DB RATING Helping you to Decide with Confidence D&B provides Scores and Ratings to help you identify organisations that are likely to fail or pay late, or will want to purchase their goods / services. This helps you to drive growth and increase profitability by:
Allowing automated decisions for increased efficiency, which will free up valuable resources
to focus on more important decisions
Enabling more consistent decisions across the entire organisation
Applying scores across an entire portfolio to quickly identify risk and opportunity
Allowing faster processing of large volumes of transactions
D&B Rating – Identify Credit-Worthiness Quickly The D&B Rating provides a quick and clear indication of the credit-worthiness of an organisation, which helps you to identify profitable opportunities for growth, and risks that could affect bad debt and cashflow. The D&B Rating is made up of two parts and presented in the following format:
Financial strength - Based on Tangible Net Worth from the latest financial accounts
Risk Indicator - Derived from the D&B Failure Score but also takes into account expert rules
and overrides In the example above, the D&B Rating indicates an organisation with Tangible Net Worth between £1,500,000 and £6,999,999 and a high risk of failure. Financial Strength The following table shows the relationship between the Financial Strength indicator and an organisation’s Tangible Net Worth:
Risk Indicator To generate the Risk Indicator the D&B Failure Score is combined with expert rules such as:
Minimum Data - To identify trading activity and provide substance for the score
High Risk Parent - High Risk of a parent cascades down through the corporate family tree
so that subsidiaries are also marked as High Risk
Detrimental Legal Events - In addition to failure events (for example; meeting of creditors,
administrator appointed, bankruptcy, etc) Detrimental Auditors Reports will also automatically mark the subject organisation as High Risk
Possible Fraudulent Activity - Our team of Severe Risk Specialists identify potential and
actual fraudulent businesses and individuals. Customers are then warned and Scores / Risk Indicators are removed or shown as High Risk
Manual Overrides - Scores and Risk Indicators can be adjusted by authorised experts to
reflect non statistical / catastrophic events The following table shows the relationship between the Risk Indicator and level of risk, and provides a guide to interpretation:
http://www.dnb.co.uk/scores-data/dandb-rating DB RATING What is the D&B Rating? The D&B Rating can help you quickly assess a firm's size and composite credit appraisal, based on information in a company's interim or fiscal balance sheet and an overall evaluation of the firm's creditworthiness. The "5A" to "HH" Rating Classifications reflect company size based on worth or equity as computed by D&B. Company size can be an effective indicator of credit capacity. These Ratings are assigned to businesses that have supplied D&B with a current financial statement. The Composite Credit Appraisal is a number, 1 through 4, that makes up the second half of the company's rating and reflects D&B's overall assessment of that firm's creditworthiness. The Composite Credit Appraisal is based on D&B’s analysis of company payments, financial information, public records, business age and other important factors (when available). Note: A "2"
is the highest Composite Credit Appraisal a company not supplying D&B with current financial information can receive. The "1R" and "2R" Rating categories reflect company size based on the total number of employees for the business. They are assigned to company files that do not contain a current financial statement. ER (Employee Range) Ratings apply to certain lines of business that do not lend themselves to classification under the D&B Rating system. Instead, D&B assigns these types of businesses an Employee Range symbol based on the number of people employed. No other significance should be attached to this symbol. For example, a rating of "ER7" means there are between five and nine employees in the company. "ERN" should not be interpreted negatively. It simply