Understanding Credit Risk For Dummies

These materials are 2016 John Wiley & Sons, Ltd.
. Any dissemination, distribution, or unauthorized use is strictly prohibited.

36 Understanding Credit Risk For Dummies, Graydon Special Edition
Understanding
Monitor Customers with a CIP
Credit Risk
Topnotch credit information providers have monitoring sys-
tems for clients use. Many credit information providers have
a monitoring system that automatically alters a rating (either
up or down) based on an event change perhaps the filing
of new accounts or changes in directors. Using that system
can let you know if the credit limit you set for a customer six
months ago is still relevant. If your credit information pro-
vider doesnt have a monitoring system in place, shop around
for a new one! And if you dont have a credit information
provider, get one!
Graydon Special Edition

Loop in Line Management
Dont keep that new information youve collected all to your-
self! Liaise with your boss and other senior management and
keep them apprised about the companys clients. Voice your
concerns. No one likes nasty surprises! Heres your chance to
become a hero or at least to say, I told you so!
Foreword by Philip King, FCICM
Continue toof Credit
Fight Fraud
Chief executive, Chartered Institute
Management
Despite all your due diligence, you may still be taken in by a
fraudster. Fraud happens all the time, and no one is immune.
Commercial fraud is a multibillionpound threat that shows
no signs of abating. And it covers every industry sector, not
just fastmoving consumer goods (FMCG). Dont become
complacent. Ensure detection methods are in place or, better
yet, utilise a credit information provider (such as Graydon UK
Ltd), which features a specialist fraud-detection team.
Stick to Your Guns

As a credit professional, you hold a great responsibility for
the good of your company. Never forget that! Refuse to be
rushed into opening an account even if you have the head
of sales breathing down your neck. Be diligent and thorough,
ensure that everyone follows the procedures, and dont agree
to credit account facilities until youre 100 per cent sure. You
wont totally avoid bad debts, but youll avoid most of them!
These materials are 2016 John Wiley & Sons, Ltd. Any dissemination, distribution, or unauthorized use is strictly prohibited.

Understanding Credit Risk For Dummies, Graydon Special Edition
Published by: John Wiley & Sons, Ltd., The Atrium, Southern Gate Chichester, West Sussex,
www.wiley.com
2016 by John Wiley & Sons, Ltd., Chichester, West Sussex
Registered Officetems for clients use. Many credit information providers have
a monitoring
John Wiley & Sons, Ltd., The Atrium,system
Southern that
Gate,automatically altersPO19
Chichester, West Sussex, a rating
8SQ, (either
United Kingdom
All rights reserved. No part
of new of this publication
accounts may be reproduced,
or changes stored
in directors. in a retrieval
Using system or
that system
transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning
can let you know if the credit limit you set for a customer
or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the six
monthsof ago
prior written permission is still relevant.
the Publisher. If your
For information aboutcredit information
how to apply pro-
for permission to
reuse the copyright
vidermaterial in thishave
doesnt book, please see our website
a monitoring http://www.wiley.com/go/
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Continue to Fight Fraud

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BrandedRights&Licenses@Wiley.com.
ISBN 9781119161646 (pbk); ISBN 9781119161639 (ebk)
Printed and bound in Great Britain
fraudster. Fraud by Page Bros, Norwich
happens all the
time, and no one is immune.
10 9 8 7 6 5Commercial
4 3 2 1 fraud is a multibillionpound threat that shows
Publishers justAcknowledgments
fastmoving consumer goods (FMCG). Dont become
Were proud of this book and of the people who worked on it. For details on how to
yet,
create a custom Forutilise
Dummiesa credit information
book for provider
your business (such as
or organization, Graydon
contact info@UK
dummies.bizLtd), which
or visit features a specialist fraud-detection
www.wiley.com/go/custompub. For details onteam.
licensing the
For Dummies brand for products or services, contact BrandedRights&Licenses@
Wiley.com.
Stick to Your Guns

Some of the people who helped bring this book to market include the following:
Development Editor: Shari Held Business Development Representative:

As a credit professional, you hold a great
Felicity Whyteresponsibility for
Project Editor: Martin V. Minner
the good of your company.Production
Never forget that! Refuse to be
Editor: Antony Sami
Editorial Manager:
rushedRev Mengle
into opening an account even if you have the head
of sales
Key Contributor: Colinbreathing downFACP,
Sanders, MCICM, yourHead
neck.ofBe diligent
Graydon and thorough,
UK Operations
MonitorTable of Contents
Customers with a CIP
a monitoring
Foreword . . . . . .system
. . . . . . . that
. . . . .automatically
. . . . . . . . . . . . . .alters
. . . . . .a . rating
. . . . . . .(either
. . . . . iv
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
About This Book........................................................................................................ 1
Foolish Assumptions................................................................................................ 2
monthsIconsago Usedisinstill This relevant. If your credit information pro- 2
Book...........................................................................................
viderHow
doesnt
This Book have a monitoring
Is Organised. system in place, shop around3
...................................................................................
for a Where
new one! to Go And From Here. if you dont have a credit information
........................................................................................... 4
provider, get one!
Chapter1: Delving into Trade Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Assessing Creditworthiness.................................................................................... 5
Digging Deeper.......................................................................................................... 6
Loop in Line Management Questioning Changes................................................................................................ 8

Keeping It Simple....................................................................................................... 8
Chapter2:
Dont keepMaking Nice:
that new Collaborating
information with collected
youve Sales. . . . . all
. . . to
. . .your-
. . . . 9
self! Liaise with
Taking the your
Boxing boss
Gloves and other senior management and10
Off................................................................................
keep Nourishing the Partnership................................................................................... 10
them apprised about the companys clients. Voice your
Taking a Proactive Stance...................................................................................... 11
Chapter3:
become aDecoding
hero orAnnual
at least Accounts
to say, I. . .told . . . .you
. . . . so!
. . . . . . . . . . . . . 13
Taking a Holistic Approach................................................................................... 14
Discovering the Trends.......................................................................................... 14

Knowing Your Industry.......................................................................................... 16
Considering Liquidity............................................................................................. 16
Factoring in Borrowed Funds................................................................................ 17
Ensuring the Accounts Current............................................................................ 17
Investigating the Directors.................................................................................... 18
fraudster.
LookingFraud happens
at PostFiled all the time, and no one is immune.19
Accounts.............................................................................
Commercial
Mastering fraud
the BasicisRatios....................................................................................
a multibillionpound threat that shows 19
no signs ofItabating.
Putting And it covers every industry sector, not 20
All in Perspective...................................................................................
just fastmoving
Chapter4: consumer
Setting Credit goods
Limits. . . . . . .(FMCG).
. . . . . . . . Dont
. . . . . . become
. . . . . . . . . . 21
complacent. Ensure
Assessing the detection methods are in place or, better
Credit Request................................................................................ 21
Chapter5:
Ltd), whichSpotting
featuresTrade Credit Fraud
a specialist . . . . . . . . . . . . . . team.
fraud-detection . . . . . . . . . . 25
Grasping How Fraud Flourishes............................................................................ 26
Knowing the Governments Role........................................................................... 26
StickChapter6:
to Your Guns
Protecting Your Business....................................................................................... 28
Ten Key Ways to Keep Up the Good Work. . . . . . . . . . . . 33

