Credit Management December 2022
THE CICM MAGAZINE FOR CONSUMER AND COMMERCIAL CREDIT PROFESSIONALS
THE CICM MAGAZINE FOR CONSUMER AND COMMERCIAL CREDIT PROFESSIONALS
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
INSOLVENCY
AUTHOR – Jo Kettner
❝
So, if confidence is in short supply – how about knowledge? This is the
area which, it seems to me, is most worthy of our attention. There is
very little that we as individual businesses can do to change the external
forces which are causing such a crisis of confidence.
I am sure that this magazine will devote
many column inches in the months ahead
examining the proposed Economic Crime
and Corporate Transparency Bill which
is currently making its way through
Parliament and sets out to close some
of the more shocking loopholes which
have allowed UK-registered entities to
feature in many of the high-profile money
laundering scandals of recent years.
Data unreliability
For our purposes I think it is worth
reiterating that, given the underlying
source data is either unverified
(Companies House, HMRC data) or
incomplete (bank data, payment data) –
and sometimes both (local government
data)! – any decisions taken using this data
have some element of risk associated with
them. I’m afraid there is no perfect source
of knowledge, no guaranteed model or
score that will enable you to go boldly
into the world of credit risk with certainty
that you won’t lose any money. But
there are tools and techniques that can
help you manage your risk and take
evidence-based decisions.
A few tips on how to boost your
knowledge:
1. Investigate alternative sources of
information – from our experience, our
clients tend to use more than one credit
reference agency (CRA) source of data. We
all have different models, and we source
and clean information in different ways
– so being able to see risk from multiple
perspectives helps you come to a more
informed conclusion about a business.
2. Talk to your customer – what is
happening in their business – how are they
managing risk, what is their institutional
attitude to the current economic climate
and measures to manage risk – how might
this impact your relationship?
3. Try to get Management Accounts – or
if you aren’t able to obtain these, use your
conversations to ask about the outlook for
order books, margins etc. Company Watch
users are able to create experiments to
plug these more up-to-date numbers into
our models to see the impact of current
financials on the underlying health of
the company.
4. Stress-test – if you aren’t able to glean
much information directly, it can be
helpful to think of the wider context
and analyse how a key customer might
be vulnerable: are they particularly
exposed to FX and commodity prices
without the ability to pass these costs
on (margin squeeze); do they have large
amounts of debt which is subject to the
company meeting certain conditions e.g.
a certain level of profitability – if this is
not achieved will they breach lending
covenants and cause the debt to be called
in? Is the company able to survive this kind
of shock? Is the company overly reliant on
one or two key customers or suppliers –
what happens if these relationships end
abruptly? We have built a Forecast View
for our clients which allows them to run
seven pre-set scenarios and then tweak
our assumptions to generate a view of a
company’s financial health in the context
of the current economic environment.
5. Focus – of course I realise that credit
managers tasked with managing a book
of hundreds or thousands of customers
can’t possibly go through each risk in
such detail, so that’s where my next
piece of advice comes in: you have to
spend some time segmenting your risks
into criticality. You may decide that
this is by absolute spend, by segments
that are particularly exposed to margin
squeeze and commodity price volatility,
by profitability or by looking at internal
data on changes in payment and ordering
patterns for example.
6. Ongoing monitoring – once you have
segmented your portfolio make sure you
set up monitoring alerts so you receive
notification if anything significant
changes – this could be Profit Warnings,
Court documents (e.g. unadvertised
winding up petitions, winding up petition
applications, CCJs etc), Director changes,
new secured debt etc. You will still need
to focus your time on the most critical
customers, but monitoring can give you
some vital early warning of potential
businesses in stress.
For the last piece of advice, I’d
make a final plea for cross-functional
collaboration. Talk to other colleagues
in your organisation who manage risk –
particularly in procurement functions
– share your knowledge about managing
financial risks with colleagues who may
be less familiar with thinking about
financial health and business failure.
There is no doubt that we are in
for rough waters ahead, but I expect
businesses whose teams are working
closely together, sharing expertise and
staying focused on the most critical risks
will find themselves best-placed to come
through the storm stronger and able to
capitalise on the opportunities which will
be there on the other side.
Jo Kettner is the outgoing CEO of Company
Watch and a member of the CICM Think Tank.
Brave | Curious | Resilient / www.cicm.com / December 2022 / PAGE 19