means D&B does not have information indicating how many people are employed at this firm. The D&B Rating field in a report may also display the following designations when certain conditions are present: The '- -' Symbol: This represents the absence of a D&B Rating and should not be interpreted as indicating that credit should be denied. It means that the information available to D&B does not permit D&B to classify the company within its Rating Key and that further inquiry should be made before reaching a credit decision. Some reasons for using the "- -" symbol include: deficit net worth, bankruptcy proceedings, lack of sufficient payment information or incomplete history indicator. DS (DUNS Support): This indicates that the information available to D&B does not permit D&B to classify the company within its Rating Key. INV (Investigation Being Conducted): When an "INV" appears, it means an investigation is being conducted on this business to get the most current details. NQ (Not Quoted): This is generally assigned when a business has been confirmed as no longer active at the location, or when D&B is unable to confirm active operations. It may also appear on some branch reports, when the branch is located in the same city as the headquarters. Rating Classification Composite Credit Appraisal (Based on Worth from Interim or Fiscal Balance Sheet) High Good Fair Limited 5A $50,000,000 and over 1 2 3 4 4A 10,000,000 to 49,999,999 1 2 3 4 3A 1,000,000 to 9,999,999 1 2 3 4 2A 750,000 to 999,999 1 2 3 4 1A 500,000 to 749,999 1 2 3 4 BA 300,000 to 499,999 1 2 3 4 BB 200,000 to 299,999 1 2 3 4 CB 125,000 to 199,999 1 2 3 4 CC 75,000 to 124,999 1 2 3 4 DC 50,000 to 74,999 1 2 3 4 DD 35,000 to 49,999 1 2 3 4 EE 20,000 to 34,999 1 2 3 4 FF 10,000 to 19,999 1 2 3 4 GG 5,000 to 9,999 1 2 3 4 HH up to 4,999 1 2 3 4 Rating Classification Based on Number of Employees) 1R 10 and over 2R 1 to 9
Composite Credit Appraisal Good Fair Limited 2 3 4 2 3 4
Key To Employee Range Applicable to lines of business not covered by the D&B Rating system ER1 1,000 or more ER2 500-999 ER3 100-499 ER4 50-99 ER5 20-49 ER6 10-19 ER7 5-9 ER8 1-4 ERN Not Available
https://mycredit.dnb.com/glossaries/d-b-rating/
CREDIT HOLD Definition When a customer is consistently late in making payments, has exceeded their credit limit, or is identified as a bad risk, you can prevent additional credit purchases by placing their account on credit hold. When a customer account is placed on credit hold, you cannot create new sales orders for that customer in Oracle Order Entry. However, you can still create transactions for that customer in Receivables. Managing your costumers’ credit hold situation INTRO. Cash flow can either make or break an operation. Although it's obvious that the most important way to manage an organizations' cash flow is its ability to collect on open invoices, managing which customer should be extended what credit and which should be extended no credit at all, are mutually important. This article will explore the ways your software could easily control these situations.
There may be the unfortunate situation that you decide to place an entire account on credit hold. Having a flag to control this case scenario would typically override all other flags and place all orders on immediate credit hold. The most common situation though, is the need for the software to determine if an order should be placed on automatic credit hold. This would allow the credit manager time to investigate whether to “force” the release of the order or to contact the account and notify them of the situation. To start, designate a flag in your customer master file that will control whether the customer should even be subject to having their orders placed on credit hold evaluation. You may decide to categorize your best and most important customers to never be placed on an account hold and having a flag to control this is very important. Next, designate a flag to control the logic of placing accounts on credit hold. This logic flag would place orders on credit hold under one of the following situations:
•
Is the account over their credit limit?
•
Is the account past due?
