Learn how to read the signs and improve your bottom line
The Challenges of Credit Management
Managing your company’s exposure to risk has become a challenging task. There is more pressure to speed up the credit review process and more responsibility resting on your shoulders to be accountable for your decisions and improve company profitability. One wrong judgment could cost your business a lot of money.
Predictive indicators, powerful evaluation tools that analyze data to measure a company’s risk, are a key business resource to help you make more consistent and confident credit decisions. With the right insight and quality information on the businesses in your portfolio, you can become adept at reading the signs about a company’s past and current financial situation to predict its future profitability or delinquency. Learning how to properly read predictive indicators will help you steer clear of companies prone to slow payment, business failure, fraud, and bad debt and let you focus on those that have the most potential for a profitable future. And it all begins with a reliable data source.
There’s a World of Information: So where do you start?
One place that a lot of people start when researching a company’s financial situation and risk exposure is the Internet, where there’s an abundance of information that’s easily accessible and free. A crucial consideration, though, is the quality of information this avenue provides. Who is managing this data? How often is it updated? Do you have access to the whole picture or only to a portion of the company’s records?
The Importance of Quality Data
A business analysis is only as good as the information it’s built on. If data isn’t managed consistently, there’s a good likelihood that it’s inaccurate or incomplete, making the credit management decisions based on this information imprecise. In the end, this could lead to costly mistakes for you and your business.
Changes are happening in the business world every minute. In the next 60 minutes alone:
- 251 businesses will have a suit, lien, or judgment filed against them
- 183 business telephone numbers will change or be disconnected
- 43 business addresses will change
- 36 directorship (CEO, CFO, etc.) changes will occur
- 33 new businesses will open their doors
- 8 companies will change their names
- 7 businesses will file for bankruptcy
When you base your credit management decisions on data that isn’t managed and updated frequently, you might not know about changes like these as immediately as you would with data that is consistently maintained. Understanding and managing your risk exposure effectively depends on using data you can trust.
The Power of Prediction
Trusted data is an essential foundation to making better credit management decisions, but it won’t be much use to you until you start applying that information to the credit management process.
That’s where predictive indicators come in. Predictive indicators are powerful risk evaluation tools that use advanced statistical techniques to analyze business data and attributes. All of this information is then condensed into easy-to-use, actionable predictive scores that accurately measure the risk a company poses to help you cost-effectively control risk and achieve maximum profits by limiting your exposure to defaults.
The Science Behind Predictive Indicators
Numerous innovative technologies have been developed to automate credit management and bring a greater efficiency to the entire collection process. These technologies have made it possible for credit managers to reduce the cost of collecting past due and write-off balances by combining the power of mathematics and aggregated company data to develop accurate predictive scores.
Predictive scores bring the quality and precision of science and statistical models to the world of credit management. They collect and measure performance risk according to each account in your portfolio to help you manage and control risk and forecast the future profitability of your accounts.
Two examples of predictive scores that help businesses detect slow-paying companies and those susceptible to business failure are financial stress scores and commercial credit scores.
Stress Less with Financial Stress Scores
A financial stress score can help you predict the likelihood that a company will obtain legal relief from its creditors or cease operations without paying all credits in full over a specific period. This score uses statistical probabilities to rank companies according to financial stress and classifies companies according to credit risk score, percentile ranking, and risk class segments. This means that you, at a glance, can quickly evaluate a company’s financial and credit standings according to a ranking or classification number and determine the probability of a company’s financial stress.
Reveal Slow-Paying Customers with Commercial Credit Scores
A commercial credit score works in much the same way, but uses statistical data to categorize companies according to their probability of delinquency or likelihood of paying bills slowly. Indicators to a business’s likelihood to act in this way are based on their history of late payments and records of financial embarrassments. Typically, these types of scores are divided into two categories: early-stage account scores (those less than 90 days past due) and late-stage account scores (those greater than 90 days overdue). Early-stage collection account scores are used to determine the account’s probability of becoming a late-stage account, while late-stage account scores determine the probability of the delinquent balance being paid off.
Both of these types of predictive scores are designed to help you statistically validate past payment patterns, public filings, and financial information, so you can develop an appropriate collection strategy and reduce expected credit losses. While predictive indicators can’t guarantee a company’s future performance, they are objective, statistical probabilities applied to facts, and they can help minimize some of the subjective factors that come into play while making credit decisions, such as emotion, workload, or pressure to rush through the application process.
Turn Analysis into Action
What you have now is quality data and statistical analysis to predict the future profitability or delinquency of your accounts and help you better manage risk. But one pitfall many enterprises encounter once they have the business insight to guide their credit decisions is a failure to take action. This “analysis paralysis” can be caused by a number of things: a business may want to continue analyzing data to make sure the best possible decision will be made at the best possible time; the initial reaction could be to wait and see if the situation will correct itself. Whatever the reason for hesitation may be, analysis paralysis can cause businesses to miss important opportunities and expose themselves to unnecessary risk. It’s important to put trust in the analysis and proactively manage your credit accounts accordingly.
Follow the Signs to Profitability
It’s been proven time and time again that companies that use predictive indicators and then proactively act on these insights experience more profitability than companies that don’t. Incorporating predictive indicators into your credit management process will help you identify high-risk accounts, assess risk more frequently, and reduce your exposure to customers with bad debts. And the end result will enable you to contain costs and continue to grow your business.
D&B is the world’s leading source of business information and insight, enabling companies to Decide with Confidence® for more than 165 years. D&B’s global commercial database contains more than 132 million business records. The database is enhanced by our proprietary DUNSRight® process, which transforms the enormous amount of data we collect daily into decision-ready insight. Decision-ready insight gives our customers a 360-degree view of their customers, prospects, and suppliers. Through the D&B Worldwide Network—an unrivaled alliance of D&B and leading business information providers around the world—customers gain access to the world’s largest and highest quality global commercial business information database.
D&B partners with many of the world’s largest and most successful enterprises as well as mid-size companies and entrepreneurial start-ups. Customers use our Risk Management Solutions™ to mitigate credit risk, increase cash flow, and drive increased profitability; our Sales & Marketing Solutions™ to increase revenue from new and existing customers; our E-Business Solutions™ to convert prospects into clients faster by enabling business professionals to research companies, executives, and industries; and our Supply Management Solutions™ to generate ongoing savings through supplier consolidation and to protect their businesses from supply chain disruption and serious financial, operational, and regulatory risk.