Stay Abreast of New Legislation............................................................................ 33
As a credit
Know Yourprofessional, you hold a great responsibility for 34
Clients News.......................................................................................
the good of Customer
Maintain your company. Never forget that! Refuse to be 34
Contact...................................................................................
rushed
Talkinto opening
to The an account even if you have the head 34
Competition........................................................................................
Keepbreathing
of sales Your Paperwork
downUp toyourDate.........................................................................
neck. Be diligent and thorough,35
Peruse the Press Regularly.................................................................................... 35
Monitor Customers with a CIP.............................................................................. 36
to credit account
Loop in facilities
Line Management. until youre 100 per cent sure. You
..................................................................................... 36
wontContinue
totallytoavoid bad.........................................................................................
Fight Fraud. debts, but youll avoid most of them!36
Stick to Your Guns.................................................................................................. 36
Foreword
C
of new accounts
redit managers or changes in directors.
are the original Using that
multi-taskers. system
Far from
can let youoverlooked
being know if theas credit
a backlimit youfunction,
office set for a customer
the role ofsix
months
the creditago is still relevant.
manager If your
is expanding credit
from information
order pro-
to cash. Credit
vider doesntteams
management have aare monitoring systemcontributions
making tangible in place, shoptoaround
the
for a new
success ofone! And if you
a business dontlevel,
at every have not
a credit
only information
tactically but
provider,
also get one!
strategically.
The secret to doing business and getting paid is, of course,

knowing your customer. To achieve this goal, credit manag-
ers have several tools and tactics at their disposal. Published
data is available from Companies House, and more current
information is available through professional credit informa-
tion firms. These firms supplement historic data with more
recent payment trends and performance.
You can find other sources of information closer to home.
Your sales teams and colleagues may have a track record or

even previous employment with a potential customer. These
resources provide valuable insight that you cannot get from
reading a spreadsheet.
fraudster.
All sourcesFraud happens
have merit; youallcan
thenever
time,have
and no one isinforma-
enough immune.
Commercial
tion. The skillfraud is a multibillionpound
is in understanding threat that
and interpreting whatshows
you
no signs
have, andof abating.
then makingAnd it coversdecisions.
informed every industry
Bettersector,
decisionsnot
justonly
not fastmoving
help youconsumer
avoid the goods (FMCG).
nasty things in Dont become
life such as fraud,
complacent.
but enable yourEnsure detection
business methods
to enjoy futureare in place
growth and or, better
prosper-
yet,
ity byutilise a credit
choosing information
the right partners.provider (such as Graydon UK
Credit management continues to grow in stature as a disci-
pline, as demonstrated by the ICMs elevation to Chartered
Stick to Your Guns
status at the start of 2015. But credit managers never under-
estimate the importance of getting the basics right. Theyre
happy to embrace anything that helps them learn and
improve. I commend this book as a valuable resource to add
to your toolbox.
Philip King, FCICM
Chief executive, Chartered Institute of Credit Management
Introduction
W
of new accounts
elcome toor changes in directors.
Understanding Using
Credit Risk that system
For Dummies.
can let you know
Credit riskifand
the fraud
creditare
limit you set
serious for a customer
problems for busi-six
monthsInago
nesses. is still
2013 the UKrelevant.
economyIf your
lostcredit information
52 billion to fraud pro-
alone,
vider
and thedoesnt
problem have a monitoring
is on system
the rise. Today, in place, have
fraudsters shopmore
around
for a than
ways new one!
everAnd
to do if their
you dont
dirtyhave
work.a But
credit
on information
the flip side,
provider, get
businesses haveone!
more tools to help identify those risks and
take proactive measures to minimise them. This introductory
guide to credit risk has been compiled by Graydon UK Ltd
to explain the intricacies of B2B credit risk and explore best
practices for protecting your business from credit risk and
fraud.
About This Book

Optimal management of credit risk is vital to companies
success in todays marketplace. Smart businesses recognise
this. They also appreciate what their financial group can bring
to the table. Instead of waiting for a problem to occur, then
going at it great guns, a proactive approach is more effective.
Todays credit managers need to be able to implement
welldesigned strategies to minimise credit risk and fraud.
Easier said than done, you say? Honestly, isnt everything?
But you have an ace up your sleeve. You have this book! And
youll glean tons of valuable information that will give you a
better understanding of the problem, how to head it off, and
how to become a hero in the boardroom!
Stick to Your Guns

To be a savvy credit manager you need to do the following:
Take a holistic approach to credit risk that values your

As agut
credit professional,
feeling as well asyou hold areview
a diligent great responsibility
of a companysfor
the good
annualof report.
your company. Never forget that! Refuse to be
Be aware of the potential risks and pitfalls you may
encounter.
2
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

Learn to read between the lines of an annual report to
gain a more comprehensive view of a companys financial
status.
Play nice with the sales department. Gain their trust
and esteem so you can provide valuable input about the
credit risk associated with a potential customer long
before the ink is dry on the contract.
can
let
Stayyou know of
abreast if the credit
whats limit
going onyou set
with for customers
your a customerand
six
the marketplace.
for a new
Sound likeone!
lots And if you donttohave
of information a credit
digest at oneinformation
time? Relax.
provider,
Weve get one!
packed this small book with the basics in an easily
understood format that gives you the head start you need.
Loop inAssumptions
Foolish Line Management
self! Liaise
Weve madewith
someyour boss
basic and other senior
assumptions management
about you for the and
pkeep them
urposes ofapprised about
writing this theWe
book. companys
assume threeclients. Voice your
things:
become
You aarehero
justbeginning
or at leastyour
to say, I told
career in you so!management
credit
and are associated with your companys financial group.
And, duh, you want to climb up the ladder to success
more quickly.
You want to positively impact your companys bottom
Despite
line all
by your due diligence,
minimising the risksyou may stillwith
associated be taken in by a
bad credit
and fraud.
You may not have a financial background perhaps
youre in sales or another area of management but you
want a better (and basic) understanding of how credit
risk affects the company.
Icons Used in This Book

