Classifying client risk

Classifying client risk is vital during economic uncertainty. This is especially the case in an economic downturn where problems with liquidity usually arise as sales and revenue streams aren't as fluid, resulting in late payment of expenses to your business. 

To weather this potential payment storm, prospective and current clients should be classified according to their anticipated credit risk. Before taking on a new client, conduct research and credit backgrounds on their company to ensure you can make educated decisions based ontheir previous payment behaviour.

Low to high risk

There is a sliding scale when it comes to classifying client risk, from low to high.

Low risk generally guarantees payment based on a client's strong credit rating, whereas high risk confirms the potential of bad debt due to unsteady revenue streams. It is important to regularly review client profiles and their risk classification to ensure their risk is managed appropriately.

If a client does move into from low to high risk, you have the ability to monitor their repayments and focus resources by placing highly experienced employees on their account.

Conducting sound research

By developing a checklist to complete before taking on a new client, it ensures you have reviewed all the uncertainties you may have had about them. This checklist should include conducting thorough background research and looking at their credit rating.

By looking at apotential client's credit rating, it confirms if the debtor has the ability to pay back their debt and identifies the likelihood of them defaulting on their debt.

If a client has a bad credit rating, it means they have a high risk of defaulting, resulting in potential bad debt. Another topic to research is a prospective client's trade and credit references as they will be able to confirm the debtor's reliability, legitimacy and business ethics.

These are just some aspects small business owners need to consider as part of their overall strategy for classifying client risk. By putting these measures in place, it will enable you adhere to the adage that prevention is better than cure.

Risk elements are prominent in a lot of small business activity. Here are some articles to help limit the potential risks:

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