Credit Risk and Client Knowledge
Of all platitudes, “know your client” seems the most obvious and obnoxious. Who doesn’t want to know his or her client? And more to the point, who thought it was a good idea to remind people of that fact?
And yet business experts continue to get paid a lot of money to tell business owners the obvious: Companies should know their clients. No kidding.
Let us start with a basic tenet: Customer knowledge directly impacts your company’s financial performance. Now that is a useful statement and gets at the reason why the adage is so pervasive.
Client Knowledge—Sales and Profits
If sales and profits were solely functions of internal company information and client feedback, running your business would be straightforward, but it is also misleading. One must get paid; without payment, discussions of sales and profits are irrelevant.
Which brings us to credit risk. Business executives need the regular reminder “know your customer’s credit risk.”
To where do companies turn for quality credit information? Typical sources might include:
- Customer payment history
- Current account aging
- Sales rep input
- Internal credit file-credit application, trade references, bank references, guarantees, etc
- External credit file-credit agency reports (Dun & Bradstreet, Experian, etc.), public records (suits, liens, judgments), news feeds (Lexis-Nexis, Google News, industry publications)
- Industry credit sources-trade groups (National Association of Credit Managers, or NACM)
Of these, your company aging is the most useful, since past payment performance is the best predictor of future payment. For most other sources of customer knowledge, most of the above-referenced sources are static (how often do you update your customer credit files?).
What if there were businesses that existed solely to know the credit risk of your clients? There are. Credit insurance companies do one thing: promise to pay you if your client cannot. Simple as that.
Think about that business model. Credit insurance companies have built incredible enterprises focused on that one thing, can your clients pay you?
So the next time some expert tells you that you should know your client, look them in the eye and tell them: “I agree, that is why I have a credit insurance policy.”