Stick to Your Guns
Because we know you have a lot on your plate, weve made
it easy for you to navigate through this book and quickly
capture the most useful and important information. Just look
for the following icons:
36
Introduction
Understanding Credit Risk For Dummies, Graydon Special Edition 3

When you see the target, youll find pithy, easy-to-understand
advice.

temsicon
This for clients
denotesuse. Many credit
important information
information youllproviders have
need to revisit
a monitoring
time and time system
again. that automatically alters a rating (either
Pay
canattention to this
let you know icon!
if the It warns
credit limit you
you against
set for acommon
customer six
pmonths
itfalls orago
hazards
is stillthat are best
relevant. avoided.
If your credit information pro-
How This Book Is Organised
provider, get one!
Understanding Credit Risk For Dummies is divided into six

chapters. Heres a succinct overview of what youll find
in each:
Chapter1:
self! Liaise with Delving
your boss into
andTrade
otherCredit.
senior This chapter and
management
keepprovides the history
them apprised aboutandthehighlights
companys of clients.
trade credit
Voicefrom
your
its origins
concerns. to the
No one present
likes day. This chapter
nasty surprises! dispels
Heres your the to
chance
becomemisconception
a hero or that assessing
at least to say,credit
I told risk
you comes
so! down to
a mere mathematical calculation!
Chapter2: Making Nice: Collaborating with Sales. Youll
learn why its so important to your companys bottom
line that credit and sales act as a team and youll find
tips all
Despite to your
facilitate
due the camaraderie!
diligence, you may still be taken in by a
fraudster.
Chapter3: Decoding Annualtime,
Fraud happens all the and noYoull
Accounts. one islearn
immune.
how
Commercial fraud is a multibillionpound threat
to interpret annual accounts so you can make sound that shows
no signs
creditofmanagement
abating. And decisions.
it covers every industry
In addition, thissector, not
chapter
just defines
fastmoving consumer goods (FMCG). Dont
the role common sense plays in the equation. become
Chapter4:
yet, Setting
utilise a credit Credit Limits.
information providerThis chapter
(such shows you
as Graydon UK
Ltd),how to factor
which in additional
features a specialistelements to supplement
fraud-detection team. your
credit information and individualise your decision.
Chapter5: Spotting Trade Credit Fraud. This all
Stick to Your Guns important chapter details why fraud is an everincreasing
problem and provides a plethora of tools for unveiling
As afraud
creditand guarding against
professional, it. a great responsibility for
you hold
the good of your company. Never
Chapter6: Ten Key Ways to Keep forgetUpthat!
theRefuse to be
Good Work.
rushed
Thisinto opening
chapter an you
gives account even
ten tips if you have
for keeping thedate
up to head
of sales breathing down your neck. Be diligent
and on the right track, moving forward! and thorough,
4
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Where
MonitortoCustomers
Go From Here
with a CIP
IfTopnotch
youre familiar
creditwith For Dummies
information books,
providers youmonitoring
have know that sys-
where youclients
tems for start isuse.
totally
Many upcredit
to you. You can devour
information the book
providers have
from cover to system
a monitoring cover, delve into the partsalters
that automatically that are new to
a rating you,
(either
use thedown)
up or book as a refresher,
based or use
on an event it as a reference
change perhaps thebook
filing
when
of newneeded.
accountsNo or
matter howinyou
changes use it, you
directors. cant
Using gosystem
that wrong!
provider, get one!


Stick to Your Guns

Chapter1with a CIP
Monitor Customers
Delving into Trade Credit
In This Chapter
Tracking the evolution of trade credit from its origins to the present
Gathering additional
provider, get information
one! to minimise credit risk

Y
bit
our business received a terrific order from a new
Dontcustomer.
keep thatYeah!
toLiaise
self! ensure it got
with
Everyone scurried
new information
outboss
your the door
youve around
collected
and invoiced
and other
doing their
all to your-
in record time.
senior management and
Then
keep you
themwaited, andabout
apprised you waited. But the cheque
the companys clients. never
Voice came.
your
Unfortunately,
concerns. No onethislikes
scenario
nastyoccurs every
surprises! day. your chance to
Heres
Delivering goods or services without receiving payment upon
delivery is risky. Some of your clients are likely to renege and

not pay you according to the agreed terms or ever. But dont
despair; you can take steps to minimise those risks.
Despite
In all yourwe
this chapter, due diligence,
discuss howyou
the may still of
practice betrade
takencredit
in by a
fraudster. Fraud happens all the time, and no one
began and evolved to where it is today. We also whet your is immune.
Commercial
appetite withfraud is apeek
a sneak multibillionpound threat that
at the basic information shows
that can
no signs of abating. And it covers every industry sector,
help ensure you dont get caught with egg on your face. And, not
just fastmoving consumer goods (FMCG). Dont
surprise! The information you need doesnt all come from abecome
complacent.
financial Ensure detection methods are in place or, better
statement!
Assessing Creditworthiness
Stick to Your Guns
The word credit is based on the Latin credere, which means
to trust or I believe. You extend credit to a business and trust
As awill
they credit
payprofessional,
you at a lateryou hold
date. Butasometimes
great responsibility for
businesses
the good of your company. Never forget that! Refuse
dont pay their debts. Perhaps they went belly up or maybe to be
rushed
they into
never openingtoanpay.
intended account even
The result is ifthe
you haveCustomers
same: the head
who dont pay jeopardise the health of your business.thorough,
of sales breathing down your neck. Be diligent and
6
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

Thats why in 1841, Lewis Tappan, a wealthy American
merchant, created a methodology for assessing a customers
ability to pay. Within ten years he had hundreds of clients and
Topnotch
more creditcorrespondents
than 2,000 information providers
all over have monitoring
the U.S. sys-
Soon, credit
tems forbegan
bureaux clients use. Many
opening credit information
worldwide, beginning withproviders
Westernhave
a monitoring
Europe in the system that automatically
1850s. Eastern Europe followed alterssuit
a rating (either
in the late
up orand
990s down)
mostbased on an
recently, event
the Middlechange
East. perhaps the filing
canthe
By let1970s
you know
creditif bureaux
the credit limitthe
were you set for
norm forachecking
customer six
the
months ago is still
creditworthiness ofrelevant.
customers If your credit information
or prospects. pro-
Correspondents
vider
in doesnt
the UK usedhave
data afrommonitoring
Companies system in place,
House, shop around
the government
for a responsible
body new one! And forif processing
you dont have a credit
all filed data,information
including:
provider, get one!
Company officers: directors, company secretary

