Risky business: effective risk mitigation for SMEs

Its often said that prevention is better than cure and in the case of risk management, this analogy also rings true. If businesses are able to put processes in place that allow them to identify potential hazards before they take hold, they will undoubtedly save themselves time, money and effort.

Find out how to avoid common mistakes by identifying risks early.

Don't set and forget

Many business owners go through all of the right steps when they take on new customers but they fail to follow through, letting all of this good work go to waste. Research shows the majority of bad debt is generated from customer accounts that businesses have been dealing with for over a year, demonstrating the importance of tight ongoing account management. 

Regardless of the industry you're involved in, changes occur at a rapid pace.  Staying on top of these changes requires up to date information which can come from a range of sources, including a credit reporting agency as well as your own sales and accounts teams.

Businesses should also develop a culture where employees are encouraged to share positive and negative customer information, whether gained from a conversation over the phone, a client visit or other research. This will help to provide a more complete picture of what's going on with each customer and to gauge whether a client is experiencing difficulties.

At a bare minimum businesses should conduct annual reviews of all customer accounts, but obviously this can change according to the amount of credit exposure that exists with any one account and how they track throughout the year with their payments.

Predicting customer bankruptcies

There are a wide variety of situations that can lead to bankruptcy. However, regular monitoring of customers using predictive risk scoring measures (that is, scores that predict the likelihood of company failure over the coming 12 months) can dramatically reduce exposure to customer failure.

SMEs can also use these scoring metrics to segment out their customer base - those in a higher risk band should be checked more frequently to ensure no adverse occurrences have taken place which may mean you need to act to pull in overdue accounts. Lower risk customers should also be checked frequently to ensure they remain in the low risk category and no additional actions are required by you to amend credit terms or chase outstanding accounts.

It's also important to keep a close eye on the payment times of your customers and of the industry in which they operate. If payment times start to blow out it can be an early indicator of financial stress and consequently, a sign you should be acting quickly to call in any payments that are outstanding.

Recognising a fraudulent operation

There are several tell-tale signs which, if you know what to look out for, can help you to spot a fraudulent customer. On their own they may appear benign, but if an account has more than one of the following attributes alarm bells should start ringing and further investigation is necessary:

  • A potential customer claims they have been in business for many years, yet nobody has heard of them and there is a distinct lack of historical information available about their operation.
  • The customer has all the answers in record time.  While it is great when a client provides all the information and documentation you request in a very short space of time, how often does this actually happen? In situations where an owner seems over eager to please, you should ask yourself why.
  • Additional tell-tale signs include trade references that are all from one industry or references that are from an obscure or unrelated sector to the one you or your client are dealing in.

Another way to spot a scam is to background check the business directors. Associations with previously failed firms can be a warning sign of potential trouble.

Putting these relatively simple measures in place will pay dividends as it will help your business to be alerted to issues early, a factor which is critical to dealing with them effectively.

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