Year-End Analysis: Evaluating Your Business Credit Portfolio

As the financial year draws to a close, businesses are taking stock, reviewing performance, and planning for the year ahead. A crucial part of this process is a thorough evaluation of your business credit portfolio. This analysis provides valuable insights into the health of your credit extension practices, helping you mitigate risk, optimise cash flow, and ensure sustainable growth in the dynamic business landscape. It’s not simply about crunching numbers; it’s about understanding the nuances of the market and using that knowledge to make informed decisions.

This article outlines the key steps involved in a comprehensive year-end analysis of your business credit portfolio, tailored to the specific context of the business environment.

1.  Data Collection and Organisation: Building a Solid Foundation

Accurate and organised data is paramount. Gather information from various sources, keeping in mind the specific regulations and practices prevalent:

• Sales and Accounting Records: Collect data on sales volumes, payment terms, outstanding invoices, Days Sales Outstanding (DSO), and bad debt write-offs. Be mindful of GST implications and how they are recorded.
• Customer Payment History: Analyse individual customer payment patterns. Identify trends in late payments, partial payments, and disputed invoices. Categorise customers based on their payment behaviour (e.g., consistently pays on time, frequently pays late, high risk). Consider the impact of seasonal fluctuations common in some industries (e.g., agriculture, tourism).
• Credit Applications and Agreements: Review the credit terms offered to each customer, including credit limits, payment schedules, and any security agreements (e.g., Personal Property Securities Register (PPSR) registrations). Ensure these agreements comply with consumer credit laws.
• Business Credit Reports: These reports, obtained from reputable credit bureaus (e.g., Equifax, Dun & Bradstreet and Centrix), are essential for assessing customer creditworthiness. They provide information on payment history with other businesses, public records (including court judgments and bankruptcies), and credit scores. A business credit report is a critical tool for understanding a customer’s financial health and potential risk.
• Debt Collection Records: Analyse the effectiveness of your debt collection efforts. Track the number of accounts sent to debt collection agencies, the recovery rate, and the average time it takes to recover outstanding debts. Ensure your collection practices comply with debt collection laws.

Organise this data in a spreadsheet or database for easy analysis. Consistency is key for accurate reporting.

2.  Key Performance Indicators (KPIs): Measuring Performance

KPIs offer a quantifiable measure of your credit management performance. Tracking these metrics over time allows you to identify trends and evaluate the effectiveness of your credit policies within the NZ business environment. Consider these KPIs:

• Days Sales Outstanding (DSO): This metric measures the average time it takes to collect payment. A high DSO can indicate slow-paying customers and potential cash flow problems. Benchmark your DSO against the industry average.
• Bad Debt Ratio: This ratio reflects the percentage of sales written off as uncollectible. A high bad debt ratio suggests weaknesses in your credit evaluation and collection processes.
• Collection Effectiveness Ratio: This metric measures the percentage of outstanding receivables collected within a specific period. A high ratio demonstrates efficient collection efforts.
• Average Invoice Amount: Tracking this helps identify trends in sales and potential risks associated with large customer accounts.
• Credit Limit Utilisation: This measures the percentage of approved credit limits customers are using. Monitoring this helps identify customers nearing their limits and potentially posing a higher risk.

3.  Customer Segmentation and Risk Assessment: Identifying Potential Issues

Segmenting customers based on creditworthiness and payment behaviour is vital. Use information from business credit reports and internal payment history to categorise customers into risk groups (low, medium, high).

• Low-Risk Customers: These customers consistently pay on time and have a strong credit history. They represent minimal risk and can be offered more favourable terms.
• Medium-Risk Customers: These customers may have occasional late payments or a less robust credit history. They require closer monitoring and may be subject to stricter credit limits.
• High-Risk Customers: These customers have a history of late payments, defaults, or other warning signs. They pose a significant risk and should be managed cautiously, potentially requiring prepayment or secured payment options. Consider the impact of the Personal Property Securities Act (PPSA) when dealing with secured credit.

Segmenting customers allows you to tailor credit policies and collection strategies, minimising risk and maximising profitability within the market.

4.  Credit Policy Review and Adjustment: Optimising Your Approach

Your year-end analysis should include a review of your credit policies. Are they aligned with your business goals and current market conditions? Consider:

• Credit Approval Process: Is your process thorough and consistent? Do you use business credit reports for all new customers? Are credit limits appropriate for each segment?
• Payment Terms: Are your payment terms competitive yet reasonable?
• Collection Procedures: Are they effective and timely? Do you have a clear escalation process for overdue accounts, including referral to debt collection agencies if necessary?
• Risk Management: Do you have strategies to mitigate credit risk, such as requiring security deposits or using credit insurance?

Adjust your policies as needed. This might involve tightening credit limits for high-risk customers, implementing stricter collection procedures, or revising your credit approval process.

5.  Documentation and Reporting: Maintaining a Clear Record

Document your findings, including KPIs, customer segmentation results, and any policy changes. This serves as a valuable reference. Prepare reports summarising your analysis and share them with stakeholders. Ensure your documentation complies with record-keeping requirements.

6.  Proactive Strategies for Improvement: Moving Forward

Your analysis is about planning for the future. Based on your findings, develop strategies to improve your credit management:

• Investing in credit management software: Automating processes can improve efficiency and accuracy.
• Training your staff: Ensure sales and collections teams are knowledgeable about your credit policies and best practices.
• Improving communication with customers: Proactive communication can help prevent late payments and resolve disputes quickly.
• Regularly monitoring your credit portfolio: Don’t wait until year-end. Regular monitoring allows you to identify potential problems early.

By conducting a thorough year-end analysis, you gain valuable insights and identify areas for improvement. This proactive approach will help you minimise risk, optimise cash flow, and achieve sustainable financial success in the business environment. Remember, a business credit report is a crucial tool, providing objective data to support informed decision-making. Embrace review and adjustment to position your business for stronger financial health in Aotearoa.