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HANDBOOK


 

Credit risk management is an important element of the proper company’s operations. The process can be shown as a series of four phases:

  1. Defining the criteria and policies of the credit risk management with the development of procedures and tools for its implementation,
  2. Analysis of customers and their environment, combined with the choice of instruments of credit risk mitigation and receivables management tools,
  3. Monitoring of the current risk (of the receivables),
  4. Collection or recovery of difficult receivables.

 

FUNDAMENTALS: Defining the principles of credit risk policy with the development of procedures and tools for implementation

Credit policy should be more than just a collection of indications for technical debt management. Properly defined can be a point of reference for the entire company (not just the finance department) on the financing of sales. Well-written, comprehensive credit policy is also helpful in the day-to-day dialogue with customers. Policy determines and formalizes the operational objectives of the company, determine the scope of rights for granting the trade credit, define expectations and responsibilities, as well as improve cooperation with other departments of the company, especially sales.

 

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ANALYSIS: Analysis of customers and the environment

The aim of credit risk analysis is: (1) assessment of the creditworthiness of customers, (2) acquire knowledge about the client's business and its market position, (3) the credit risk level allowed for the enterprise associated with the counterparty, and (4) determination of the framework and conditions for cooperation with the customer. The key objective of the analysis is to build and maintain a portfolio of profitable customers. This does not mean that we strive for complete avoidance of credit risk or consider the best the portfolio the one which is not difficult, but we think that the best client portfolio (receivables) is the one that brings the most revenue.

 

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MONITORING: Monitoring of current risks (receivables)

Monitoring receivables are supervising the operation of receivables in order to minimize delays in the payments from contractors. This is essential in the activities of any company, because it allows you to track down even a few days’ delay. All the tools used for monitoring of the receivables are aimed, at a gentle way, to inform the contractor about the upcoming payment date. Typically, that includes a payment reminder, bank account number, which is to be paid and possibly, in the case of objections, the request for contact.

  

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COLLECTIONS: Recovery, which is recovering difficult debts

If, despite of the use monitoring customers’ receivables, he does not regulate their obligations, the case should proceed to the next stage, i.e. friendly collections. The aim of friendly collections is to carry out a rapid and effective process of recovery using the tools relevant to this category of claims. The entrepreneur should focus on investing funds in its own debt collections department or outsourcing it. The next step is hard collections where debt collectors use a lot more serious sanctions. Hard collections (hard recovery) applies only to the so-called, difficult debtors.

 

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