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Why Payment Experience is So Important Now

Can companies draw conclusions about potential risks based on customers' payment behavior? But what needs to be taken into account? More in SCHUMANN Insights.
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26.10.2022, Prof. Dr. Matthias Schumann

What Can Customer Payment Behavior Tell Us?

Many signals point to an economic recession. Rising energy costs, shortages of materials and components with rising prices, a lack of personnel in many areas, interest rate increases and declining incoming orders.

If you want to make a good assessment of the resulting risks, especially on the customer side, it is worth taking a closer look at customers' payment behavior. What is relevant here?

Indicators of Potential Risks

Basically, it is important to check whether the customer's payment behavior is changing. Longer payment targets are always a reason to take a closer look at the customer. This applies even more if the customer exceeds the payment targets or even runs into dunning stages.

If the customer has had fixed payment terms for his open accounts payable up to now and these terms are now changing, then this is also a reason to follow up.

Particularly relevant are situations in which the customer has previously taken a cash discount and now becomes a gross payer. This suggests, due to the usually with the discount connected large discounting at least on liquidity bottlenecks. Thus, in such a situation special caution is required.

There are however still further aspects:

If, for example, the sales volume generated with the customer is reduced and the payment target is extended at the same time, a review should also be conducted.

Some companies also have the strategy, when payment difficulties are foreseeable, to cover themselves comprehensively with the suppliers beforehand. If unusual order patterns are to be recognized based on the experience with the customer, one should be just as vigilant.

Finally, complaints behavior may also play a role. If the number of complaints increases, in part without justification, this may also be a strategy for delaying payments.

Possible Solutions for Companies

In such situations it is beneficial to know the payment behavior of our customers at other companies, at least on average or in distribution. Payment experience pools, in which one participates, help here. This can be supported efficiently with IT solutions. It may be that an A-supplier, who is important for the customer, pays well, whereas less relevant suppliers pay less well. This can be an alarm signal for the own company to recognize early on that there are already problems in other places. Likewise, general tendencies for customers can be recognized there. You can then compare this with the payment behavior observed in your own company and draw conclusions from it.

Realistically, with a larger customer base, one will only be able to perform these analyses with IT support, with the IT solution then pointing out the specifics. With the help of good solutions, one will thus be able to establish helpful support systems.

On this note, I wish you every success in assessing your risks in credit management.

SCHUMANN Lines

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