•
Both
This means that if the account is coded as logic 1, their orders will be placed on credit hold if they are over their credit limit. Logic 2 will place their orders on hold if they are past due, and logic 3 if either one is true. Next, identify the dollar amount each one of your customers will have as their credit limit. As orders are being processed in your system, have your system instantaneously check the order amount against the available credit balance. This balance is calculated by simply subtracting the amount currently due on the account (accounts receivable open amount) from the credit limit. It is critical that your software notify your staff when orders are placed on credit hold and the reason why. This way your staff can properly communicate the situation with the customer and take immediate action as necessary while properly protecting your assets. Once an order is placed on credit hold, it immediately appears on the credit manager evaluation screen. This screen is their tool to manage all orders that the system automatically places on credit hold. This screen should provide your credit manager with immediate access to information that
enables them to make decisions and take immediate action. Some of the information and action provided on this screen may be:
•
Current due and open amount aged properly
•
History of all open and closed orders
•
Previous payment history
•
All ongoing notation and customer communication and the ability to easily type additional notes
•
Ability to directly release orders from this screen
Although your software can significantly enhance your ability to efficiently manage your cash flow and accounts status, appropriate human communication is still critical. Armed with all this information, it is the credit manager's ability to either deny the customer the order or allow it to go through. How they chose to do it, is walking the balance of protecting the organizations assets or building customers for life. http://www.cbsoftware.com/cbnn/managing_your_customers_credit_hold_situation.php
CREDIT TERMS Definition: Credit terms are the payment requirements stated on an invoice. It is fairly common for sellers to offer early payment terms to their customers in order to accelerate the flow of inbound cash. This is especially common for cash-strapped businesses, or those that have no backup line of credit to absorb any short-term cash shortfalls. The terms which indicate when payment is due for sales made on account (or credit). For example, the credit terms might be 2/10, net 30. This means the amount is due in 30 days; however, if the amount is paid in 10 days a discount of 2% will be permitted. Other terms might be net 10 days, due upon receipt, net 60 days, etc. The credit terms offered to customers for early payment need to be sufficiently lucrative for them to want to pay early, but not so lucrative that the seller is effectively paying an inordinately high interest rate for the use of the money that it is receiving early. The term structure used for credit terms is to first state the number of days you are giving customers from the invoice date in which to take advantage of the early payment credit terms. For example, if a customer is supposed to pay within 10 days without any discount, the terms are "net 10 days," whereas if the customer must pay within 10 days to qualify for a 2% discount, the terms are "2/10". To expand upon the last example, if the customer must pay within 10 days to obtain a 2% discount, or can make a normal payment in 30 days, then the terms are stated as "2/10 net 30". The table below shows some of the more common credit terms, explains what they mean, and also notes the effective interest rate that you are offering customers with each one. The concept of credit terms can be broadened to include the entire arrangement under which payments are made, rather than just the terms associated with early payments. If so, the following topics are included within the credit terms:
The amount of credit extended to the customer
The time period within which payments must be made by the customer
Early payment discount terms
The penalty to be charged if payments are late
The Cost of Credit You should be aware of the formula for determining the effective interest rate that you are offering customers through your early payment discount terms. The formula steps are:
1. Calculate the difference between the payment date for those taking the early payment discount, and the date when payment is normally due, and divide it into 360 days. For example, under 2/10 net 30 terms, you would divide 20 days into 360, to arrive at 18. You use this number to annualize the interest rate calculated in the next step.
2. Subtract the discount percentage from 100% and divide the result into the discount percentage. For example, under 2/10 net 30 terms, you would divide 2% by 98% to arrive at 0.0204. This is the interest rate being offered through the credit terms.
