A new economic landscape is ahead as the world begins to understand the full impact of the COVID-19 crisis. As restrictions are loosened, you need to start planning for recovery and determining how to respond to fast-moving change. The key to an effective response includes planning with the assets you have today to help shape your success for tomorrow.
You need to focus on an important central goal: rapid revenue recovery. By capturing revenue quickly, you are positioned to respond to early demand, take advantage of new opportunities and build up cash reserves, which will be critical in helping you adapt to what promises to be a new age of evolution in the business climate.
By responding appropriately to the challenges of the new economic landscape, business leaders like you can recover and thrive. Here are the steps you can take to reinvent your credit management process.
Step one: Review customers’ financial health
The first step to reopening and expanding business in the new economic landscape is to take a look at your current accounts and review all of the details you know about your customers. Conducting a thorough review of both new and existing customers can help you avoid credit risk problems that can disrupt your cash flow. In today’s uncertain environment, it is better to be proactive than reactive in managing your financial risk.
Reviewing your customers’ financial health is similar to the process you took to understand their creditworthiness before you established the relationship. To start reviewing, you need to complete the following.
- Determine risk-reward status
- Understand each customer’s risk to your business
- Flag for regular review
Do you see any problems with your accounts or come across any red flags? Do you know what to look for? Here are four signs that your customers may be struggling with financial instability.
- Late payments
- Questionable credit decisions
- New financial processes
- Increase in credit checks
After your customer accounts are reviewed it’s time to move to step two along the path.
Step two: Evaluate cash flow and financial risks
Evaluating each customer’s cash flow and financial risks will help you better understand if you should continue to extend trade credit, how much, and under what terms. By doing so, you will take an effective risk management approach that will help you avert problems that could affect your reopening or growth strategy. But you must also evaluate all the financial risks that affect your cash flow and your company’s viability in the new economy.
Financial risk is a constant in every business and the best way to manage those risks varies from industry to industry. A financial risk assessment can help you identify the risk level specific to your business, prioritize those risks, develop ways to avoid them, and outline steps to manage them should they happen. A financial risk assessment also helps you understand your risk appetite.
By identifying financial risks, you can take a proactive stance in protecting your business’s cash flow and improving performance as you reopen and grow your business. To identify financial risk, start by carefully reviewing your corporate balance sheet or statement of financial position. You will want to understand what your main sources of revenue are and how customer credit terms affect this revenue.
Once your evaluation and plan are in place, you can move to step three.
Step three: Evolve your business operations through sustainability and positioning for growth
The new economy will demand that you evolve your business to grow and be successful. You will need to take an approach that balances adapting to the crisis as it evolves as well as positioning your company for growth for the future.
Economic crises such as COVID-19 don’t have to mean the end of business. Consider Groupon, Instagram, and Slack—all companies that chose to reinvent themselves during the Great Recession to enhance their sustainability. Their evolutionary models are good ones to follow.
Your business strategy was most likely tested during the health crisis. Learn from that test and determine how you need to pivot to ensure sustainability. What changes to your supply chain must you make to meet customer demand? What new digital capabilities must you offer in response to customer needs and to improve your internal operations? What hybrid work models for employees do you need to initiate?
Once you have your sustainability plan in place and working, you must create a long-term growth strategy. This will include developing a plan for new or enhanced products or services, strengthening your marketing and sales focus, and streamlining operations while reducing expenses.
Liquidity is imperative in executing a growth strategy in the new economy. Once you have a clear picture of your customers’ financial health (Step 1) and have evaluated your cash flow and financial risks (Step 2), you can identify cost-improvement initiatives that will help direct spending in ways that will sustain your business and position it for growth.
After organizing your sustainability and growth goals, you can move to step four.
Step four: Reinvent your credit management
For your last step on the road to recovery, you’ll need to reinvent your credit management process. How well you manage the credit approval and payment process with your customers will have major implications both for the potential growth and for the financial health of those relationships.
Credit management must strike an optimal balance to control risk and increase profitable transactions. Credit management that is too lax can leave your company waiting (and waiting) for payment on a customer’s invoices. Studies show that one-fifth of bankruptcies among small and medium-size businesses can be traced back to late payment or non-payment by customers. Yet, credit management that is too conservative can stifle the growth of an otherwise healthy customer relationship. If customers are unable to obtain the trade credit they need, they may take their business elsewhere.
Finding the sweet spot between these two extremes is essential to your company’s future. Of course, it isn’t possible to eliminate all credit risks. However, a strong approach to credit management can simplify credit approvals at all stages of the customer relationship.
You can help to streamline and reinvent your credit management with these nine tips:
- Know your customers
- Clearly document terms and conditions
- Get receipts
- Bill quickly
- Call on or before the due date
- Schedule periodic payment reminders
- Document and communicate the payment process
- Regularly review customer financial information
- Be consistent
As you put these tips and practices into use, keep in mind that credit management is not a one-off project. It’s a process you must keep working on all year throughout your journey as you reopen and grow your business.
Weather the storm with trade credit insurance
So, what’s next on the horizon for you and your business? Even a well-defined strategy using the steps defined in this article can’t defend your business from all unforeseen risks—but trade credit insurance may be able to help.
Trade credit insurance from Euler Hermes gives businesses access to the most accurate information on customers, prospects, industries, and countries. This takes the guesswork out of credit processes, giving businesses the confidence to safely grow at home or abroad in the new economy. It also provides a safety net to reimburse you if you do encounter accounts receivable disruption due to payment defaults, slow payments, or customer insolvencies.
In these times of uncertainty, Euler Hermes’ global team of data scientists uses big data, machine learning, and AI to see the changes in different sectors and industries before their customers do. Euler Hermes is able to ring the alarm to help their customers steer their businesses in the right direction and avoid a trade arrangement that could potentially devastate their cash flow and throw them off their paths to recovery.
Download their Guide to Credit Insurance to learn more.
