A New Approach to Credit Risk

With new figures revealing businesses across all sectors increasingly struggling to settle accounts, a new approach has been suggested to properly assess whether your clients are a credit risk.

Company financials have long been considered a critical component in the credit assessment process. And with new figures for the June quarter showing that fewer bills are being paid on time, the risk profile of many companies remains less than perfect.

"We have witnessed a number of high profile failures during the past 12 months, in part a result of cash flow issues related to slowing demand and higher operating costs. This is obviously impacting business payment terms," said Dun & Bradstreet director Adam Siddique.

"During more difficult periods, it becomes increasingly critical for business to remain focused on fundamentals such as cash flow. A proactive approach to risk and receivables management can often prevent a situation where businesses wait months to be paid.”

He argues, however, that, as a consequence of the recent global credit crisis, financial assessments continue to be based on a firm's performance during a period of severe global instability.

He suggests basing financial decisions on real-time data rather than solely upon infrequently reported financial records. Rather than relying on credit ratings that can be up to 12 months old, Siddique suggests a more advantageous and revealing risk assessment can be obtained from trade information.

This, he believes, would also be a relatively simple way to stimulate Australia’s economic recovery through increased cash flow.

Reported monthly, trade data is seen to be both more predictive in nature and timely in its insight of current performance, offering behavioural data which reveals how an organisation is paying its obligation and how it has paid its accounts historically, argues Dun & Bradstreet.

Resultantly, the credit data firm believes that the use of more and better data ensures credit providers have a fuller picture of a business’s financial health, identifying both high and low risk customers and enabling firms to minimise the risk of late payments and bad debts, and identify the good credit accounts that will create long-term, profitable credit relationships.