Assessing Customer Risk

The main objective of your business is not merely to sell, but to sell profitably and get paid for goods or services supplied. Due to lockdown restrictions and other COVID regulation, making payment can be problematic. With this in mind, we have created a process to assess just how risky your customers are and to use this information to minimise any financial losses you might otherwise suffer.

The Three-Step Risk Assessment Process We Have Created

  1. Initially, we suggest you divide customers into Can Pay, Cannot Pay (they have cashflow issues) and will not pay (bad payers) categories.
  2. Secondly, rank customers as T (transactional) or R (relationship). Transactional customers are concerned about price, quantity, and delivery, i.e., always want more for less. Transactional behaviour is the default position for many businesses in a crisis. Relationship clients are more open to conversations about the value of the goods or services you supply. They will enjoy their business relationship with you and be loyal customers.
  3. Last of all, we ranked clients 1 (low) to 5 (high) for risk of failure.

Using this approach, we would like to offer you our support to undertake a formal risk assessment of your customers.

This will enable you to better manage risk with eyes wide open rather than stumbling into situations where work is undertaken, or goods supplied in areas where there are increasing risks and where customers may not have the inclination or resources to pay.

Low Risk Group

Customers classified as low risk can continue to be supported without undue consideration of risk.

HOWEVER, if you start to pick up indicators that their circumstances are changing, that they are perhaps shifting into higher risk categories, then their level of risk should be increased.

High Risk Group

Work or goods supplied to customers classified as high risk should only fulfilled if you are paid in advance.

NOTE: Circumstances can change and if you believe that high risk customers should be considered at lower risk, due to improving circumstances, then reclassify.

Intermediate Risk

If a customer is neither low nor high risk, but somewhere in between, make sure that you keep a watching brief on their account to ensure they do not exceed your credit terms.

Integrate Risk Assessment Into Your Credit Control System

As a customer risk increases, so should your attention to their account. Tighten up credit terms as risk increases. Have a system in place to place a stop on accounts when necessary.

We Can Help

COVID disruption is far-reaching. Even if your business seems to be weathering the present lockdown restrictions, keeping a weather eye on your customers, to identify those at risk, will pay dividends in the long term.

You will be less likely to suffer bad debts and any resulting loss of cash flow.

If you would like us to discuss how this process of assessing risk could be undertaken for your business, please call. We can help.

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