? Do you take on that new customer? Do you hire against a potential expected need – full time staff or freelancers? How many customers can you afford to lose at any one point in time? What are the risk profiles of your strategic accounts?
Making a decision on any of these fronts that’s predicated on an inaccurate understanding of your cashflow will have both financial and reputational consequences. Take the well-known example of Zavvi and Woolworths in 2008 – overexposure to a single supplier which in itself was overexposed left Zavvi vulnerable to its ultimate fate.
Careful planning – in this instance through its supply chain – could have insulated the company from demise.
Similarly Connaught, the public housing maintenance company, is another such example. When the company was forced into administration in September 2010, the 150 or so councils who relied on its services were immediately affected.
Earlier insight into the state of Connaught’s weak finances, combined with the knowledge of its high exposure to government finances as cuts were looming, could have alerted councils to diversify their supplier base sooner.
Real-time decision making
It is often only when the issue rolls up to the FD, in internal reports which may already be out-of-date, that excessive exposure to a specific company or category of risk may emerge. Given the volatility in the market, this delay could have negative consequences, and the lack of real-time insight will limit effective decision making.
Another challenge for time-constrained credit departments is the fact that regulations (such as Sarbanes Oxley) as well as many credit insurance companies require evidence of the decision-making process for all credit transactions. Maintaining and referencing physical libraries of credit information reports is a very analogue process and again, doesn’t keep pace with the speed of decision making in the current business environment.
A procedural challenge for credit departments is keeping up-to-date with a rapidly evolving environment. If a specific company has been flagged as “at risk” and gets put on a watchlist, credit managers might sign up for information alerts.
Managing the torrent of these alerts can be a job in its own right: even if you had just a small portfolio of creditors on your watchlist that might result in 100 emails each day, with updates varying from profit warnings to CCJs. In addition, keeping up with the hundreds of alerts with information on each and any of their customers at risk from a variety of information sources can be time consuming. Finding a way to filter and control these is vital.
Enter the cloud
The web has modernised any number of sectors and departments, facilitating a more collaborative, transparent and effective way of working. Today, new credit risk management applications are bringing that same promise to addressing the issue of cashflow from a credit risk perspective.
With a cloud based system, any number of challenges can be overcome. Silos are broken down – even if you still work in similar roles with regards to size of deal or geographic or sectoral split of creditor, a web-based system can advise on duplications and provide a sense of overall exposure to cashflow issues.
Collaborative working becomes possible – escaping the analogue world of an information vacuum when a key person is on holiday or not available. Indeed, this also eliminates duplication – credit information for customers’ need only be sourced once.
Information alerts can be personalised against whatever’s appropriate for the specific context, whether it’s the FD getting updates on major activity from significant customers, or a credit controller requesting updates on company principals moving house for customers on a high risk threshold.
Crucially, data has the potential to become ‘live’ – not just the latest credit report you have bought against a specific customer, but the latest available from your information provider.
Changing credit risk management forever
With all these points considered, the cloud presents an opportunity for the credit risk department to streamline the way it looks at cashflow, with the potential to deliver collaborative, personalised, live insight into your business’ exposure, and enable better decisions. Ultimately, cloud computing will change forever the way that credit risk is assessed.