Registered office address
Annual accounts and annual returns
Dont keep that
Charges new information
or secured youve collected all to your-
borrowings
keep them
Based apprised
on their about
findings, the companys
correspondents clients.
made Voice your
subjective
concerns.
value No oneand
judgments likes nasty surprises!
assigned a company Heres your
a credit chance to
rating.
Today, empirically derived scoring systems are the gold
standard for assessing credit risk. This methodology provides
modernday credit controllers and managers like you with the
predictive outcomes you need to make these difficult calls.
The key ingredient for assessing creditworthiness, then and
now, is the annual account. Under penalty of law, private
limited companies and public limited companies must file
nine months and six months from yearend, respectively.
Digging Deeper
If you think your works finished after scrutinising the annual

Stick to Your Guns
account, think again! Thats just one part of the overall inves-
tigation into a company. It isnt only about the maths!
The next step is to learn everything you can about the
company. The story behind the numbers is just as revealing
as the numbers themselves. And to make informed decisions,
you need a comprehensive perspective.
36
Understanding Credit Risk ForChapter1:
Dummies,Delving into
Graydon Trade Edition
Special Credit 7

Put on your reporters hat and adopt the five Ws who, what,
when, where, and why as your investigative tools.
Topnotch
The Internetcredit
makes information providers
it easy to search have monitoring
for information not sys-
ntems for clients
ecessarily use.in
included Many credit
financial information
reports, providers
such as have
the direc-
a monitoring
tors system
backgrounds that
are automatically
they blemish freealters a rating (either
or questionable
up or
and down) the
whether based on an as
industry event change
a whole perhaps
is thriving or the filing
declining.
Knowing your customers
You
for amay
newthink
one! youre trading
And if you with
dont haveJohn Smith,
a credit but are you?
information
John Smith
provider, getcan
one!actually be any of these:
John Smith Ltd

John Smith trading as John Smith Engineering (sole
trader)
Dont
John keep that and
Smith new Julie
information youveas
Smith trading collected all to your-
John Smith
self! Engineering
Liaise with your boss and
(partnership) other senior management and
A ginormous
concerns. No one company Ltd
likes nasty trading as
surprises! Johnyour
Heres Smithchance to
becomeEngineering
a hero (division)
or at least to say, I told you so!
Why does the type of business matter? Sole traders and

partnerships are personally liable for all debts, while private
limited companies are liable for only the companys debts,
limited to assets realised against liabilities.
Getting familiar with sectors
just also
You fastmoving
need toconsumer
bone up on goods
your(FMCG).
customersDont become
industries
complacent. Ensure detection methods are in place
andtheir customers industries. In particular, you want or, better
yet, utilise
toknow: a credit information provider (such as Graydon UK
Who are the market leaders?
Stick to Your GunsWhat are the growth prospects for the sector?
What challenges lie ahead for the sector?
Your customers
the good of yourproblem
company. can become
Never your
forget problem.
that! If they
Refuse to be
dont
rushedgetinto
paid, you dont
opening get paid. even if you have the head
an account
8
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Questioning Changes
Although
Topnotch you vetted
credit a company
information thoroughly
providers havebefore extending
monitoring sys-
credit,
tems foryour job still
clients use.isnt
Manyfinished.
credit Things change.
information Reviewhave
providers
customer accounts
a monitoring system regularly for information
that automatically alterssuch as: (either
a rating
of New
new directors
accounts oror resigning
changes directors Using that system
in directors.
can let you know if
A change of address the credit limit you set for a customer six
A doesnt
vider change have
of banka monitoring system in place, shop around
for a new one!
DeteriorationAndinif the
youcompanys
dont havepayment
a credit information
record
provider, get one!
Investigate the reasons behind those changes question your
customer, too then reevaluate their creditworthiness.
A customers website showcases the positives, but for infor-
mation suchthat
Dont keep as the
newloss of a key contract,
information closure of
youve collected allato
site, or
your-
layoffs, you with
self! Liaise needyour
to turn toand
boss other sources.
other senior management and
For prospective
concerns. No onecustomers,
likes nastythe questionHeres
surprises! is: Why didchance
your they to
leave
become a competitor
a hero ortoatcome
least to
to you?
say, IPerhaps
told youyour
so! competitor
wasnt responsive enough. But maybe the customer was late
making payments!

Keeping It Simple
Dont drown in
Commercial a sea
fraud is of figures. When starting
a multibillionpound out,that
threat stick to the
shows
basics. Look at the key figures and the most basic ratios.
no signs of abating. And it covers every industry sector, not Dig
deep to unearth trends.
just fastmoving consumer Askgoods
these (FMCG).
questions:
Dont become
Are
yet, sales
utilise increasing
a credit or declining?
information provider (such as Graydon UK
Are profits rising or falling accordingly?
How much of the profit is being reverted to the business?
Stick to Your Guns

How much has the company borrowed, and how has its
borrowing affected cash flow?
Youre
the goodjustofbeginning your career
your company. Neverin credit
forget management.
that! Dont
Refuse to be
attempt to run
rushed into beforean
opening you can walk!
account Getting
even a handle
if you onhead
have the the
essentials now will down
of sales breathing make your neck.
work easier downand
Be diligent thethorough,
road!
So
to there
credititaccount
is, an introduction to trade
facilities until yourecredit
100 perand some
cent teasers
sure. You
of whats
wont to come.
totally avoidAre
badyou ready
debts, buttoyoull
dig deeper?
avoid most of them!
Chapter2with a CIP
Monitor Customers
Making Nice: Collaborating
with Sales
In This provider, get one!
Chapter
Recognising the need for cooperation and collaboration

Employing tactics to develop stronger relationships
Taking the lead in providing innovative, winwin solutions
I
n many companies, the sales department and the credit
department spend lots of time in their respective corners
getting prepared to square off against each other!

Why? The competition to make a sale has never been more
fierce. And from the sales managers perspective, when the
Despite
credit all your due
department diligence,
puts youon
the brakes may still be takensale,
a hardearned in by a
its
fraudster.
time to come Fraud
out happens
fighting! all the time, and no one is immune.
no signs ofthe
Protecting abating.
companyAndfrom
it covers
creditevery industry
risk has sector, not
also become more
just fastmoving
difficult and moreconsumer
crucial togoods (FMCG). very
a companys Dontsurvival.
becomeFrom
complacent.
the Ensure perspective,
credit managers detection methods
the salesaredepartment
in place or,should
better
yet,
be utilise
more a credit information
discriminating. Not every provider (such
prospects as Graydon
signature on theUK
Ltd), which
dotted line isfeatures
cause fora specialist
celebration!fraud-detection team.
So the lines are drawn. And when everyones in fight mode, no

