Credit risk has two dimensions: late payment and non-payment. But, other factors also influence risk, most importantly gross profit margins and your firm's tolerance for risk. Automated systems allow you to adjust for these factors across the entire order-to-cash process, not just credit decisioning but also collection and dispute management workflows.

 

PRINCIPLES: 

With credit controls your primary objective is to establish evidence of control within all your systems. Every approval needs to be directed to an authorized individual. Every action needs to be completed within predetermined parameters. Every exception needs to be addressed according to protocol. Accordingly, credit controls include some combination of the following elements:

  • Credit Limits
  • Risk Classifications
  • Approval Authorities
  • Cycle Time Parameters
  • Assignment of Responsibilities
  • Work Rules
  • Exception Reporting

 

BENEFITS: 

Establishing comprehensive credit controls provides various benefits related to your overall risk management environment. They are:

1. Remove unnecessary ambiguity from your decision-making processes.

2. Ensure a strategic balance between risk and sales in order to achieve corporate profitability objectives. 

3. Facilitate compliance with regulatory protocols such as Sarbanes-Oxley and SAS-70. 

4. Ensure all tasks are handled within accepted parameters.

 

RECOMMENDATIONS:

1. Set realistic credit limits for every account in your portfolio

2. Assign every account a risk classification that factors in exposure (credit limit) versus creditworthiness. 

3. Use automatic credit expiration dates. 

4. Set credit (exposure) limits for AR portfolio segments that pose a high risk of default. 

5. Use approval authorities to delegate the decision workload while at the same time maintaining stringent control over exposure and risk. 

 

REPORTING AND PERFORMANCE MEASURES: 

1. Credit Limit and Risk Classification Changes

2. AR by Risk Classification
 

3. Credit Limits Expiring

4. Underutilized Credit Limits

 

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