How credit managers can help build organisational resilience in 2023

Article by Maha Awada as published in the most recent edition of the Australian Institute of Credit Management's (AICM) Risk Management Magazine.

From higher inflation to ongoing global supply chain constraints, compounding economic pressures are just one area of risk which credit managers and finance teams must face head-on in 2023.

With a looming global recession, the most resilient organisations will be those with teams coming together to openly discuss risks with clear accountability. Finance teams are responsible for the financial health of any business, so credit managers have a role to play but must step up to the challenge. Credit managers can’t manage risk alone. To lead
through an increasingly challenging trade environment, a culture of risk management must exist right through an organisation, but credit managers need to understand their role and take decisive action to protect a company’s balance sheet and manage the everthreatening

The evolving role of a credit manager

Results from Lockton’s CFO Strategic Risk Report (opens a new window) (including 50 CFOs and senior finance leaders in Australia) revealed finance teams are becoming more responsible for the current approaches, and sentiments, to strategic risk management. Perception of risk is constantly shifting. In 2022, 66% of CFOs changed their approach to risk management from Q1 to Q3 due to the ‘velocity of risk’ and its impact on business. Velocity of risk is a new layer of risk management based on the speed at which a potential risk impacts a business and materialises.

So what risks do credit managers need to watch out for?

Unsurprisingly, economic and supply chain risks are just two risks which ranked in the
top five risks of most concern last year. Although high-performing credit teams have been on the front-line safeguarding their company against these risks, confidence has declined. Input
cost risk preparedness declined by 16%. Confidence in managing economic and supply chain risks also declined.

How are the most successful credit management teams responding to these risks?

To adjust to the changed risk exposure, successful credit managers are taking a more
holistic and dynamic approach to better understand the effect risks have on each other and assessing the speed at which any cumulative influence might disrupt or threaten their
business. In this article, Lockton shares our recommended areas of focus based on how high-performing credit management peers are responding to supply chain, insolvency, interest rate and economic risks.

Supply chain risks and response

  • Review business continuity procedures (BCP)

Develop/update Business Continuity Plans to ensure they address the wider issues experienced over the last 36 months.

  • Expand supplier network and re-connect with suppliers
    Is there an increasing risk of customer/supplier default?

Review supply chain networks and develop strong relationships with multiple suppliers/

  • Risk monitoring

Establish process and procedures for the ongoing risk monitoring of suppliers and customers.

  • Trade Credit Insurance

Trade Credit Insurance protects businesses by quickly reimbursing up to 90% of any
domestic or export insured debt following insolvency or default, this may include pre-shipment credit risk for goods on delivery. It also provides monitoring and financial information about customers, knowledge of marketplaces, and debt collection services.

Success story

A Lockton Trade Credit Insurance client provides plastic containers with custom labels to their customers. While the policy covers invoices for goods sold, our client had to incur expenses
prior to the sale of goods to produce custom named labels. Lockton negotiated 90 days pre-shipment cover for bespoke goods with the insurer. Subsequently, one of our client’s customers became insolvent 60 days prior to invoice.

At this stage, thousands of containers with custom labels had been produced and expenses
already spent. As the labels were at that point worthless, the client was able to claim this loss under the policy. The plastic itself, however, was able to be used for another customer and treated as salvage which reduced the claim value. The labels themselves accounted for approximately 20% of the total invoice value. Without the insurance this would have had to be written off as a bad debt.

Insolvency risks and response

  • Credit risk management framework

Businesses extending credit terms should have a documented process to identify,
monitor, and manage their accounts receivable exposure. This can be as sophisticated as the business requires.

  • Credit check customers

Credit checks should be conducted on all new customers and at least annually for all existing customers.

  • Debt collection

Take immediate action on overdue invoices and document correspondence. For timepoor
businesses, it may be best to engage an external debt collector to ensure maximum

  • Personal property securities register

Where applicable, businesses should register their security interest on the National PPSR. The registration protects interest in the goods or assets should the customer become insolvent or default.

Interest rates risks and response

  • Better cash flow management

Seek to understand the nature of clients the business transacts with, and how increases in
interest can impact their ability to pay on time.

  • Supply chain management

It is crucial for businesses to maintain appropriate stock levels to reduce inventory and
unnecessary overhead costs. An efficient supply chain will support a stronger cash flow and
improve risk mitigation.

  • Prepare for financial scrutiny It is important to be prepared for greater financial scrutiny from financiers, credit insurers, suppliers, and other stakeholders.

Economic risks and response

  • Prepare for an economic downturn

Prepare for the possibility of an economic downturn and its credit implications. If the economy slows, concerns about liquidity and credit will return and the number of companies entering administration will likely grow.

  • Review your credit risk management

Review your credit risk management (CRM) procedures and consider the viability of
transferring risk to the insurance market to reduce the risks associated with customer nonpayment or default.

  • Outsource your collections

Regular reviews of your accounts receivable and collections process is critical in successfully
recovering overdue invoices. Outsourcing is an affordable and effective option for time poor businesses.

Where to from here?

Credit managers will continue to face a disruptive, complex, and dynamic landscape.
Rather than wait and react as risk events unfold, getting on the front foot is crucial.

By taking action, credit managers can improve the resilience of a business and position themselves strongly in unpredictable, uncertain times.

The full Lockton CFO Strategic Risk Report (opens a new window) is available for download now.