Stick to Your Guns
one benefits, least of all, the company.
In this chapter, we show why infighting between the sales

department and the credit department is detrimental to the
company. We cover some steps credit can take to break the
ice and involve the sales department in the credit process.
And we discuss the responsibility the credit department has
in helping make a sale a good sale!
10
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Taking
Monitorthe Boxing Gloves
Customers with aOff
CIP
Sometimes
Topnotch the credit
credit department
information may feel
providers a good
have right hook
monitoring sys-
istems
called
forfor to make
clients use.the sales
Many department
credit get the
information message
providers
have
and vice versa.system
a monitoring But nothatoneautomatically
wins in that scenario.
alters a rating (either
How canaccounts
of new you turnor that situation
changes around? AUsing
in directors. collaborative
that system
relationship between
can let you know credit
if the and
credit sales,
limit youone
set based on mutual
for a customer six
respect
monthsandagounderstanding,
is still relevant.isIf key
yourtocredit
successful trading.
information pro-
When eachone!
for a new department
And if you respects
dont have and ahonours the role of the
credit information
other, and get
provider, works one!together in the companys best interests, its
a winwin for everyone!
Loop in Linethe
Nourishing Management
Partnership
When each with
self! Liaise department
your bossknows
and the role
other the other
senior plays within
management and
the
keepcompany, the goals
them apprised each
about department
the companysstrives for
clients. and the
Voice your
challenges
concerns. No each faces,
one likesthey
nastycan more easily
surprises! understand
Heres whyto
your chance
each
becomedepartment
a hero reacts in the
or at least to way
say, it
I does. Along
told you so!with these
insights comes respect. And when respect replaces distrust,
the tone is set for future cooperation.

Small steps can yield big results. Try throwing an interdepart-
mental party to ease the tension and put a little fun into the
Despite all your due
gettingacquainted diligence, you may still be taken in by a
process.
Commercial
Both fraud need
departments is a multibillionpound threat
to understand theres that shows
a natural
connection between them and that they need onesector,
no signs of abating. And it covers every industry anothernot
just
to fastmoving
operate consumer
optimally. goodsdepartment
If the sales (FMCG). Dont become
doesnt sell on
complacent.
credit, Ensure doesnt
the company detection methods
need are
a credit in place or,But
department. better
if
yet, utilise a credit information provider (such as Graydon
those credit sales arent solid, the companys bottom line and UK
Ltd), which features
solvency are threatened. a specialist fraud-detection team.
The sales department really is the lifeblood of the organisa-

Stick to Your Guns
tion. That isnt just sales hype! Without a continuous stream
of new sales, the company wont survive.
Here are some
the good tactics
of your the credit
company. Neverdepartment
forget that!can initiate
Refuse to
to be
make
rushedtheinto
partnering
openingprocess run more
an account evensmoothly:
if you have the head
36
Understanding Chapter2:
Credit RiskMaking Nice: Collaborating
For Dummies, withEdition
Graydon Special Sales 11

Strive to get buyin from the sales department to ensure
credit applications are fully and accurately completed
the first time round. Be sure to explain the conse-
Topnotch
quences, credit information
which range from providers have monitoring
inconvenience sys-
having the
temsapplication
for clientsreturned
use. Many forcredit information
correction providers
or completion have
to
a monitoring
disaster system
bad debtthatorautomatically
nonpayment.alters a rating (either
Dont cave under pressure! If the application isnt up to
scratch, dont begin processing it. Politely send it back to
the sales department and request that it be corrected or
completed. After a while, theyll get the idea!
for
aTake
new the
one!mystery
And if you
outdont
of thehave a credit
credit information
process by facilitating
provider, get one! for the sales department. Keep it blame
a presentation
free while shedding light on pertinent issues.

Encourage the sales department to prevet prospects.
Prevetting saves time and money for everyone involved.
And its less disappointing to both the salesperson and
Dont keep
the that new
potential information
client to find outyouve
early collected
on that theallsale
to your-
cant
self! be
Liaise with your
approved. boss to
Be sure and other
give salessenior management
the tools they need and

keepno them apprised
holding back about the companys
on access to financialclients. Voice
databases andyour
concerns.
qualityNo one likesSure,
forecasts! nasty surprises!
you may have Heres your
to give thechance
sales to
become a hero additional
department or at least training,
to say, I but
toldthats
you so!
another good
opportunity to build a better relationship!

Prevetting a client keeps everyones expectations in
check early in the sales process.
Taking a Proactive Stance

Sales representatives initiate contact with potential customers,
so theyre naturally involved at the beginning of the sales cycle.
Often, credit isnt consulted until later in the transaction.
But an effective credit manager doesnt wait to jump into the
ring at the end of the sales cycle. The credit departments
Stick to Your Guns

goal is to prevent a problem from happening in the first place
or to minimise potential problems. To do that, credit needs to
be involved at the beginning of the sales cycle especially for
As acompanys
the credit professional,
biggest andyou hold
most a great responsibility
important clients. for
rushed
You mayinto
haveopening an account
to get out even ifzone
of your comfort you have themore
and be head
of sales breathing
assertive to reclaimdown your
credits neck.
place atBe
thediligent andthe
table. But thorough,
results
ensure
will that everyone
be worth it! follows the procedures, and dont agree
12
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Monitor Customers
Being with a CIP
a credit problemsolver
Savvy credit
tems forprofessionals
clients use. devise
Many credit margins allow, providers
information a settlementhave
creativea approaches
monitoring systemto ensure a automatically
that discount alters
can get you ahead
a rating (either
good sale upgoes through.based on an eventofchange
or down) the competition
perhaps the andfiling
give
of new accounts or changes in the buyer Using
directors. a big that
incentive
system to
For example, if a potential customers
can let you know if the credit settle
limit youaccounts
set for apromptly.
customer This
six
credit limit is 10,000 and the order is
months ago is still relevant. If approach
your credit improves
informationyour pro-
cash
for 20,000, you have several options:
vider doesnt have a monitoringflow as well!
system Offering
in place, shopa small
around
Deny forcredit.
a newThis is And
one! the easiest
if you dont but have significant percentage dis-
a credit information
option, and theget
provider, facts support it,
one! count is commonplace in many
but its lazy. No one wins with sectors, but it need not apply to
this one. all customers unless it is writ-

Ask the customer for a 50/50
transaction 10,000 up front
ten in your credit policy. Utilise
a discount where it benefits your
business most.
and Dont
10,000keep
on credit to bring
that new information youve collected all to your-
the self!
sale Liaise
in line with
with the
yourcredit Pointing
boss and otherout potential
senior problems with
management and
limit.keep them apprised about the the companys
sale isnt enough. Youve
clients. Voicegotyour
to
concerns. offer solutions!
Consider usingNo one likesfor
discounts nasty surprises! Heres your chance to
cashbecome a hero or
as an enticement. If at least to say, I told you so!
profit

