Lost in field work
2 Jun 09
The financial health of your customers and suppliers is vital to the survival of your own business, says Richard Goslan, but how much do you really know about them?
by Richard Goslan
Nobody is safe. That’s the bleak but, in the light of recent events, realistic message from the companies that provide credit reports on other businesses.
If you take into account the fact that even apparently solid institutions such as Lehman Brothers disappeared so quickly from the financial landscape, then the importance of trying to get an accurate and up-to-date insight into your customers’ or suppliers’ finances takes on a new significance.
That means rethinking what level of information you should take into consideration, according to Andy Watson, managing director of Jordans’ business information service.
“Credit reference reports are primarily driven by automated analysis of key pieces of information, and in order to do that meaningfully, first you need as much information as you can possibly get, but really it needs to be the right type of information,” he says.
“The algorithms or mechanisms that are used to make the assessment have to have been updated in terms of what’s happening in the world, to make sure that changing macro-economic conditions have been taken into account.”
The demand for credit reports is driving the industry to innovate and offer a range of new products to satisfy the new-found emphasis on risk management.
Software development company Draycir, for example, is soon to release a product called Credit Guardian, powered by data from Experian, which is designed to give small and medium-sized businesses year-round access to business information.
“Among other things, our product will show you how people pay,” explains Draycir director Robert Ball. “For example, large and well-known companies may have a solid credit rating, but when you look at their pay
performance figures, they might show that they pay on average about 90 days late. So even if you’re guaranteed to get that money, you could have gone under by that point because you didn’t receive the payment on time.”
And the days of only carrying out a credit check on a new customer when you are about to enter into business with them for the first time are over, says Nic Beishon, head of Equifax Commercial Information Solutions.
“The ongoing monitoring of customers’ credit status should be an integral part of any commercial relationship and this means that account management must become much more fundamental to good credit management,” he says.
“This helps a business to identify changes affecting customers’ financial status and gives them an insight so that they can respond accordingly – whether it’s changing collections activities, revising terms of payment or, in the worst case, closing the account.”
Martin Williams, managing director of Graydon UK, says: “Most companies that use credit information – and most don’t – just do so to check out potential new customers, not to check out existing customers. But most of your bad debts will come from existing customers going under, not from new business.”
Graydon is launching a new credit information service for SMEs, the Graydon Enhanced Credit Information Service, which is aimed at giving them greater control of the information provided about their financial health by the credit reference companies.
Powered by Validis, the business accounting data analysis specialist, the service will allow users to identify potential issues, anomalies or errors in their management accounts which previously prevented them from being used in the credit rating process.
“It will play an important role in restoring the flow of finance to companies in what has become a market starved by macro-economic conditions,” says Williams.
“Commercial lenders are thinking harder than ever before about the extension of credit as the severe economic downturn continues. They also need to be able to base their decisions on reliable detailed financial data and insights. So it’s essential that credit reference agencies do everything within their power to offer credit recommendations based on up-to-the minute information.”
Equifax’s Nic Beishon recommends that as well as checking on your customers’ credit status, it makes more sense than ever to obtain a copy of a business report on your own company, and go through it carefully.
“Companies should make sure they look their best to prospective suppliers and customers,” he says. “It is possible that if a business has kept its credit rating positive, it may be able to use this to get better terms with suppliers, and in the process it may save money or acquire better quality supplies.”
And now is not the time to think about saving on the costs incurred by carrying out credit checks.
“There’s an issue of balancing risk and reward,” says Andy Watson from Jordans. “Do you pay what in the grand scheme of things is a small amount of money in order to ensure that you’re securing a larger amount of money?
“There will be chancers who take a risk, but I think there are more and more who will go to the risk managers and say, look if I’m going to do business with someone, I have to be clear that they’re going to be able to pay their bills at the end of the month or the quarter. Otherwise what’s the point?”
“The current climate may create the temptation for many businesses to cut spending on some of the basic processes and disciplines that would normally be part of ‘business as usual’ activity,” says Beishon. “But cutting back on checks could be a real false economy.”