How to conduct risk assessment of your RECEIVABLES
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ssessing your receivables has become more important than ever during the Covid-19 pandemic, with increased levels of insolvency and other factors such as the interrup on of supply chains impacting businesses globally. During such periods of economic uncertainty, you should assess your receivables regularly. Early detec on of risk will help you avoid or minimise poten al losses. An assessment of outstanding invoices and the risk ofnon-payment will help you iden fy any weak points and guide you to take decisive ac on to minimise risk and protect your business. Here are a few tips to help you to complete a risk assessment of your accounts receivable and secure yourcash flow during this me of economic uncertainty.
Sort your customers into groups Sor ng your customers into groups will help you iden fy pa erns and 96 europeanbusinessmagazine.com
establish a risk profile. For example, if a customer stands out in a group for demonstrating poor payment prac ces, they may present a higher payment risk. Or you may find indicaons of stress in a specific geography or sector. You can use this exercise to note how evenly your customer base is spread. If a high concentraon of your turnover is limited to a small number of customers, you may be at a higher risk of insolvency if that key source of income is lost. Conversely, customers that represent just a small part of your overall receivables should not make a great impact if they fail to pay you. Consider organising your customers into groups, such as domes c customers, or customers from a parcular region or country, trade sectors. You could also sort them into order using the size of the customer base, the percentage of your overall receivables they represent, or whether or not they have guaranteed payment.
Limit your exposure to bad debts In addi on to iden fying which customers or areas pose greater risk to your cash flow, it is useful to iden fy and list what security arrangements and guarantees your business uses. These may include: • l Bonds • l Comfort le ers • l Credit insurance • l Factoring • l Le ers of credit • l Lien • l Reten on of tle • l Transfer of assets • l Transfer of receivables Analysing your security arrangements and guarantees can help you shed light on how high the share of total losses could be and what percentage of your por olio is protected.
