Managing credit risk is a key priority and challenge in today's dynamic and somewhat unpredictable economy. Credit Managers are being asked to take a fresh look at their receivables portfolio. Effective approaches are needed to strike the right balance between ongoing customer relationships, payment risk, and their company's revenue and cash flow objectives. Some help is needed to prioritize credit and collections tasks and to design a credit policy based on customer's risk and sales potential.

A useful way to approach this comes from a matrix covered in Steven Covey's The 7 Habits of Highly Effective People. The matrix can easily be adapted to accounts receivable portfolio assessment. Credit Managers can use this to bring clarity to where to apply limited resources, which customers need limited oversight, those requiring more aggressive collection action and risk evaluation and a credit policy adapted to today's realities.

Let's take a deep dive into each quadrant and understand it in detail.

Quadrant I - High Risk, High Sales

If your customer falls in this quadrant, switch to crisis management mode.

1. Track their behavior and financial performance frequently.
2. Use a conservative credit policy that is flexible enough for reasonable business to continue while imposing strict terms and risk mitigation measures such as a personal guarantee or promissory note.
3. Keep a close look on payment trends. Look for a spike in unwarranted disputes and deductions that may mask intentional delaying tactics.
4. While it is essential to maintain a good relationship with this customer, have a detailed dunning plan also ready. It should have defined cadence, starting from gentle reminders to demand letters.
5. Act quickly if the customer's business is failing, or it is likely a bankruptcy filing is looming.

Quadrant II - Low Risk, High Sales

This quadrant is the sweet spot. A less intrusive approach is needed. Keep other internal stakeholders, particularly Sales, informed of any concerns. The sales teams can take the initiative to drive business and build a long-term relationship with this customer.

1. Employ a credit policy that allows a credit limit appropriate for the business needs of the customer with the flexibility to review and increase the limit as your company's business with them grows.
2. Trigger alerts for these customers if their financial trends or credit ratings show signs of concern.
3. Use a softer dunning strategy with gentle reminders and follow-ups.
4. Make a courtesy collection call covering high value invoices, just to confirm there are no issues preventing payment to terms.

Quadrant III - High Risk, Low Sales

The customers falling in this quadrant need a stricter credit policy that demands with more frequent contact.

1. Have a stringent credit policy with a conservative credit limit.
2. Consider requiring credit card payment or advances prior to shipment.
3. Automate regular periodic reviews for these customers.
4. Hold orders/shipments when amounts are past due.
5. Trigger an alert and act quickly if the customer's business is failing, or it is likely a bankruptcy filing is looming.

Quadrant IV - Low Risk, Low Sales

These customers are not high priority. Develop a credit and collection policy that minimizes staff attention on these customers.

1. Collection should be automated, minimal staff effort should be required to maintain these accounts. With that said, be sure to resolve small balances before they age beyond collectability.
2. Due to the low risk with these customers, the credit policy can be flexible. Encourage Sales to develop additional business with these customers.
3. Trigger alerts to let you know if concerns develop.