If a sales representative has a potential sale with a customer
who pays after 90 days instead of 30 days, advise sales to
charge a slightly higher rate to offset the losses entailed by a
late payment!
So break with the old traditions, get out of your comfort zone
and make a real difference. Your relationship with the sales
department will improve and the credit process will go more
smoothly. And that will give you more time to deal with other
important issues such as interpreting annual accounts
coming up next!
Stick to Your Guns

Chapter3with a CIP
Monitor Customers
Decoding Annual Accounts
In This Chapter
Interpreting annual accounts
Supplementing
provider,annual accounts with additional information
get one!
Learning which ratios to master first

N Dont ow
keep
keep
self! Liaise
them
thatgetting
were
with
new information
your
apprised
down to one
boss
about
and
the
youve
other
collected
of the
senior
companys
all to your-
credit man
management
agers most valuable tools the annual account. This
clients.
mysterious report boils a companys essence down to one
concerns. No one likes nasty
Voice
and
your
surprises! Heres your chance to
neatly packaged bundle of figures.
By law, a companys annual account must contain the following
items:
Balance sheet
Despite
Profitalland
your dueaccount
loss diligence, youthe
(with may still be taken
exception in by
of small or a
fraudster. Fraud happens
medium companies) all the time, and no one is immune.
no Auditors
signs reportAnd it covers every industry sector, not
of abating.
just fastmoving
Directors reportconsumer goods (FMCG). Dont become
yet, utilise
Now that youa credit information
have all providerthe
that information, (such as Graydon
big question is UK
Ltd),do
what which
you features
do with it?a specialist
As a creditfraud-detection
manager, yourteam.role is to
put on your wizards hat and decipher what these figures
mean. The job may sound intimidating, but if you take it a
Stick to Your Guns
step at a time, youll soon impress your colleagues with your
wizardry and your wise decisions!
In this
the chapter,
good of yourwecompany.
discuss the key forget
Never components to consider
that! Refuse to be
when
rushed reviewing an annual
into opening account
an account and how
even if youtohave
interpret those
the head
numbers to get thedown
of sales breathing most your
accurate
neck.and
Becomprehensive infor
diligent and thorough,
mation. We also
ensure that look atfollows
everyone other factors that can help
the procedures, you get
and dont a
agree
more comprehensive financial picture of the company.
14
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Taking
MonitoraCustomers
Holistic Approach
with a CIP
An annual account
Topnotch is much more
credit information than historical
providers data fromsys-
have monitoring
public
tems forrecords.
clientsIf use.
you take
Manythe information
credit it contains
information at face
providers have
value, youll shortchange
a monitoring system thatyourself. And that
automatically skewed
alters interpre
a rating (either
tation
up or will
down)likely leadon
based to an
your making
event wonky
change credit decisions.
perhaps the filing
Now,
of newthat isnt going
accounts to help you
or changes get aheadUsing
in directors. in your career,
that systemis it?
When
months interpreted
ago is stillcorrectly,
relevant. aIf companys
your creditannual account
information pro-can
do these things:
Give you
provider, guidance about the amount of credit to extend
get one!
to a company
Help you predict a companys willingness to pay
Help you predict business failure
Discovering the Trends

Abecome
companys yearend
a hero or at figures
least tomay
say,look strong,
I told but if you
you so!
make a value judgment based solely on yearend figures, you
may be sorry!

To get a better grasp of a companys financial health, look at
a companys accounts over the last three to five years. Your
Despite
goal is toall your
spot due diligence, you may still be taken in by a
trends.
Commercial
Are fraud up
sales trending is aormultibillionpound
down? How about threat that shows
the companys
profits, net worth, and shareholders funds? Thesesector,
no signs of abating. And it covers every industry not
are key
just fastmoving
indicators consumerfinancial
of a companys goods (FMCG). Dont
health, so youbecome
need to
complacent.
know if theyreEnsure detection
increasing methods are
or decreasing. in place
Ideally, youor, better
should
yet, utilise a credit information provider
see a steady upward line in each category. (such as Graydon UK
For example, at 1 billion, Company ABCs annual sales figures
may look strong until a comparison of previous sales figures
Stick to Your Guns
shows theyve been steadily declining over the past five years.
Numbers dont lie, but interpreted in isolation, they may not
give
As ayou theprofessional,
credit real picture, you
either.
hold a great responsibility for
Yearend figures
rushed into viewed
opening in isolation
an account can ifbeyou
even deceiving.
have theTry to
head
view the breathing
of sales figures fordown
the last three
your to Be
neck. fivediligent
years. and thorough,
36
Understanding Credit Risk Chapter3: Decoding
For Dummies, Annual
Graydon Accounts
Special Edition 15

Table31 shows a financially healthy company. Look for year
onyear sales growth and increasing profits.

Table 3-1 Snapshot
tems for clients use. Many of credit
a Healthy Company
information providers have
Number ofup or down) based on 52
weeks an event change52 perhaps 52 the filing 52
Accounts date
of new accounts13/09/2014
or changes 14/09/2013
in directors. 15/09/2012
Using 17/09/2011
that system
Currency can let you know if the
GBPcredit limit you
GBP set for a
GBP customer six
GBP
SALES vider doesnt have 2786250
a monitoring 2583515
system in2297946
place, shop 2096422
around
for a new
Cost of goods sold one! And if you
2253549 dont have
2089637 a credit information
1930835 1739249
provider, get one!
GROSS PROFIT 532701 493878 367111 357173
Wages and salaries 312730 257986 231284 197488

Directors emoluments
Auditors fees 228
923
165 75
806
120
994 689
Dont keep that new

Trading profit information
380416 youve collected
339142 273022 all to 250833
your-
Depreciation
keep them apprised96943 91030
about the companys 88751 Voice your
clients. 69645
OPERATING concerns.
PROFIT No one likes
283473nasty surprises!
248112 Heres your chance
184271 to
181188
become
Nontrading incomea hero or at least to (10318)
say, I told you so!
5 8
Interest payable 9521 647 16769 13134

PRETAX PROFIT 273952 237147 167507 168062
Despite
The all your
balance due
sheet diligence,
extract you may
in Table32 still be
shows taken in by a
yearonyear
growth in net worth/shareholders funds. For a financially is immune.
Commercial fraud is a multibillionpound threat
healthy company, the net worth should be a positive number that shows
no signs of abating. And it covers every industry
that has been growing over a period of years in tandem withsector, not
just fastmoving
sales and profits.consumer goods (FMCG). Dont become
Table 3-2 Growth in Net Worth/Shareholders Funds
SHARE CAPITAL + RESERVES 293718 287336 188219 179018
Stick to Your Guns

Share capital + sundry reserves
Issued share capital 50000 50000
52539
50000
51719
50000
50966 50546

Sundry reserves 2539 1719 966 546
Profit and rushed
loss account 241179 even
into opening an account 235617if you137253 128472
have the head
of sales
SHAREHOLDERS FUNDS breathing down your
293718 neck. Be
287336diligent and
188219 thorough,
179018
CAPITAL EMPLOYED 321969 324616 233866
to credit account facilities until youre 100 per cent sure. 225677
You
16
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

Look at the profit margins as well. If Company ABC recorded
sales of 50 million and pretax profits of 1,000, what does
that tell you? Profit margins are slim!
Knowing Your Industry

How you interpret the numbers also depends on the industry
involved. Get to know the peculiarities of your industry. The
Internet is a great place to start.
These questions can help you get a feel for an industry:
provider, get one!
Is it a thriving sector, in general?

