It starts with understanding your customer's financial health. Request recent statements, such as balance sheets, profit and loss accounts, and cash flow statements. Then analyse liquidity: how do current assets relate to current liabilities? Also look at solvency by comparing equity with total assets.
Profitability is also important: both gross and net margins provide insight into financial performance. A positive and consistent cash flow indicates that the customer will be able to meet future obligations. Analyse the ratio between debt and equity, and take external factors such as competition, regulations, economic trends and the company profile into account.
Look and compare
Compare your customer with other companies in the same industry and identify potential threats, whether operational or legal. Consider requesting a credit report via Xolv. This often provides deeper insights than what you can find out yourself. Nowadays, you can also insure specific debtors, such as your largest customers, so that you do not have to cover your entire turnover.
Well-considered choices
If you have insight into the quality of your customer portfolio, you can make informed decisions about your credit management, negotiations and strategic choices. When you know which customers are at risk, you can take timely action and prevent unexpected write-offs. For investors or portfolio managers, this insight is also very important when making buying or selling decisions.
If you want thorough insight into your customer portfolio, you can contact Xolv. The risk analysis tools we use give you insight into trade and credit risks. This is a good way to assess the creditworthiness of companies.