Business Credit Journal Seeing the Forest and the Trees
July 2014
(How to Use Credit Scoring to Monitor Risk in Your Receivables Portfolio) By Michele Friske, MFA, MBA, CCE, CICP; Sr. Credit Analyst, EVRAZ North America Often in credit, we have a tendency to become lost in the trees, and miss the forest. We evaluate credit on an account-by-account basis, examining the risk associated with each individual customer, without stepping back to evaluate the risk of the portfolio as a whole. Credit scoring can be used as a tool to view the forest, and to better evaluate risk at a company level. Do you know, for instance, the over-all credit health score of your company? Do you know what it was last quarter or last year? Have you evaluated whether you are carrying too much risk or too little? We are all familiar with the basic constructs of Credit 101. A company in a growth stage that wants to stimulate sales relaxes credit. A mature company that wants to increase profit restricts credit. But how do you gauge whether your company’s credit policy is too restrictive or too relaxed?
In This Issue Seeing the Forest and the Trees ........................ 1 International Corner................ 2 President’s Message................ 3 Key to Success........................ 4
When we implemented credit scoring at EVRAZ North America, we had three primary objectives:
Questions from the Forum....... 6
Reducing a Customer's Account Recievables in the Zone of Insolvency.................. 9
1. Better understand and quickly evaluate the amount of credit risk in our customer base. 2. Communicate to management. 3. Provide information to the sales team.
Understanding Risk in the Customer Base
Award Of Excellence............... 11
Like many companies, our former policy was to evaluate each and every account once a year. We tried to coordinate the review with the release of the customer’s annual financial statements. The fatal flaw in this method is that a customer’s financial position can change quickly. We needed a process that would enable us to monitor any sudden changes in behavior. We investigated several scoring systems, and ultimately selected Dun and Bradstreet (D & B). We combined our payment history with D & B’s proprietary information to arrive at a credit score ranked from 0 to 10. We score our portfolio quarterly, which enables us to monitor accounts more frequently than an annual review and allows us to quickly classify each customer as high, moderate, or low risk. We also monitor accounts that have had a sudden change in behavior. Accounts with a score that dropped more than 1.5 points in a quarter are given priority treatment. This may or may not necessitate a change in credit limits depending on what is driving the change. For instance, a low-risk account may have a drop in score but still remain in the low-risk category. We need to know whether the drop was caused by an isolated change in payment behavior, or if the customer has adopted a terms pushback strategy. If the drop caused a change in risk from moderate to high, we would be justifiably concerned and react accordingly.
10 Ways to Help You Stay on Track & Manage Your Time Better............................ 8 Years, Events that Defined NACM and the Credit Provession........ 12 Tips & Tricks........................... 13 U.S. Bankruptcy Court District of Oregon................... 14 U.S. Bankruptcy Court Western District of Washington............................ 15
continued on page 8
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