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How to leverage financial risk assessments (and what to look out for)

Published 21/12/2022, 10:42 am
© Reuters.  How to leverage financial risk assessments (and what to look out for)

The latest CreditorWatch Business Risk Index reveals exactly how subdued business trade momentum across Australia currently is.

The index’s key indicator of business growth, trade receivables, has fallen 16 per cent quarter-on-quarter; credit enquiries are up 87% year on year and up 61% on the month prior, while external administrations and payment defaults continue to rise.

All of this suggests business confidence is being negatively impacted and conditions are somewhat volatile as we head into the new year.

However, there are ways businesses can protect themselves through these periods of uncertainty, and even thrive, by leveraging a range of credit management tools available to them.

In this article:

  • Complement your credit reports with valuable financial insights
  • Assess suppliers and contractors and make better procurement decisions
  • Assess customers and debtors and make better trade credit decisions
  • Save time and resources with succinct and effective reports
This includes financial risk assessments – a comprehensive look into the financial viability of a business’s trading partners, from both credit and procurement perspectives, to see whether it can pay on time and honour contracts. This information is vitally important when it comes to protecting and growing your business.

Let’s dive into the factors that comprise these assessments, how to leverage them and what you can do to position your business for success in 2023 and beyond.

Complement your credit reports with valuable financial insights

Financial risk assessments enable you to delve deeper into an entity’s financial position by going beyond their credit report.

They help businesses make high-value financial decisions and mitigate risks upfront.

They also help with ongoing due diligence, to assess potential trading partners and conduct annual reviews on existing ones. They help with ongoing due diligence, to assess potential trading partners and conduct annual reviews on existing ones.

A credit report is still an immensely valuable tool as it uses data from more than 50 public and private sources to present the credit history and risk profile of an entity.

Our credit reports, for example, assess a company’s risk score, payment rating, credit enquiries, payment defaults, ATO tax defaults, court actions, cross directorship information, ASIC notices and other adverse data like winding up and insolvency notices or administration or liquidation appointments.

However, organisations can obtain an even stronger understanding of the financial health of a business by pairing a credit report with a financial risk assessment, which uses valuable data from company financials, including cash flow, income statements and balance sheets, over a two-to-three-year period.

Assess suppliers and contractors and make better procurement decisions

When making procurement decisions, it is essential to understand the risks associated with potential suppliers and contractors. Are they going to be an asset or liability to your business? What happens if a service provider goes bust halfway through a contract?

If your supplier is unable to fulfil their contract, there will be significant financial and reputational repercussions for your business. If you fail to deliver your products and services to your customers, they could lose trust in your business, which could affect client acquisition and retention, and therefore impact your bottom line.

Financial risk assessments help procurement managers choose the right service provider by checking the financial viability of entities tendering for a contract, revealing potential risks and predicting future performance. These reports enable businesses to implement risk management strategies upfront to avoid supply disruptions, project delays and failures.

Assess customers and debtors and make better trade credit decisions

When granting credit, there is always the risk that your debtor will not be able to pay you back. Late payments or payment defaults can be devastating to your business, especially if these happen with large deals or multiple key customers.

It is, therefore, important to strengthen due diligence when assessing key customers, credit limit increases and major deals.

You can team your financial risk assessment with credit evaluation – a report that considers the value of the transaction and assesses the suitability of the proposed credit limit and terms, in relation to the entity’s financial performance.

This is followed by a professional analysis, contextualising the situation according to the current state of the industry and economy. These reports and expert opinions help credit managers and CFOs make more accurate credit decisions to protect their business from bad debt.

Save time and resources with succinct and effective reports

It can be confusing (not to mention hugely time-consuming) to go through thousands of pages of company data and review years of financial statements, to determine how a company is performing.

A financial risk assessment summarises all of a company’s financial information in a single page. It presents its financial performance in a succinct manner, using simple explanations, graphs, ratios and tables. Its uniform format also makes it easy to compare entities. Better yet, when you engage a professional organisation to complete this assessment, it can be delivered within a matter of days – saving you headaches and allowing you to make more-informed business decisions faster.

As your business prepares for 2023, financial risk assessments can help protect you and prime your organisation for growth.

I encourage you to take stock in the coming weeks and commit to assessing the financial stability of your trading partners through financial risk assessments and feel the benefits of greater empowerment and reduced risk across your business.

Patrick Coghlan is a founding member and CEO of CreditorWatch, a commercial credit reporting bureau that enables businesses of all sizes to access credit risk information on any entity in Australia.

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