By Dean Kaplan+
Putting the time and effort to do thorough credit analyses will lead to a better customer base and fewer debt collection issues in the future. This is the fourth in a seven part series of articles about things the credit department should include in their credit analysis of potential new customers. This article will focus on financial statements and credit reports.
When requesting financial statements from a potential new customer, it is a good idea to ask for ending balance sheets and income statements for the last two fiscal years. Generally, a customer that is forthcoming with the requested financial information will be treated more favorably in the credit decision. The reason why you want to look at financial statements is to be able to define the risk associated with extending credit to the customer. The higher the dollar amount of credit extended, the more financial data you may want to request and examine. It may be valuable to compare the potential customer’s financial data to other similar customers to identify strengths or weaknesses relative to the industry.
Under no circumstances should you ever accept estimated financial statements from a potential new customer. Always require the financial statements be signed and dated by the owner. If the statements are submitted by an accountant, require the accountant to sign off on the statements on the accountant’s stationary. In addition, require that the potential new customer sign off on what is submitted by the accountant. If the statements are received by mail, save the envelope in which the statements were sent because it shows the date stamped by the post office. Saving the envelope can become important if credit is extended based upon fraudulent information. The envelope can prove that the fraudulent information was sent via the USPS.
The credit analysis for a potential new customer should include requesting credit reports. There are four categories of credit information available for businesses:
a. Business Information Report by Dun & Bradstreet.
b. Payment history reports such as those provided by the National Association of Credit Management, Dun & Bradstreet, Experian and Reimer Reporting.
c. Credit agency reports specialized to a particular industry.
d. Trade group interchange reports.
From these four credit information sources, the following information can be collected:
a. Contact information associated with the potential new customer (check the information provided by the customer with the information obtained on the credit reports). This information would include the business name, address, and telephone number, the name of the owner or CEO, and the Standard Industrial Classification code. The SIC code can be helpful if the credit department has a customer classification system in its database.
b. Agency rating
c. Agency credit line dollar amount recommendation
d. Payment history
e. Financial data (hard data with trends identified)
f. Banking data
g. Historical information about owner(s)
h. Information about business operations
The above information provided in credit reports can be combined with the financial data submitted by the potential new customer. These data together should provide the credit department with a wealth of information which will help them assess the credit risk posed by the new customer. Solid credit decisions will be worth the time and effort required to collect and analyze new customer financial data.
Collection agencies are usually not involved in a credit department’s decision of whether or not to extend credit to a potential new customer. Collection issues can arise for a variety of reasons. In today’s tough economic times, many companies are just barely scraping by. When cash flow slows way down, this can make it nearly impossible for companies to make payments to their vendors, and the debt collection process begins. When collection agencies get involved in accounts receivable collections, the data gathered during the original credit analysis can come in very handy. Knowing accurate contact and banking information can significantly increase a collection agency’s chances of successful debt collections. The time taken to gather complete and accurate credit analysis information is definitely time well spent.
Click here if you are ready to go onto the next article in this seven part series Credit Analysis To Promote Successful Debt Collection 5 Of 7. Click here if you missed previous articles Credit Analysis To Promote Successful Debt Collection 1 Of 7.
And be sure to check out the other articles in this series:
- Evaluate New Customers
- Credit Application Development
- Credit References
- Financial Statements and Credit Reports
- Credit Decision
- Purchase Orders
- Identifying A Fraudulent Credit Applicant
The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.