Do earnings fluctuate with the seasons?
Is its success dependent upon another industry?
What are its prospects for growth?
keep
Isthem apprised
its market about
share the companys
expanding clients. Voice your
or declining?
Is it an antiquated industry that hasnt kept up with the
times, or an innovative, fledgling industry?
How well is it anticipated to fare in the current economic
climate?
Profit margins vary from industry to industry, so compare

companies within the same sector. For retail, a 1per cent profit
margin is typical. Even a giant of a business like Tesco makes
only modest profit margins when it makes a profit at all!
The more you know about an industry, the more likely you are
to make good decisions about businesses in that sector.
Considering Liquidity
Stick to Your Guns
Liquidity the difference between current assets (monies
accrued or due to be received within one year) and current
liabilities (monies due to be paid within one year) is just as
important an indicator as a companys net worth.
Liquidity ratios can provide information about a companys
ability to meet its shortterm financial obligations. They can
determine whether youre likely to be paid, and when!
36
For Dummies, Annual
Graydon Accounts
Special Edition 17

This is a simple but powerful concept. For example, if you
earn 2,000 per month and your expenses total 1,000 per
month, you have 1,000 to play with. Life is good!
tems
But for clients
if you use. Many
earn 1,000 creditand
per month information providers
your expenses totalhave
a monitoring
2,000, system
your world thatdifferent.
looks automatically
Youllalters
have toa rating (either
be miserly
up oryouve
until down)worked
based on anway
your event change
back perhaps
to positive the filing
liquidity!
can letbusinesses
When you know are if the credit
short on limit you setfunds,
accessible for a customer
they have six
to
months ago
consider is still relevant.
supplementing theirIf income
your credit information pro-
by borrowing.
Factoring in Borrowed Funds

provider, get one!

These days, many companies borrow funds at some point. It
may be a loan, an overdraft, or assetbased lending, which is
increasingly becoming the norm.
self! Liaise with
Assetbased your
lending is boss and other
borrowing fundssenior management
against a security. and
If
keep them
youve ever apprised
borrowedabout theyour
against companys
mortgage,clients. Voice the
you know your
concerns.
basic No one
concept. Booklikes nasty
debts surprises!
(monies Heres your
a companys chance
invoiced to
but
become
hasnt yeta collected)
hero or at least
can alsotobe
say, I told
used you so!
as security.
No matter what the form a loan, an overdraft or assetbased

lending borrowing money always comes at a cost in the form
of interest payments.
Look at the level of funds a company has borrowed and how
much interest its paying. Then take another look at those
trends to see how this changes the picture.
Raise a big red flag when a trend shows a decline in sales and
profits combined with an increase in borrowing!
Ensuring the Accounts Current

Stick to Your Guns
Are the accounts filed with Companies House up to date with
regards to the companys legal obligations? Specific rules
govern filing requirements for public limited companies and
private companies. And theyre different for each entity.
A private limited company must file 21 months from its
incorporation date, and thereafter within nine months
after its yearend. For example, if a private limited
18
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

companys yearend was in December 2014, it must file its
results no later than the end of September 2015.
A public limited company must file 18 months from its
incorporation date, and thereafter within six months
after its yearend. For example, if a public limited com
panys yearend was in December 2014, it must file its
results no later than the end of June 2015.
Filed reports are historical data. Always supplement them
with current results from your own research.
Investigating the Directors

provider, get one!

Dont forget to dig up info on the guys whore calling the shots.
Do the directors have a track record of managing successful
businesses, or mismanaging failures?
By company law, a director is obligated to list all other direc
torships he or she held within the last seven years.
Although not listed as directors, shareholders can run the
company. In that case, theyre called shadow directors.

If the company is a new limited entity, look at their business
experience. For example, if a directors prior work experience
Despite on
focused all retail,
your dueyoudiligence,
should doyou may still beiftaken
a doubletake he orin byisa
she
fraudster.
listed Fraud happens
as director all the time,
of an engineering and no one is immune.
company!
no more
Its signs likely
of abating.
that aAnd it covers
director withevery industry
experience sector,
in one not
indus
justparlays
try fastmoving consumer
that expertise togoods
found(FMCG). Dont
his or her ownbecome
business.
complacent.
Thats how mostEnsure detection
businesses getmethods are in place or, better
started today.
ALtd),
newwhich features
business seeksacredit
specialist fraud-detection
opportunities. team.
Find out the
complete story behind its formation, and whether its a sole
trader, a partnership, or a private or public limited company.
Stick to Your Guns
The risk status of a nonlimited business (sole trader or part
nership) is different from that of a limited business. With a
nonlimited business, the owners personal assets can be
tapped to pay off debt, but the owners personal assets are
protected with a limited business.
36
For Dummies, Annual
Graydon Accounts
Special Edition 19
Looking
Monitor at PostFiled
Customers Accounts
with a CIP
Management
Topnotch creditaccounts offer more
information timely have
providers information about
monitoring sys-
the
temscompanys
for clientsfinancial status
use. Many thaninformation
credit the annualproviders
account. have
Typically, theyre
a monitoring prepared
system to show a companys
that automatically progress
alters a rating (either
to date, which can be compared to the filed
up or down) based on an event change perhaps the annual report.
filing
They
of newprovide
accountsmanagers with in
or changes thedirectors.
latest cashflow statistics
Using that systemon
which
can lettoyou
base shortterm
know decisions,
if the credit limit youandset
arefor
often used forsix
a customer a
companys
months agopresentation to banks
is still relevant. If yourwhen itsinformation
credit trying to procure
pro-
additional funding.
Management
provider, getaccounts
one! invariably omit taxation and potential
dividends until the trading figures are audited internally or
externally.

