Accounting & Finance

What is credit risk management?

  • 3 min Read
  • November 10, 2021

Author

Escalon

Table of Contents

A global pandemic and the resulting recession have affected every business in the world. Therefore, it is crucial for all businesses to increase their working capital in order to protect their company, now more than ever. 


Due to the pandemic — and even without a pandemic — there will always be customers who will not be able to pay up if you sell on credit terms. This is where knowing the nuances of credit risk management can help save your enterprise. 


Understanding credit risk management 



Credit risk management is the process of analyzing the risks associated with selling goods on credit. Essentially, it entails analyzing the buyer’s credibility to ensure timely payments. 


Credit risk management is important especially for small and medium-sized companies because, in most cases, these businesses are so focused on increasing sales that they do not always analyze their portfolio risk carefully. And, because of improper credit risk management, they experience delayed payments, which affects their working capital. 


Credit risk analysis is different for every organization. The challenges that a large enterprise faces is usually different from that of a mid-sized business. Often, established businesses have a dedicated credit risk analysis team that mines user data, studies customer credit reviews and also secures a bank guarantee before extending credit to customers. However, for small- and medium-sized businesses, getting access to credit rating sources, due to the time and cost attached, may pose a challenge. 


4 best practices for managing credit risk



Managing credit risk is important to any small business that wants to grow its financial strength. And to manage risk, the first thing is to know how to anticipate risk. Check out these four strategies your small business can take right away in order to manage credit risk: 


  1. Don’t focus only on new customers

    – Most business owners believe that long-term business relationships are stable and built on a foundation of trust. However, bad debt can come from old and new customers alike. Therefore, it is prudent to treat credit risk management as a continuous process. And all entrepreneurs must appraise the credit risk for their suppliers, vendors and customers on a regular basis, and keep an eye on trends in business credit profiles that indicate imminent trouble.  


  1. Trust technology

    – A manual credit risk review process may seem cheaper and something that can be done just by pulling in data from multiple reporting sources and examining it. However, this method may end up causing more harm than good as you may end up either missing or misunderstanding crucial information.


  2. Trust your team members

    – Sometimes, your people in sales, marketing, customer service and even the executive suite may come in useful while assessing your credit risk. For instance, a customer may let out to a salesperson that they are downsizing their office and may have problems with slow payments.


  3. Take fraud seriously

    – Most small businesses are anxious to build relationships with new vendors, suppliers, customers and other business partners, and may overlook signs that a business relationship may not serve their best interests. Hence, it is important to apply risk management practices to all work relationships.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Accounting & Finance

AAP vs. Cash Accounting: Which Method Is Best for Your Growing Business? 

Choosing the right accounting method can significantly impact how you track financial performance, manage taxes, and plan growth. Two common...

Read More
Accounting & Finance

Beyond Bootstrapping: Advanced Cash Flow Management for Scaling Companies 

Bootstrapping—financing growth through internal cash flow—is a hallmark of many successful startups. But as businesses mature past their initial stage,...

Read More
Technology & Security

Building a Scalable Tech Stack: How to Choose the Right Tools for Growth 

In today’s business landscape, technology is more than a convenience—it’s a strategic asset that can supercharge growth. But as you...

Read More
Accounting & Finance

How to Reduce Month-End Close Time Without Sacrificing Accuracy 

The month-end close can feel like a perpetual scramble—collecting invoices, reconciling accounts, fixing last-minute errors. A drawn-out close not only...

Read More
uncategorized

How to Reduce Overhead Costs Without Impacting Productivity 

Overhead costs—from utilities and rent to administrative staffing—can quietly swell until they erode profit margins and slow your ability to...

Read More
Accounting & Finance

How to Structure Your Finance Team as Your Business Scales

Growth triggers a tidal wave of financial complexity, multi-entity operations, new product lines, overseas expansion, or investor relations. If your...

Read More
Accounting & Finance

M&A Readiness: How to Prepare Your Financials for a Successful Acquisition or Sale 

Mergers and acquisitions (M&A) can dramatically alter a company’s trajectory—unlocking new markets, technologies, or customer bases. Yet, many deals stumble...

Read More
Accounting & Finance

Optimizing Working Capital: Strategies to Maximize Liquidity Without Raising Funds 

Working capital: The difference between your current assets and your current liabilities. It’s a key barometer of financial health.  While...

Read More
Accounting & Finance

Outsourcing vs. In-House: A Strategic Guide for Growing Companies

Expanding your team and capabilities is critical to sustaining growth—but the question often arises: Should you build an in-house department...

Read More