3. Multiply the result of both calculations together to obtain the annualized interest rate. To conclude the example, you would multiply 18 by 0.0204 to arrive at an effective annualized interest rate of 36.72%. Thus, the full calculation for the cost of credit is: Discount %/(1-Discount %) x (360/(Full allowed payment days - Discount days)) Accounting for Credit Terms When a customer takes an early payment discount to pay for an invoice, the accounting for the transaction is: Debit cash for the amount of cash received Debit sales discounts for the amount of the early payment discount Credit accounts receivable for the full amount of the invoice This entry effectively clears the invoice from the aged accounts receivable report, since it has now been paid in full. Credit Terms Table The following table contains a number of standard payment terms, what they mean, and the effective annual interest rate that you are offering under these credit terms (if any). Credit
Effective
Terms
Explanation
Interest
Net 10
Pay in 10 days
None
Net 30
Pay in 30 days
None
Net EOM 10
Pay within 10 days of month-end
None
1/10 Net 30
Take 1% discount if pay in 10 days, otherwise pay in 30 days
18.2%
2/10 Net 30
Take 2% discount if pay in 10 days, otherwise pay in 30 days
36.7%
1/10 Net 60
Take 1% discount if pay in 10 days, otherwise pay in 60 days
7.3%
2/10 Net 60
Take 2% discount if pay in 10 days, otherwise pay in 60 days
14.7%
Credit terms with discounts When a seller offers credit terms of net 30 days, the net amount for the sales transaction is due 30 days after the sales invoice date. To illustrate the meaning of net, assume that Gem Merchandise Co. sells $1,000 of goods to a customer. Upon receiving the goods the customer finds that $100 of the goods are not acceptable. The customer contacts Gem and is instructed to return the unacceptable goods. This means that Gem's net sale ends up being $900; the customer's net purchase will also be $900 ($1,000 minus the $100 returned). It also means that Gem's net receivable from this customer will be $900. Unfortunately, companies who sell on credit often find that they don't receive payments from customers on time. In fact, one study found that if the credit term is net 30 days, the money, on average, arrived 45 days after the invoice date. In order to speed up these payments, some companies give credit terms that offer a discount to those customers who pay within a shorter period of time. The discount is referred to as a sales discount, cash discount, or an early payment discount, and the shorter period of time is known as the discount period. For example, the term 2/10, net 30 allows a customer to deduct 2% of the net amount owed if the customer pays within 10 days of the invoice date. If a customer does not pay within the discount period of 10 days, the net purchase amount (without the discount) is due 30 days after the invoice date. Using the example from above, let's illustrate how the credit term of 2/10, net 30 works. Gem Merchandise Co. ships $1,000 of goods and the customer returns $100 of unacceptable goods to Gem within a few days. At that point, the net amount owed by the customer is $900. If the customer pays Gem within 10 days of the invoice date, the customer is allowed to deduct $18 (2% of $900) from the net purchase of $900. In other words, the $900 amount can be settled for $882 if it is paid within the 10-day discount period. Let's assume that the sale above took place on the first day that Gem was open for business, June 1. On June 6 Gem receives the returned goods and restocks them, and on June 11 it receives $882 from the buyer. Gem's cost of goods is 80% of their original selling prices (before discounts). The above transactions are reflected in Gem's general ledger as follows:
If the customer waits 30 days to pay Gem, the June 11 entry shown above will not occur. In its place will be the following entry on July 1:
Examples of Amounts Due Under Varying Credit Terms The following chart shows the amounts a seller would receive under various credit terms for a merchandise sale of $1,000 and an authorized return of $100 of goods.
Credit Terms
Brief Description
Net days
10
Net days
30
Amount To Received
The net amount is due within 10 days of the invoice date.
$900
The net amount is due within 30 days of the invoice date.
$900
Be
Net days
60
The net amount is due within 60 days of the invoice date.
$900
2/10, n/30
If paid within 10 days of the invoice date, the buyer may deduct 2% from the net amount. ($900 minus $18)
$882
2/10, n/30
If paid in 30 days of the invoice date, the net amount is due.
$900
If paid within 10 days of the invoice date, the buyer may deduct 1% from the net amount. ($900 minus 1/10, n/60
$9)
$891
1/10, n/60
If paid in 60 days of the invoice date, the net amount is due.
$900
Net EOM 10
The net amount is due within 10 days after the end of the month (EOM). In other words, payment for any sale made in June is due by July 10.
$900
Costs of Discounts Some people believe that the credit term of 2/10, net 30 is far too generous. They argue that when a $900 receivable is settled for $882 (simply because the customer pays 20 days early) the seller is, in effect, giving the buyer the equivalent of a 36% annual interest rate (2% for 20 days equates to 36% for 360 days). Some sellers won't offer terms such as 2/10, net 30 because of these high percentage equivalents. Other sellers are discouraged to find that some customers take the discount and ignore the obligation to pay within the stated discount period. http://www.accountingcoach.com/accounts-receivable-and-bad-debts-expense/explanation/2 http://www.businessdictionary.com/definition/credit-terms.html http://www.accountingtools.com/credit-terms-cost-of-credit