Credit-to-cash briefing:

How to conduct a risk
assessment of yourreceivables
Your company’s accounts receivable is an important
indicator for assessing business health.

Credit-to-cash briefing:

How to conduct a risk assessment of yourreceivables
An assessment of outstanding invoices and the risk ofnon-payment will help you identify any weak points andguide you to take decisive action to minimise risk andprotect your business.
Assessing your receivables has become more important
than ever during the COVID-19 pandemic, with increased
levels of insolvency and other factors such as theinterruption of supply chains negatively impacting
businesses throughout the world. During such periods of
economic uncertainty you should assess your receivables
regularly. Early detection of risk will help you avoid or
minimise potential losses.
Below is a range of tasks you can do to complete a risk
assessment of your accounts receivable and secure yourcash flow during this time of economic uncertainty.

1. Sort your customers into
groups

2. Limit your exposure tobad debts

3. Assess your history of
unpaid invoicesSorting your customers into groups will
help you identify patterns and establish
a risk profile. For example if a customer
stands out in a group for demonstratingpoor payment practices, they may
present a higher payment risk. Or you
may find indications of stress in a
specific geography or sector.

In addition to identifying whichcustomers or areas pose greater risk toyour cash flow, it is useful to identify
and list what security arrangements
and guarantees your business uses.
These may include:

Looking at the history of losses
incurred through insolvencies allows
you to draw conclusions about general
default risks. Is there a pattern? For
example, are the bad debts clusteredin a particular sector or geography?
Can you identify a group that has agreater need for security arrangements
and guarantees than other customer
groups? In addition to helping you
identify areas to approach with caution
moving forward, analysing past baddebts can also help you assess thequality of your company’s receivables
management. Can you identify areas
for improvement within your own
company’s policies and processes?

You can use this exercise to note
how evenly your customer base isspread. If a high concentration of yourturnover is limited to a small numberof customers, you may be at a higher
risk of insolvency if that key source ofincome is lost. Conversely, customers
that represent just a small part of youroverall receivables should not make agreat impact if they fail to pay you.
Examples of possible groupings toassess include: Domestic customers
 Foreign customers (you could

further differentiate this bycountry or region)
 Trade sectors
 Product categories
 Size of customer Percentage of your overall
receivables the customer
represents
 Debtors with and without
payment guarantees

 Bonds
 Comfort letters
 Credit insurance Factoring Letters of credit Lien Retention of title
 Transfer of assets
 Transfer of receivables

Analysing your security arrangements
and guarantees can help you shed lighton how high the share of total losses
could be and what percentage of yourportfolio is protected.

 Plot out the history of bad debts

over the past five years

 Differentiate individual

insolvencies, e.g. according tosector, size, region
 Assess future potential risks
inherent to individual segments
and put in place processes tominimise the risks
It is also worth paying attention to any
insolvencies in your sector. Has there
been an increase in insolvencies and is
your sector more vulnerable following
the outbreak of the coronavirus
pandemic? It may be worth seeking
guarantees to help protect youraccounts receivable from the risk ofcustomer insolvency.

Credit-to-cash briefing:

How to conduct a risk assessment of yourreceivables
4. Calculate DSO – Days
Sales Outstanding

5. Complete an aging report
You can use the report to:

The average time in terms of days
between invoicing and payment isyour DSO and is a good indicator of
the efficiency of your receivables
management.
To calculate your DSO first divide
your total accounts receivable by thetotal value of your credit sales. Then
multiply this figure by the number ofdays in the period you are assessing.
Many businesses calculate their DSO ona regular basis, monthly, quarterly orannually.
DSO formula

DSO =Accts receivabletotal credit sales

xno. ofdays

DSO calculation example

DSO =100,000
150,000x30= 20

Regularly checking your DSO will help
you check: How the ratio has changed within

the past years/months
 How the ratio stands compared toyour industry’s average, if yourcompany’s DSO is much higher orlower than the industry average
are you offering payment terms
that are more or less risky thanyour competitors?
 How many customers pay within
the agreed credit period and how
many fall in arrears
 How successful your business is at
cashing in invoices
It may be that the greatest risk to youraccounts receivable is not a customer,
but rather your business’s internal
collection processes. An improvementin this area could result in a lower DSO
and reduced risk.

 Assess the financial health of eachcustomer

 Review your own business – isyour sector slowing down?

 Explore your sales practices – isyour sales team extending longer
credit terms?

6. Identify future risks toyour cash flow
When assessing your debtors’
creditworthiness, future developments
and planning processes should betaken into consideration.
Aspects to be taken into accountinclude:New products/target groups
Moving into a different customer base,or launching new products or services
can give rise to new payment risks.
You can try to minimise these with - forinstance - credit insurance, factoring, orbonds, at least until the new service or
customer has become established.
New regions
Entering a new geographical market
can be fraught with risk including
unfamiliar trade laws or practices,varying rules on imports and customs
duties and potential political instability.
A thorough risk assessment for eachmarket you trade in will help you
identify and take steps to minimiserisk.
Expanded sales
If your business has experienced
growth in sales, it is wise to investigate
whether your debtor structure basehas remained unchanged or whether
market changes or new products
have affected the rise in sales. Does
your sales team operate with due
diligence parameters? Does sales
growth represent higher risks to yourbusiness?
New customers
Completing thorough due diligenceand seeking letters of credit or tradecredit insurance on every proposed
new customer will help you minimise
the risks associated with taking on a
new customer. It is also a good idea toconsider each customer individuallywhen assessing the risks posed to youraccounts receivable. For example, anindividual customer may present very
little risk despite being located in aregion regarded as high risk. If you
dismiss them because of their location,
you could miss out on a valuable sales
opportunity.

7. Assess the impact of yourpayment terms on yourreceivables
Make a critical assessment to findout if your payment terms meet yourcompany’s requirements or if theyneed to be adjusted. Often, many
individual clauses can result in too
many variations and lead to delayed
payments. You could seek to reduce
the number of clauses in your payment
terms or find ways to enhance their
attractiveness e.g. with the help ofpayment incentives like bonuses,
discounts, period of payment.

8. Enhance the skills of yourcredit management teamThe risk of losses can be reduced
by qualified credit managers andrelated staff. In times of economic
stress, such as the current situation
caused by the COVID-19 pandemic,
you can help protect your company’s
cash flow by appointing a teamdedicated to monitoring your accounts
receivable through weekly reviews andempowering the team to act quickly.
Start with an audit of the skills ofyour credit management team andthen build on this with additional
staff as needed and a programme ofprofessional development to plug any
skills gaps and support your team’s
knowledge and motivation. In addition
you could encourage your receivablesmanagement team to become involvedin cash flow focused events such as: Seminars and conferences Networking events
 Credit management organisation

membership Technical literature Internet forums and webinars.

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This publication is provided for information purposes only and is not intended as a recommen­dation oradvice as to particular transactions, investments or strategies in any way to any reader. Readers must
make their own independent decisions, commercial or otherwise, regarding the information provided.
While we have made every attempt to ensure that the information contained in this publication hasbeen obtained from reliable sources, Atradius is not responsible for any errors or omissions, or for theresults obtained from the use of this information. All information in this publication is provided ’as is’,with no guarantee of completeness, accuracy, timeliness or of the results obtained from its use, andwithout warranty of any kind, express or implied. In no event will Atradius, its related partnerships
or corporations, or the partners, agents or employees thereof, be liable to you or anyone else for any
decision made or action taken in reliance on the information in this publication, or for any consequential,
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