Managing Customer Credit and Trading Risk

Outcome

• You are protected against losses from unpaid receivables by being able to identify potential risk customers at an early stage in the credit monitoring routine. This means that you can act in time instead of reacting when it is too late. If a loss should occur in spite of this, the severity of the loss is reduced.
• You have an individual insurance for each potential risk customer and an effective control over the current insurance status
• Unexpected disturbances in the company's cash flow due to fluctuations in currency and interest rates are minimized by the management of future rate agreements
• Your trading risk is reduced through the use of letters of credit for your import and export
• You know the latest currency value of your foreign currency balances.

Use the result to:

• Maintain a good reputation
• Increase your revenues
• Improve your customer relations
• Plan for your future administrative and financial development
• Reevaluate the company's credit policy, when necessary.

Before you start

The company must have a well-defined policy for how to manage the operations risk and what actions to take in different situations.

Follow These Steps

1. Acknowledge and Identify Risks

   Before focusing on the potential reward of the company's financial activities, you need to understand and manage the risk inherent in these activities. The company must have a well-defined policy for its risk management and what actions to take in different situations.

2. Evaluate and Prioritize Risk

   The company must establish a well-defined policy for how to manage risk factors connected to customer credit and international trade. No amount of prudence can eliminate every possible danger. However, the most important risk factors can be eliminated or controlled.

   For the customer credit management, the result of this activity is reflected in the credit monitoring and DSO settings.

3. Managing Customer Credit

   Use the automated credit monitoring toolbox to identify potential problem customers based on their credit status and payment behavior. This enables you to review the customer's credit policy and take action at an early stage.

4. Managing Insurance for Potential Risk Customer

   To protect the company against losses from unpaid receivables, apply for an insurance for each customer that you suspect is or may become a potential risk. By monitoring how much of the amount insured that is used compared to the amount of the customer's open and past due invoices, you can decide what action to take before the amount is exceeded.

5. Managing Future Rate Agreements

   To reduce the impact changes in currency and interest rates would have on the company, use the M3 functions to manage future rate agreements with fixed rates.

6. Following Up Currency Exposure

   Effective hedging includes checking the current exchange rate trends on a regular basis. By revaluing your foreign currency balances to reflect the latest and future development based on simulated exchange rates, you obtain the information necessary for compensating for any drastic exchange rate fluctuations.

   You create such revaluations in 'Currency Exposure. Print AR/AP' (RMS560) and 'Currency Exposure. Print GL' (RMS565).

7. Managing Trading Risk through Letters of Credit

   By using letters of credit you can practically eliminate any risk in your foreign trade. Letters of credit constitute the safest payment method in international markets, mainly due to the internationally acknowledged regulations.

8. Evaluate Results and Revise Strategies

   Evaluate how effective the company's risk management is on a regular basis. When needed, revise your strategies.