5 Ways Automated Credit Risk Management Moves Your Business Forward

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1 5 Ways Automated Credit Risk Management Moves Your Business Forward An AR & O2C white paper Sponsored by

2 5 Ways Automated Credit Risk Management Moves Your Business Forward Not all businesses are in a position to require payment for their goods and services upfront or at the time of delivery. As a result, many businesses extend credit to trading partners. In some cases, extending credit helps businesses attract customers. But this practice has big financial implications for a business. For starters, poorly managed credit can mean long delays in converting sales to cash. Capital that is tied up in receivables the largest current asset on the balance sheet of most businesses, according to the Association of Financial Professionals (AFP) cannot be used for investments, or to earn interest. Credit exposure also leads to high default rates, charge-offs, and regulatory compliance concerns. Slow revenue growth and political uncertainty are raising the stakes for strong credit management. The International Monetary Fund s 2017 World Economic Outlook notes that uncertainties surrounding the new U.S. presidential administration could have negative implications on the global economy and trade. The latest Global Insolvency Index from Euler Hermes predicts that company insolvencies will increase 3 percent in the United States, with more insolvencies expected worldwide. Dun & Bradstreet s Country Risk Score shows that global risk has increased compared to Moreover, the National Association of Credit Management (NACM) warns that credit managers must be on guard and prepared for any contingency as a result of a record-breaking $2 trillion in U.S. corporate debt coming due within the next five years. Worse, Moody s Investors Service reports that more than $1 trillion of this maturing debt is held by speculative-grade corporations, and that 16 percent of these businesses are in market sectors such as manufacturing that have a negative outlook. Complicating matters, anticipated increases in the base interest rate by U.S. Federal Reserve will make refinancing more expensive for businesses, exacerbating the negative impact of bad debt. As interest rates rise, credit managers must pay close attention to covenants, debt ratios, cashflow from operations, and interest coverage. Rising interest rates have a particularly large impact on businesses that operate with slim margins, significantly increasing the possibility of bankruptcy filings. Navigating these treacherous financial waters requires credit managers to be adept in determining the likelihood that a trading partner will be unwilling or unable to fulfill their financial obligations. The Problem over 90% of businesses extend credit with-out a reference. Despite the tremendous importance of credit management, most businesses manage their credit risk in a manual or semi-automated fashion. The accounting systems designed for small and mid-sized businesses provide an aging report as the primary credit tool. Some ERP platforms offer rudimentary credit functionality, such as alerts when a customer has an overdue invoice. The products and services offered by rating agencies typically are not integrated with ERP platforms. And proprietary data-mining models for assessing credit risk are costly to setup, and slow and inaccurate. Worst of all, Dun and Bradstreet estimates that over 90 percent of businesses extend credit without a reference. These traditional approaches to credit management create five big challenges for suppliers: 1. Fragmented data: Suppliers cannot count on every customer to be truthful when it comes to financial issues, so it is imperative that suppliers research a trading partner thoroughly 2016 IOFM, Diversified Communications. No part of this publication may be reproduced, stored in a retrieval system or transmitted by 2

