15 Tips: What to Look for In Your Credit Management System

We are working in a volatile time. Post pandemic, we would hope to find our feet and collectively make strong strides into a financially robust future. The war in Ukraine, increases in fuel and utility costs, hikes in inflation and, (for British companies) the tax, administrative, supply chain and talent repercussions of Brexit, have only slowed the economy, making any springy bounce-back seem a far cry.

This article looks at the growing need for a solid, highly capable, easy to use and trust-worthy Credit Management tool and the features to look for when you make your selection.

In the US in 2021, 6,691 commercial bankruptcies were filed. This was down 41% compared to 2020. Looking at the UK figures in 2022, according to Reuters’ article “Bankruptcy filings are creeping back up in early 2022”, the total number of new bankruptcies filed in March ‘22 grew 33.5% over February ’22, although the total number was still lower than March 2021.

Given world events, our immediate economic future looks volatile. Organizations are called to be judicious in their own cost management, and extra vigilant when working with partners (in this case customers). An eye into partners’ financial risk alleviates your own risk.

With this in mind, what do you need to look for in a solution?

1. Ideally a credit risk tool is in the cloud and SaaS based, which means lower running costs for you, and upgrades happen when your IT team is sleeping.
2. As a business, you will likely use a credit agency like Dunn & Bradstreet to rate the risk of your customers. Whichever credit management tool you use will need to connect to the data provided by the credit agency. You will want to run agencies’ reports through your credit management tool, and even receive alerts from the credit agency.
3. You will likely have an existing relationship with an insurance provider like Coface or a Euler Hermes, protecting you should a customer file for bankruptcy between placing the order and settling the invoice. All data pertaining to insurance needs to be visible via your credit management tool.
4. When an analyst logs in, you will want the tool to take them to a worklist, ranking customers that the analyst needs to assess. Each customer has a credit limit, and this will vary according to each customer’s risk profile. The tool needs to be configured to raise alerts based on customers’ credit utilization. If a customer sits at 95% utilization, depending on their profile, the tool needs to trigger an alert.
5. Customer profiling is fundamental to risk scoring. Your credit management tool will need to pull on data from within the tool and within the ERP (like invoice data, credit limit and payment data) and couple this picture with information provided by credit agencies.
6. The platform will ideally be able to give you preventative information. This will equip you with leading indicators that spur you to “act now”. For example, the solution will look at the Weighted Average Days Late for 12 months for one customer. Maybe the average days late to pay an invoice has been 7 days over 12 months but in the last 3 months, this has jumped to 12. This would allow the credit analyst to mobilize preventative action for that customer.
7. Regardless of the tool you use, you will need to have confidence in your risk scoring methodology. You will then want a tool that enables you to update this score, based on data accessible via the tool, and have clear visibility of the score.
8. You will want your tool to house attachments (companies financials) and significant emails. Ideally your tool has the ability to store relevant documents which are easily retrievable and referenceable.
9. Companies often have a parent, and this parent will act as the guarantor. Your credit tool will need to a) log this information and b) apply logic to make sure this information influences the credit score. Ideally the tool you select has intelligence built into how you can spread securities. Paul Heard, Former Digital Transformation Leader and Head of Enterprise Architecture at MicroFocus said “While working with parent-child companies, we are able to assign a credit limit to the parent and then distribute it by percentage between the child companies depending on the amount of business we have to do/ expect to do with each one of them.”
10. A key part of any credit management tool is workflow. An analyst will update a credit limit, which will need a credit manager or regional CFO to approve depending on the limit. Workflow rules are key here. Any change is auditable and the updated record will be copied to the ERP. The tool will need to provide the approver with the full profile to help govern the final decision. Consumer giant Mosaic saw a reduction of 55.5% in approval time when switching to their new credit management tool.
11. Your tool will want to receive specific external information and trigger a workflow in order to drive action. Credit agencies now provide key alerts regarding bankruptcy filings and these alerts trigger workflow.
12. Securities is a huge part of credit risk assessment, and you will want your platform to a) house all attachments pertaining to a customer (parent guarantee, bank guarantee, letter of credit), and b) ingest all this information to help build out the risk profile, and c) alert you when securities are coming up to expire or renewal.
13. Blocked orders will be released or remain blocked depending on information in the tool. You will want your tool to make a recommendation regarding release or remain. HighRadius uses machine learning to look across customer data (payment behaviour, aging amount, promise to pay, overshoot percentage) and will inform the analyst on whether to release the blocked order or not. HighRadius trains its technology to decipher a customer’s future behaviour based on two years of historical data.
14. For new customers, you are relying on information provided by customer or third party data. You will need your tool to collect new information through a customer application form which is thorough and intuitive to complete. This is the beginning of the risk assessment journey for this customer, so this data collection methodology needs to be reliable. Mercury Marine used HighRadius for onboarding new customers and saw their time to onboard decrease by 67% from 4.5 days to 1.5 days.
15. You will want to make sure your credit management tool won’t let you down. Make sure you gather references! HighRadius credit management is used by 50 companies worldwide including HP, Ferrero and Shell. TechData are enjoying $160,000 recurring annual savings because of the credit management module. The team at TechData has seen a 3 x increase in productivity.

Given the volatility in today’s economic climate, Accounts Receivable teams will want to move away from manual credit management to a highly automated, machine learning-based platform to provide visibility, trustworthy profiles and scoring, and smart approval workflows. Now is the time to reduce exposure. Your credit management tool has a huge role to play.

This article was commissioned by HighRadius.

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