Developing your Customer’s Unique Debtor Risk Score Card
Relying on a debtor risk rating, which is solely based on available financial information that can be up to 18 months old may not provide insight into the current financial strength of the business.
This is certainly the case following a challenging period of trading where sales and margins have been negatively impacted for many industry sectors. Simply relying on a Company Information Report, does not factor in your own companies risk appetite, profit margins, available working capital, desire or need to increase market share, individual debtor risk grade and payment performance score.
What Is a Debtor Risk Score Card?
A Debtor Risk Score Card measures the probability of recovery of the outstanding balance and statistically estimates a Debtor’s willingness, and ability to pay. While you cannot eliminate the total Risk, you can calculate in real time the measured risk in trading on open account terms at the individual Debtor level. The score card, also highlights high-risk Debtors where, in the event of payment default, your collection stance should be immediate.
The individual Debtor Rating based on your score card will allow you to consider margins versus risk and potential future sales opportunities.
In an ideal world we would only trade with financially strong and highly rated customers. However, in reality this is not an option for most companies. Trading only with strong customers typically negatively impacts margins and requires extended terms of payment which affects both working capital and profit.
If you would like to discuss how a Debtor Risk Score Card would be of benefit to you, please contact us.