Uncertain times call for sophisticated analysis and the adoption of a smart risk culture

By Mike Feldwick, Head of UK & Ireland at Tinubu Square

Uncertainty is the watchword for the times we are living in right now. The implications of the UK’s exit from the European Union, the recent inauguration of a new and controversial US President and the fluctuations of the currency are just three of many factors that combine to create a changeable business environment.

The overall economic picture is mixed. According to the Financial Times[1], services over the past year have expanded robustly, while construction and manufacturing have struggled. However, whilst consumer confidence took a post-Brexit hit, it quickly recovered which has also supported the continuing rise in retail sales volumes.

The outlook for 2017, therefore, is hard to predict. Economic growth may slow, but this will largely depend on the outcome of the Brexit negotiations, which are likely to have a delaying effect on business investment plans.   

For many organisations, the lessons learned during eight years of recession will stand them in good steadwhile we wait for the situation to level out. On a day to day basis, they are practiced at looking out for the warning signs and when it comes to managing their own financial health they have implemented credit risk assessments and procedures to guard against payment defaults and bad debts.

In some industries, eg. eCommerce and retail or the steel and oilsector, there are a range of factors which present higher than average financial risks to suppliers. This can leave them unsure about entering into trade credit arrangements and searching for reassurance.

So how cancompanies assess the risks and balance these against the opportunities? They can start by implementing detailed analysis in order to gain informed risk assessments, and there are two main approaches.

The first is by leveraging big data so that processes can be transformed. This could take time to implement but it will have a considerable impact, particularly in the finance department, where the efficiency of systems based on multiple mixed ledgers has long been questioned and found wanting.

The advantages of combining all the data that a company has on its customers and the analysis that can be drawn from the data means that finance directors and credit managers have actionable insight.It might require a considerable change to IT systems, but this challenge has to be weighed up against the increase in financial risk of using complex and in some cases discordant systems. The first step, therefore, is to deal with existing, entrenched processes and silos that still remain in many organisations. How can information that is fragmented within different departments, be combined into a single, useful function that gives a 360° view of the customer, and even more importantly, how can that then be translated into vital analysis? 

The key is to start small. If manageable data and analytics projects in specific departments result in tangible benefits, the value of them to the company will increase.  Credit managers should focus on easy wins, data that can analyse trade payment behaviour, for example. This provides an overview of the characteristics of customer payments that allows credit managers to form a case-by-case view on credit limits and access. It puts them firmly in control and it gives them the tools to bring siloed teams and departments together, to collaborate and combine efforts for optimum return.It is actually to the benefit of all operational employees, not just credit managers but right through to sales directors and CFOs to promote big data as a means to make good financial decisions. The net result is that big data projects are seen to have real value and those invested in the process gain board-level endorsement to extend them more broadly.

The second approach to analysis is by using a third-party consulting service.  This will provide a company with access to expert risk analysts with real-time information on any buyer in any country, so it is as applicable to local trade credit management as it is to organisations who are trading overseas. As well as risk assessments, this type of service can provide broader advice on risk issues and sectors and geographies to be wary of through its constant monitoring of the landscape.

The most effective third-party risk analyst services also offer on-call expert opinions. This is helpful for finance directors or credit managers who recognise that there may be a risk with a potential buyer, but are unable to access the appropriate information. The insight that individual advisors can provide can realise significant savings in time and money.

In conjunction with analysis, companies also need to consider the issue of company culture. The reason that silos exist in many companies is because individuals and departments lack the appropriate mechanisms and incentives to share data. Credit managersrely on the sharing of data, whether it’s with sales departments or back-office functions or anywhere in the order to cash cycle. Their priority is establishing a smart risk culture - a means by which their company can increase its tolerance to financial risk - and the best way of making this work is by gaining the involvement of the entire organisation and by implementing financial IT systems or software that can be shared across the company.

Here are some guidelines for achieving a smart risk culture that start with improved practices:

  1. Manage debts - Monies owed, on average, amount to one third of the balance sheet. This is costly, in terms of the time spent chasing money and the effort to secure short-term financing. Look at adopting mechanisms that automate credit management and control processes.
  2. Involve all levels of the organisation. The only way to effectively implement processes for identifying, analysing and managing exposure to risk is by involving all staff connected to the process from credit controllers through to the sales team. Theirinsight on customers will be essential.
  3. Be selective about customers. Carry out detailed analysis to identify their trading history  and the markets they operate in. Work with the sales team to qualify prospects, then make thorough credit checks and implement robust financial negotiations. Balance the benefits of a commercial relationship and the risks.
  4. Monitor customers. Track their financial health and implement a faster response to negative information to reduce exposure to risk. If the intelligence says that their financial situation and credit rating has improved, relax credit terms.
  5. If appropriate, consider transferring risk to a credit insurer. A credit insurance policy provides data on clients that outlinesthe risk exposure to help with informed decision making. The recovery of past-due claims is in the hands of the credit insurer, and companies receive compensation regardless of whether the debt is finally paid to the insurer or not.
  6. Control export activities. Outside factors, whether political, commercial, financial, logistical or legal add to the risk environment. A credit risk management policy is useful for automating a significant portion of the most important processes, such as monitoring changes to the customer’s commercial environment, or even tracking changes in Terms and Conditions.

A combination of a smart risk culture and the implementation of technology solutions that can leverage customer information and deliver external intelligence puts financial control back into the organisation increasing its tolerance to risk. It’s a balance worth achieving in these uncertain times.