Good business financial management involves preparing for adverse or unwanted situations, such as default. In this sense, it is important to know what credit risk is and how it can affect the business.
From there, it is possible to monitor and manage this condition through risk measures. As a result, you can reduce defaults, increase the level of predictability of the enterprise and benefit its financial health.
Want to know how this is possible? Next, find out what credit risk is and understand how to monitor this condition in your company!
What is credit risk and how does it work?
To know how to manage credit risk, it is necessary to understand this concept. It represents the probability that a debtor will not make payment for the credit offered under the previously agreed conditions.
Therefore, a higher credit risk means that there is a greater chance of a customer defaulting. Therefore, the analysis of this characteristic seeks to predict this type of behavior, guiding the granting of credit to customers who present a more positive evaluation.
Why is it important to manage credit risk?
After understanding what credit risk is, the next step is to understand the importance of measures aimed at managing it. One of the main reasons involves reducing the level of default.
With efficient risk management, it is possible to offer credit to customers who are more likely to meet their financial obligations. This dynamic helps to reduce late payments and non-payments, bringing greater financial predictability and greater balance in accounts payable and receivable.
As a result, the business can have more resources available. A better financial situation, in turn, allows the company to invest strategically in improvements and development.
This can make the business more competitive in the market — gaining more customers and better positioning, for example.
How to monitor and manage this type of risk?
Knowing the impacts that credit risk has on a company, it is necessary to know how to effectively manage these threats. This way, you ensure that your business processes are protected against default and its consequences.
Below, see how to monitor this risk and understand what the main points of attention are to be successful in this movement!
Make a diagnosis of the business’s financial situation
Before analyzing the client, it is essential to understand the company’s financial situation. This dynamic is essential to define the tolerable limits for granting credit, without this harming the business strategy.
At this point, it is important to evaluate the financial inflows and outflows, the characteristics of the operations and the company’s obligations. The greater the commitment of resources obtained from sales, the lower the credit supply tends to be.
This issue must be considered because, even if the customer is a good payer, granting too much credit can harm the financial balance of the company. After all, in the event of default, it may become impossible to settle obligations with suppliers, for example.
Define criteria for credit assessment
After recognizing the company’s general scenario, it is necessary to structure the process for credit analysis and, consequently, risk. At this point, you should be concerned with establishing the steps for customer analysis and the criteria that will be used.
Data can be obtained using public information, available through services such as credit bureaus. However, remember that the customer must authorize the processing of their data, in accordance with the General Data Protection Law (LGPD).
Therefore, collecting permission must be part of the registration and application analysis process. In addition, during the evaluation phase, it is worth establishing criteria such as:
- payment history;
- financial behavior;
- income capacity;
- credit limit;
- among other points.
The more structured the analysis, the easier it will be to replicate it for different clients and make the process increasingly efficient. Based on these factors, it is also possible to make decisions objectively.
Prepare the projected cash flow
Credit risk management also involves monitoring transactions that have already been carried out. In other words, it is necessary to continue checking information about customers who have taken out credit, as this helps to identify possible impacts of default.
One way to manage your cash flow involves preparing a projected cash flow. This consists of accounts payable and receivable , including credit granted to customers.
This tool allows you to understand payment forecasts, cash needs over time, and areas of concern. This allows you to manage your credit supply and meet your business’s financial obligations.
When making this projection, also consider factors relevant to cash flow, such as the current delinquency rate — which consists of the percentage of overdue loans. Making projections about possible delays will help create a more realistic projection, contributing to strategic planning.
Incorporate technology into management
To facilitate risk assessment, credit granting and management, it is interesting to use technology. This way, you can automate tasks, gain efficiency and have more control over decision-making.
In this sense, it is worth having business financial management software . With it, you will be able to manage your cash flow automatically, for example. You will also be able to structure relevant data — which will help you in a credit risk analysis aligned with the business demands.