3 before entering into a business arrangement. For those suppliers that perform credit-limit checks, they typically complete the process whenever a sales order is created or changed. This makes credit ratings and business information vital parts of a risk management strategy. Suppliers must gather data from multiple internal and external sources, such as online news reports, annual reports and credit ratings, to determine a trading partner s creditworthiness, and their payment track record. Antiquated approaches to managing credit risk make it difficult to aggregate data when and where decision-makers need it. What s more, the process requires a lot of communication between sales and finance, and the review and release process often consumes significant time and resources. In many cases, suppliers must manually enter data such as balance sheet ratings into their ERP. Credit managers cannot make informed decisions without complete, accurate information. Fragmented data is one of the biggest obstacles to managing credit risk. 2. Poor risk modeling: Determining how much credit to extend to a customer is critical to credit management. Credit risk models provide risk/return measures that enable businesses to calculate their exposure. Credit and risk scores are usually calculated based on internal data, external information, and a customer s payment history. Ideally, the data should be updated daily to account for changes in a trading partner s business. Unfortunately, antiquated approaches to managing credit risk cannot generate complex, meaningful risk measure to provide an overview of enterprise exposure. Moreover, it is hard to adjust the risk models used by antiquated approaches to managing credit risk. This results in duplication of effort. And manually gathering the data required for the models each day is a big burden. Rigorous and accurate credit risk modeling is critical to mitigating exposure. 3. Inefficiency: Processing credit-blocked sales orders is another critical component of credit management. When customers place an order, the supplier must check the customer s credit exposure (open orders, deliveries, billing documents, and invoices posted on the account) against the allocated credit limit. In a traditional credit risk management environment, if problems are uncovered, the blocked sales order must be manually reviewed and forwarded for further processing. Credit managers must have access to key data on a customer s credit standing and exposure. An extensive deliberation between sales and credit managers then is often required to review credit holds and determine how to proceed; all the while, potential revenue from the customer order is held up. Complicating matters, the outdated information on which antiquated credit risk management solutions rely may create unnecessary delays. 4. Weak risk management tools: Selling goods and services on credit terms is a common practice but has traditionally enjoyed little legal protection. Getting cash in hand is not a sure thing since customers may pay their balances late, declare bankruptcy, or default on payment. Disparate data sources lead to poor visibility into the risk profile of a credit portfolio. 5. Inadequate reporting: Suppliers must know where they stand with credit risk at any point in time. Moreover, credit decisions must be documented in an auditable way that fulfills compliance requirements. But many businesses rely on spreadsheets for their credit risk management reporting. Spreadsheets do not provide an audit trail of credit risk decisions. 3

4 Automation enables suppliers to accurately predict individual and portfolio credit risk. The multiple columns necessary for most credit risk spreadsheets offer a confusing overview of data. And extracting the correct data from spreadsheets to generate charts and graphs can be tricky. What s more, an entire dataset can become compromised as a result of mis-keyed data, an incorrect function key, or an accidental keystroke while maneuvering through a spreadsheet. Credit data also can become lost or compromised if a complicated spreadsheet (such as those with macros and pivot-sheets) is improperly maintained. Computer viruses or hardware failures also can cause the data in a spreadsheet to become corrupt or lost. Each of these issues is a major headache for a business. Together, they create a credit management environment that costs too much, takes too long, creates potential risks, and throttles cash flow. The Benefits of Digitalizing Your Credit Management Digitizing and fully integrating the credit management cycle moves a business forward in five ways: 1. Mitigate potential risks: The first step in the credit management process is gathering information from the trading partner such as sales trends, company profits, the extent of borrowing, and its working-capital ratio. This information helps suppliers assess the trading partner s liquidity and financial trends, to indicate the trading partner s ability to meet short-term financial obligations. Credit management solutions automate the analysis and rating of customers to calculate credit management parameters such as credit limit, credit score and risk category. The technology uses a scoring system to determine how much credit to extend to a customer, if any. Scoring systems reduce the guesswork and manual processes of making credit decisions, while mitigating credit risks. The technology also enables decision-makers to quickly retrieve and manage credit reports and business information online. Huge amounts of information ( Big Data ) can be processed in a matter of seconds. Credit reports and business reports can be managed within the supplier s ERP. Customers and business partners also can be linked within the supplier s ERP so critical information can be integrated with the supplier s order-to-cash lifecycle. Based on this 360-degree view of information, suppliers are in a better position to evaluate a trading partner s payment history, properly assess risks, make informed credit decisions, and take preventative steps, where necessary. What s more, credit management solutions organize solvencyrelated follow-up processes. Monitoring customer risks enables credit managers to take proactive measures 2. Save time and money: Automating credit management frees staff to focus on valueadded activities such as interacting with customers, negotiating payment terms, and analyzing payment trends. For instance, the technology organizes credit management processes, such as onboarding and credit limit requests, and automatically reviews credit limit applications to calculate the credit limit, internal credit score and risk category for each trading partner. Credit management solutions also monitor a customer s credit rating, payment behavior and buying behavior. Automatically uncovering negative credit trends enables credit managers to quickly block a customer, put orders on credit hold, adjust payment terms or step up dunning procedures. And the integration of a credit management solution with a supplier s ERP eliminates the need to manually input data, or to switch between systems to access key data. 4

