- Home
- Bankruptcy and Bankruptcy Code
- Business Entities
- Departmental Operations
- Credit Practices
- Legal
- Risk Analysis
- Understanding Accounts Receivable Costs
- Accounts Receivable Forecasting
- Informing Customers of their Credit Limits
- Authorization for Bank to Release Credit Information
- Authorizing Release of Credit Information
- Bank Loans and Bank Credit
- Expediting Bank Reference Requests
- Understanding Banking Relationships
- Bounced Checks; Collecting on Bounced Checks, NSF Checks
- Business Credit; Trade Credit; Open Account Credit Terms
- The Five Cs of Credit Analysis
- Check Acceptance
- Check Kiting
- Classification of Risk; Customer Risk Score
- Risk Management
- Risk vs Reward in Credit Decisionmaking
- COD Terms; Slow Pay; High Risk; Risk Mitigation;
- Code of Ethics
- Confidentiality Agreement
- Consumer Credit Granting
- Commercial Credit Application; Necessary Components
- Credit Approval Process
- Credit Associations
- Credit Decision-Making
- Offering Open Account Terms; Credit Extension
- Customer Credit File; Credit File
- Credit Granting Authority
- Credit History and Strategy
- Credit Insurance; Trade Credit Insurance; Export Credit Insurance
- Credit Line or Credit Limit
- Credit Policy Checklist
- Credit References
- Credit Reporting Agencies
- Credit Risk Environment
- Credit Risk Management
- Credit Role/Strategy
- Credit Decision Making: Is it Art or Science?
- Customer Purchase Orders, Errors on POs and their Impact on Collections
- Customer Retention
- Grace Periods and Cash Discounts
- Direct and Indirect Credit Investigations
- Unearned Discounts; Unearned Cash Discounts; Cash Discounts
- Enterprise Resource Planning
- Ethics for the Credit Manager
- Evaluating Financial Health
- Exchange of Credit Information
- Extended Dating Terms
- Credit File Documentation
- Fraud Signs and Prevention
- History of Credit
- Cargo Insurance
- Insurance Brokers and Credit Insurance
- Internet as a Source of Credit Information
- Late Charges
- Minimum First Order Without Credit Investigation
- New Account Checklist
- Non-Disclosure Agreement
- Open Account Sales; Open Account Terms; Extension of Credit on Open Account Terms
- Order Approval; Order Hold; Credit Reviews; Pending Order Review
- Order Controls / Order Approval
- Pro Forma Invoices
- Requesting Financial Information from Customers
- Restrictive Endorsements
- Returned Checks
- Return Merchandise Authorizations
- Root Cause Analysis of Past Due Balances
- Safeguarding Accounts
- Security Agreements; Secured Debts
- Seller's Invoice
- Terms and Conditions
- Terms of Sale
- Terms of Sale: Examples
- Types of Credit: Consumer Credit; Bank Credit; Commercial Credit; B2B; Business to Business
- Written Credit Policy Manual
- Handling Post Audit Claims More Effectively; Post Audit Claims
- Do's and Don'ts of Business to Business Debt Collection, Debt Collection Practices
- Bad Debt Reserves
- Advantages and Disadvantages of Purchasing Credit Insurance
- A Letter of Introduction
- Addressing Chronic Slow Pay Customers
- More about Cash Forecasting
- Streamlining Order Processing
- Collection Practices
- Financial Analysis
- Financing Methods
- International Credit
- Laws and Regulations
- Payment Methods
- Performance Measures
- Security Instruments
- Career Management, and Job Change
- Credit Website Tools
- Upcoming Educational Events
- Credit and Collections Tools and Tips
- Tips on Creating Better Emails
- Generating Effective Credit Correspondence
- Exporting
- Accounting
Risk Management
Credit risk is the risk of financial loss resulting from the failure of the debtor to honor part or all of its obligations to paycreditors’ invoices as they come due. The goal of credit management is to optimize the company’s sales and profits by keeping both credit risk and payment delinquencies within acceptable limits. Sound credit management involves finding the right balance in the risk/reward relationship between sales and bad-debt losses. The key steps include:
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Identifying uncertainties / risks.
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Analyzing these uncertainties and risks: This is done to determine their size and potential impact on the department and on the organization as a whole.
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Prioritizing your risk assessment and risk mitigation efforts based on size, severity and likelihood.
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Avoiding risk: This can be accomplished by refusing to extend credit to high-risk accounts. However, in most companies this is not a viable option since so many customers could be classified as high risk that refusing to sell to them would reduce sales to unacceptable levels.
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Controlling - Mitigating risk: This option involves developing a comprehensive plan to reduce credit risk or more specifically reduce the probability that the risk event will occur and then implementing that plan, and monitoring the credit department’s efforts to carry out the plan.
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Accepting risk: A few companies simply accept the risks associated with doing business with customers identified as high risk. These tend to be companies trying to gain market share, companies with high profit margins, companies with excess inventory, and companies with adequate reserves for the bad debt losses that are almost certain to accompany this policy.
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Managing risk: Organizations willing to accept risks need to manage it. Examples of management tied to credit risk include: Conducting ongoing reviews, Increase involvement by supervisors or department managers, and sharing concerns and updates with other departments including Finance, Treasury, Sales and Production.
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Transferring credit risk: An example of transferring credit risk would involve purchasing credit insurance. Other examples of transferring credit risk include flooring or factoring of the company’s accounts receivable.
© 2009 by Michael C. Dennis. All Rights Reserved.