Credit Risk Management Tactics for Manufacturing Businesses

As we approach three years since the start of the Coronavirus pandemic, manufacturing businesses are still battling pandemic-related consequences. These include supply chain disruptions, skilled labor shortages, and now, increasing inflation. These increasingly untenable obstacles along with the inevitable logistical challenges of running a manufacturing business can shake the financial stability of any manufacturer.

Supply chain disruptions and skilled labor shortages create compounding resource and human capital constraints. These limitations make it virtually impossible for any business to grow. Team bandwidth constraints not only stifle growth but also increase risks associated with data and decisioning inaccuracies. For manufacturing businesses, bandwidth constraints can grow exponentially if your team is forced to endure tedious, manual credit risk management processes and decentralized operating systems that can bottom out productivity and skyrocket operational costs. Inefficient or inaccurate credit risk management due to manual data and decisioning mistakes coupled with rising business and consumer costs can lead to runaway days sales outstanding and increase the likelihood of bad debt.

Days sales outstanding is a measurement of the payment collection period, or the number of days it takes for a business to receive payment on money owed. Across the board, a “good” days sales outstanding number is 45 days or below. In the manufacturing industry, average days sales outstanding can range from 28-54 days. Whatever your number, decreasing your DSO should be a priority for any growth-minded business.

So how can manufacturers implement effective credit risk management strategies to reduce DSO and increase cash flow in spite of today’s challenges?

Know Your KPIs

To set yourself up for success in any climate, it’s valuable to identify your key performance indicators and pivot strategy as needed to achieve your goals. Key performance indicators are target metrics that help your business focus on what’s most important to your success. In volatile markets, KPIs are critical. For manufacturing businesses, your KPIs might include throughput, demand forecasting, and cash flow metrics like DSO.

Once you’ve identified your KPIs, you can then assess your business, proactively battle market challenges, and more effectively manage risk. Key performance indicators can also help you identify large efficiency gaps within your business that may be suppressing the bandwidth and productivity of your team. With a clear measure of success in place, you can better determine particularly vulnerable financial risks and invest in solutions to improve performance and productivity.

Leverage Context

Effective credit risk management starts with smart, data-driven credit approvals. Especially today, manufacturers need a clear view of their client’s financial scope to mitigate credit risk. This includes holistically reviewing data and determining the likelihood of delinquency, which can be an extremely complex, tedious process without the right tools.

But effective credit risk management isn’t just about a smart credit approval decision at the onset. To minimize financial risk, manufacturers should invest in proactive credit risk monitoring, including continually reviewing changes in client behavior or economic circumstances that could result in lengthy DSO or delinquencies. Proactive monitoring is another time-consuming but necessary process that can easily consume the bandwidth of your team without an efficient process in place.

Perhaps the simplest way to gain context into your client portfolio is to maintain consistent, transparent communication with clients. By communicating with customers, notifying them of upcoming payments, and checking in on late payments, you can help minimize risk while also gaining context into the likelihood of clients making payments on time. Many organizations try to cut back on these client communications in an effort to conserve team bandwidth, but “old-fashioned” customer service and relationship building can drive effective credit risk management and client retention in the long term.

Automate!

Your KPI analysis probably revealed significant efficiency or productivity constraints on your business. Additionally, to truly implement an effective credit risk management strategy, manufacturing businesses must leverage context and data-driven insights, which can compound inefficiencies. With an automated credit risk management solution, manufacturers can minimize risk and achieve 10x productivity.

At CreditPoint, we’ve helped leading manufacturers increase their data accuracy by 30% while saving 50% in time savings and millions in bad debt. Our highly configurable software can help you centralize, consolidate, and automate your credit risk management processes from credit decisioning to monitoring, collections, and even customer communications.

If you’re ready to take control of your credit risk management and help your business thrive despite market challenges, schedule a consultation with CreditPoint Software to learn how you can leverage the efficiency and risk-reduction benefits of an optimized software solution.