5 Integrating a credit management solution with an ERP also enables suppliers to leverage credit management tools within their ERP. For instance, solution providers offer a function that enables suppliers to define and maintain credit data, such as a credit limit and risk category, within the system. Solutions also can automatically check a customer s total amount of open orders, deliveries, and billing documents against the allocated credit limit. Efficiently processing credit-blocked sales orders accelerates revenues. 3. Enhance customer service: Credit is an integral part of customer relationship management at most businesses. The credit function must balance the sales and receivables objectives of the business. One way that credit management solutions accomplish these objectives is by accelerating the processing of credit-blocked sales orders. In order to make a decision on blocked sales orders, credit managers need information such as the customer s credit standing and current credit exposure. Credit management solutions aggregate information from internal and external sources, and facilitate communication between credit managers and sales, to help process credit holds quickly and efficiently, while speeding cash flow. Credit managers can list, review and release blocked sales orders for further processing. Credit management solutions also provide full transparency during the processing of credit-blocked sales orders. Integrating a credit management solution with the supplier s ERP also accelerates the delivery of orders once a credit decision is made. Moreover, interactive web interfaces enable field-based sales staff, as an example, to access customer and credit rating data in realtime via a smartphone or tablet, so they can be better prepared for customer meetings. Credit insurance prevents late payments from translating into cash flow shortages. The full view provided by automation reduces administrative burdens and improves communication between stakeholders. And a full audit trail of decisions on credit-blocked sales orders ensures accountability and streamlines compliance and reporting. 4. Reduce the negative impact of late payments: Late payments can translate into cash flow shortages, revenue declines, or bankruptcy. It is for this reason that more suppliers are turning to credit insurance. Credit insurance traditionally has been used in international trading, where chasing customers for cash is problematic. But it is catching on in more situations where credit is being extended. Credit insurance can cover either individual accounts or the entire turnover of a business. The insurance provider reimburses the supplier for any insured receivables that cannot be collected. If a business is covered for protracted Default, it is protected not just against customer non-payment but also against significantly late payments. Companies also can insure their manufacturing risk: the risk of customer bankruptcy during the manufacturing phase. Credit management solutions enable businesses to send their credit limit requests directly from their ERP platform to the insurance provider via a secure online connection. Suppliers can manage their credit insurance limits, insurance policy terms and conditions through their ERP platform. The credit management solution then monitors customers to alert the supplier of any fall out of the discretionary credit limit (DCL). And the technology automatically determines nonpayment notifications. 5. Know where your company stands at all times: Automation makes credit management reporting easy. Users can quickly input data, view information, and set up automatic alerts 5

6 based on configurable business rules. The integration of a credit management solution with an ERP platform such as SAP provides users with 360-degree visibility into an account to spot trends and segment customers who might respond well to a particular credit strategy. Information is digitally stored in a central repository, and is instantly accessible to authorized users, regardless of their location. Relevant fields can be exported and manipulated to generate management reports and analytics with a few clicks of a mouse. Dashboards organize and display Key Performance Indicators (KPIs) so credit managers can track their customer portfolio and any payment delays and bad debt risks in real-time. This visibility enables credit managers to take preventative measures to safeguard the company s liquidity. Moreover, automating credit management with modern technologies such as Fiori, HANA and the cloud, better align the function with the emerging global digital trade and commerce environment. Conclusion Credit management is critical to helping businesses avoid severe financial risks, complications or even insolvency. But traditional approaches to credit management result in fragmented data, poor risk modeling, inefficiency, weak risk management, and inadequate reporting. Automating credit management with technology that is integrated with a supplier s ERP enables suppliers to proactively identify credit risks, payment delays and defaults across their portfolio to prevent losses and secure and optimize liquidity. Armed with this technology, credit managers can mitigate risks, save time and money, enhance customer service, reduce the negative impact of late payments, and know where your company stands at all times. The modern technologies used by some credit management solutions also align the credit function with the emerging global digital trade and commerce environment. These benefits make credit management solutions a musthave for any business in times of growing insolvency risks and uncertainty. Setting Up Your Business for the Digitalized Economy Companies all over the world recognize the importance of setting up their credit management for the challenges of a digitalized economy. Automated processes are becoming ever more important and are used as a competitive edge in many markets. As a provider for professional SAP integrated finance solutions, we at Hanse Orga Group know that credit management automation is becoming state of the art in most companies. After all, if you want to ensure your organization can thrive through the challenges ahead, you need to identify and adopt successful optimization strategies. Along the entire order-to-cash cycle, there is a vast and often hidden potential for many companies to cut costs and maximize liquidity. Implementing a credit management system puts you in a position to identify credit risks and payments delays or defaults across your customer base ahead of time and enables you to prevent these risks and to secure and optimize your business s liquidity. A professional credit management system is an absolute must-have for any business that offers their goods and services on credit terms. This is why we have designed FS² Credit, the unique SAP embedded solution that helps you handle these challenges efficiently and automate your credit management. FS 2 Credit offers the following key components: Credit Management Automatic analysis and rating of customers Determination of credit management indicators (credit limit, credit score, risk category, etc.) Organization of solvency-related follow-up processes Credit Limit Approval Credit limit application Integrated approval procedure Automatic update of the approved credit limit in SAP Audit-proof documentation of decisions 6

