02 Credit Risks
Another kind of liquidity problems occur because of the company’s credit management. Some companies were aggressively seeking sales growth and often ignore huge pile up of account receivables. Worse still, it often turned out that the receivables were not in good in view of the no so good credit standing of the buyers. Driven by the sales target, many suppliers had offered long credit terms which led to problematic DSO (days of sales outstanding). The worst-case scenario was that management bet on non-occurrence of buyer defaults despite the substantial credit risk exposure.
Account receivables have direct impact on the revenue of a company. The receivables can turn into working capital only after they are settled. The fast turn around of working capital, the more trade and operations the company can do, and consequently the higher revenue the company can achieve over the year.
Account Receivables vs Revenue
The credit exposure of account receivables is the possible default of buyers. Past due on the receivables often turn into bad debts. A company needs to be aware of the credit quality of its buyers and shall have mitigations to protect its receivables.
Read More: Credit Risk Management and Profitability
AR Credit Exposure
Read More: Credit Risk Management - Key Issues
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Credit Terms and DSO
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Buyer Portfolio Quality
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Loss History
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AR Management System
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Risk Mitigation and Solutions