Debtors risk analysis
This query is : Resolved
15 June 2017
can any one guide me on Debtors risk analysis and also does any one have such a format regarding that?
15 June 2017
The analysis of risk of recovery of dues from the debtor is regarded as debtor's risk analysis.
If depends upon the careful study of the behaviour of the debtors. The finance manager normally takes into account the risk analysis.There is no format per se. The various factors could be.....cibil score, trustworthyness, age analysis, promptness of payment by debtor etc.
If depends upon the careful study of the behaviour of the debtors. The finance manager normally takes into account the risk analysis.There is no format per se. The various factors could be.....cibil score, trustworthyness, age analysis, promptness of payment by debtor etc.
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15 June 2017
Hi Nitesh! As Amol has rightly pointed out, debtors risk analysis is a foremost important tool in trade receivable management. I presume you are required to conduct a debtor risk analysis from the perspective of an auditor, and that requires a deeper understanding of the nature of business of your client and the needs identification of the risk attached to debtors and the collection behaviour of the debtors.
Assuming you are only concerned about risk in debtor collection/ collection performance, following points may be considered as the key factors you are supposed to look at.
1. Identify that your working capital cycle is the general basis for fixing a credit period. Extended credit periods will lead the organisation to cash crunch.
2. Ensure that the customer is aware of the credit terms, ideally this should be mentioned in the invoice or any master agreements etc.
3. Prepare an analysis which consist of bill wise payment made by debtors and classify the payment performance into buckets of days/weeks. For example, the number of times amount was collected within 1 week/value of invoices which was received in 15 days, 30 days, 45 days etc.
4. If possible, and circumstances permit, see whether the customers do have a credit rating. In long term projects which involves huge amounts of transactions, parties provide their credit rating certificate.
5. See whether default in timely collection has a pattern. One time, two times may be okay but a continuous behaviour of late payment by customer is not viable.
6. Profile the customer on factors such as payment, acknowledgement of debt while follow up, sales return aspects and disputes etc. Rating must be given to the customers based on their performance.
7. See to that whether the customer demands more trade discount. A volume discount may be a good indicator, however trade discount after the sales have been effected indicates the inability of the customer to give quick payments.
8. Trend in the volume of sales. A long-standing customer is more trusted compared to a customer who does one time deal.
9. Extent of business with the customer and impact on such sales in the operations of the customer. If your customer is solely dependent on your materials, that would mean that the risk of non-collection is relatively less compared to a scenario where you are to compete with other players to do business with your customer.
Hope this helps.
Assuming you are only concerned about risk in debtor collection/ collection performance, following points may be considered as the key factors you are supposed to look at.
1. Identify that your working capital cycle is the general basis for fixing a credit period. Extended credit periods will lead the organisation to cash crunch.
2. Ensure that the customer is aware of the credit terms, ideally this should be mentioned in the invoice or any master agreements etc.
3. Prepare an analysis which consist of bill wise payment made by debtors and classify the payment performance into buckets of days/weeks. For example, the number of times amount was collected within 1 week/value of invoices which was received in 15 days, 30 days, 45 days etc.
4. If possible, and circumstances permit, see whether the customers do have a credit rating. In long term projects which involves huge amounts of transactions, parties provide their credit rating certificate.
5. See whether default in timely collection has a pattern. One time, two times may be okay but a continuous behaviour of late payment by customer is not viable.
6. Profile the customer on factors such as payment, acknowledgement of debt while follow up, sales return aspects and disputes etc. Rating must be given to the customers based on their performance.
7. See to that whether the customer demands more trade discount. A volume discount may be a good indicator, however trade discount after the sales have been effected indicates the inability of the customer to give quick payments.
8. Trend in the volume of sales. A long-standing customer is more trusted compared to a customer who does one time deal.
9. Extent of business with the customer and impact on such sales in the operations of the customer. If your customer is solely dependent on your materials, that would mean that the risk of non-collection is relatively less compared to a scenario where you are to compete with other players to do business with your customer.
Hope this helps.
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