7 Processing Credit Holds Credit check application Integrated approval procedure Automatic release or cancellation of blocked sales orders in SAP Audit-proof documentation of decisions Online Access to Credit Agencies SAP integrated connection to the leading national and international information providers Online inquiry and retrieval of credit reports within SAP Support of various credit information reports Support of the monitoring and alert services FS 2 helps you to gather and consolidate data automatically and provides you with a profound and up-todate analysis on each customer as well as automated calculations of your credit management parameters. It supports you in this process with full transparency along the entire processing cycle, automation of administrative tasks, enhanced communication between teams, and an audit-proof documentation. About the Sponsor Hanse Orga Group is a global provider of SAP-integrated and web-based solutions for finance process automation. The modular software family FS² is configurable to individual needs and offers solutions accounts receivable, credit management, cash application as well as accounts payable, ebam, working capital and cash, liquidity and treasury management. The solutions are configurable and thus ideal for companies of all sizes from medium-sized company to global player and all industry sectors. The solutions of Hanse Orga Group are valued for their intelligent and self-learning features and the great of automation and central control that are enabled by them. The solution for credit management, for example, helps reduce credit risk and helps decrease bad debt loss by 40 % on average, while the cash application software enables automation ratios of up to 90% in processing payment information. With over 330 employees in seven locations, Hanse Orga Group supports over 1,600 business customers today. In 2015 and 2016 the SAP-embedded software family FS² won the international TMI Award for Innovation & Excellence for Best ERP Based Software. Hanse Orga Group is also active as a consultant in the field of SAP Treasury. For more information, visit: About the AR & O2C Network The AR & O2C Network is the leading provider of training, education and certification programs specifically for Accounts Receivable, Order-to-Cash, Global and Shared Services professionals. Membership to the AR & O2C Network ( provides comprehensive tools and resources to financial operations professionals who manage or are deeply involved in the Accounts Receivable and Order-to-Cash process. Topics include Accounts Receivable and Order-to- Cash Policies, Managing Customer Information, Process Automation Technologies, AR Compliance (Sales & Use Tax, Canadian Tax, Sarbanes-Oxley, Escheatment, Government Restriction Lists and Uniform Commercial Code), and Accounts Receivable and Order-to-Cash management issues. A membership to the AR & O2C Network provides tangible ROI to any organization saving your organization time and money. Nearly 10,000 professionals have been certified as an Accredited Receivables Specialist or Manager (available in English, Simple Chinese and Spanish) through the AR & O2C Network and its parent company, the Institute of Finance & Management. AR & O2C Network also hosts the annual Accounts Receivable & Order-to-Cash conference, designed to facilitate education and peer networking. AR & O2C Network is produced by the Institute of Finance and Management (IOFM), which is the leading organization providing training, education and certification programs specifically for professionals in Accounts Payable, Procure-to-Pay, Accounts Receivable, and Order-to-Cash, as well as key tax and compliance resources for Global and Shared Services professionals, Controllers and their F&A teams. With a universe of over 100,000 financial operations professionals, IOFM is the trusted source of information in the rapidly evolving field of financial operations. 7