3 facets of customer monitoring

Last week, we looked at the responsibilities of a credit manager and his/her role in determining a customer's creditworthiness before doing business with them. This week, it's all about how credit managers can continue to implement effective risk management strategies even after signing on a customer.

It's important to monitor your customer base on an ongoing basis and not just at the outset of the business relationship. Research shows that the majority of bad debt is generated from customers that businesses have been dealing with for over a year, demonstrating the importance of tight ongoing account management.

Regular monitoring can alert you to early warning signs of financial trouble, such as an increase in delinquent accounts, court actions and collection notices or other factors that contribute to the overall risk score of a business. So what customer data should you monitor?

Economic developments

Regardless of the industry you operate in, changing market conditions, such as a fall in demand for a particular product, supply chain shocks or natural disasters, can affect a firm's ability to pay. So can general economic condititions such as increased competition, higher costs or reduced sales. Of course, events that affect particular industries and geographic locations should also be taken into consideration - such as the tropical cyclones that affected the Queensland agriculture industry a few years ago.

Payment history

It is also important to keep a close eye on the payment times of your customers  and of the industry in which they operate. If payment times start to blow out, it can be an early indicator of financial stress and consequently, a sign you should be acting quickly to call in any payments that are outstanding. Consistently late payers should certainly be taken as a red flag for future late payments, and you may need to consider if you still want to retain them as customers.

Customer segmentation

Companies can also use scoring metrics to segment out their customer base, with those classified a higher risk checked more frequently to ensure no adverse occurrences have taken place over a certain period of time. For instance, the score can be based on the financial position, previous payment history, credit report, trade references, directorship information and court actions associated with a particular customer.

When one of these inputs change, so does the overall risk score, enabling you to determine at a glance if a particular customer is low, medium or high risk. Lower risk customers should also be monitored in the event these customers move to a higher risk category.

Putting these measures in place is beneficial in the long-run as it will help your business manage crises before they even occur and ensure the ongoing financial health of your business.

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