A draft account is a second type of postfiled account. This
account is typically very accurate and is often used as the
Dontfor
basis keep
thethat
nextnew
filedinformation
report. youve collected all to your-
keeptypes
Both them of
apprised
accounts about the companys
management clients.
and draft Voice
are your
helpful
concerns.
to No one likes
credit controllers nastythey
because surprises!
provideHeres your
a more chance to
uptodate
becomeofathe
picture hero or at least
companys to say,
trading I told you so!
figures.
Continue tothe
Mastering Fight Fraud
Basic Ratios
Despite
Many all your
ratios due diligence,
are available you managers
for credit may still betotaken
use ininassess
by a
fraudster. Fraud happens all the time, and
ing a companys accounts. You can measure how quicklyno one is immune.
aCommercial
company turns fraud is aits
over multibillionpound
stock, how quickly threat that shows
it collects on
invoices and a whole slew of other measurements,sector,
no signs of abating. And it covers every industry not
including
just fastmoving
performance consumer
ratios, liquiditygoods (FMCG).
ratios, Dont become
and solvency ratios.
yet, utilise
Your credit areference
credit information provider
agency generally (such as the
highlights Graydon
most UK
Ltd), which features a specialist
meaningful ratios in its credit reports. fraud-detection team.
But until youre a seasoned credit manager, stick to the

Stick to Your Guns
basics. After you have them down pat you can add more
sophisticated assessment tools to your toolbox.
the current
The good ofratio
youriscompany.
quite simple current
Never assets
forget that! divided
Refuse by
to be
current
rushed liabilities
into opening but
anits one ofthe
account evenmost important
if you have theratios
head
to
ofmaster. Table33down
sales breathing is an your
example
neck.ofBe
a balance
diligent sheet with a
and thorough,
2:1 current
ensure thatratio. A 2:1 follows
everyone currentthe
ratio is ideal andand
procedures, indicates a
dont agree
healthy liquidity position, but a 1:1 current ratio is acceptable.
20
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Monitor
Table 3-3 Customers with
Liquidity/Working a CIP
Capital
CURRENT ASSETS
Stock
tems for clients use. 1,000providers have
Many credit information
a monitoring system that automatically alters
Debtors a rating (either
10,000
Cash at bank 9,000
can let you know ifTOTAL ASSETS
the credit 20,000
limit you set for a customer six
CURRENTmonths ago is still relevant. If your credit information pro-
LIABILITIES
Trade creditors 5,000
provider, get one! Bank overdraft 4,000
H Purchase 1,000

TOTAL LIABILITIES 10,000
NET CURRENT ASSETS 10,000
self!balance
The Liaise with your
sheet bossthat
shows andthe
other senior has
company management and
20,000 avail
keepinthem
able apprised
current assetsabout the 10,000
to cover companys clients.liabilities,
in current Voice your
concerns.
leaving the No one likes
company nasty
with surprises!
a balance Heres in
of 10,000 your chance
liquid to
assets.
become
Thats a herogood
a pretty or at least toposition!
financial say, I told you so!
The quick ratio current assets, minus stock, divided by

current liabilities gives a more accurate measurement of
cash flow and liquidity. Why? Because you wont have the
conversion rate dollar
Despite all your amount until
due diligence, the stock
you may is taken
still be sold. in by a
By themselves,
Commercial most
fraud is ratios arent highly meaningful.
a multibillionpound threat thatTo shows
get
no signs of abating. And it covers every industrydata.
the real picture, compare them to historical A 2:1
sector, not
cjust
urrent or quick ratio
fastmoving looks goods
consumer great until you Dont
(FMCG). discover last
become
years ratio was
complacent. 3:1. And
Ensure the year
detection before are
methods thatinitplace
was 4:1!
or, better
Putting It All in Perspective
Stick to Your Guns
So, even when youre working with annual accounts, it isnt all
about the maths!
Common
the good sense
of yourand a desire Never
company. to uncover
forgetsubtle nuances
that! Refuse to are
be
also critical to making credit decisions. Learn how
rushed into opening an account even if you have the to finesse
head
that information
of sales breathingtodown
set credit
yourlimits
neck. Be
coming upand
diligent next!
thorough,
Chapter4with a CIP
Monitor Customers
Setting Credit Limits
In This Chapter
Evaluating creditworthiness
Learning why theget
provider, why behind a credit request is so important
one!
Utilising thirdparty reporting to your advantage

WDont keep
keep
hen that
self! Liaise
them
think you have
concerns.
new
youve
apprised
information
mastered
boss
aboutyou
everything
and
youveof
the basics
other
the need
collected
senior
companys
reading all
account (and reading between the lines), you mayand
with your management
to your-
a credit
clients.limits.
to set credit VoiceButyour
dont be soNo one Remember
hasty. likes nasty when
surprises! Heres
we said your
it isnt allchance
about to
become
the maths?a hero orthan
Rather at least tobasing
glibly say, I your
told you
finalso!
decision on
the annual account alone, keep investigating to give your
report more depth.
In this chapter, we discuss additional ways to supplement
your credit
Despite information
all your and help
due diligence, you
you maydetermine not just
still be taken in by a
whether
fraudster.to Fraud
extendhappens
credit, but howtime,
all the much credit!
and no one is immune.
Assessing the Credit Request
As yet, utilise manager,
a credit a credit information
you want toprovider
open new (such as Graydon
accounts. After UK
Ltd),
all, which features
increasing a specialist
sales (and revenue)fraud-detection team.
is key to your companys
financial health. But the quality and profitability of that
revenue are what really matter.
Stick to Your Guns
Good credit assessment helps to reduce bad debts and
increase profitability.
As a credit Youyou
professional, need a great
hold deal
a great of insight into
responsibility for
your clients situation and requirements to make
the good of your company. Never forget that! Refuse solidto be
drushed
ecisions.
The good
ensure news
that is therefollows
everyone are nothe
hard and fast rules!
procedures, and The
dontbad
agree
news is there are no hard and fast rules!
22
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Honing
Monitor in on creditworthiness
If the potential customer has been prevetted and found cred-
itworthy, thats great! If not, you need to analyse the annual
accounts, looking beyond the obvious and considering:
Are sales and profitability figures trending up or down
compared to the last three to five years?
Is the
months industry
ago thriving, Ifwith
is still relevant. yourpotential for future growth?
credit information pro-
How reputable and experienced are the directors?
provider, get one!
Comparing the amount of credit a company is requesting
to its annual total sales can also provide insight into the

companys purchasing requirements. If it requests a figure
that represents 75 per cent of its annual sales, you wouldnt
approve that credit limit, would you? We hope not!
That bringswith
self! Liaise up another
your boss question.
and otherHowsenior
large management
a supplier do and
you
want
keepto be to
them this company?
apprised about the A huge contract
companys can be
clients. tempting,
Voice your
but you have
concerns. Noto weigh
one likesthat against
nasty the risk
surprises! thatyour
Heres the company
chance to
may not pay
become you! Is
a hero ortheir business
at least to say,worth
I toldthe
yourisk?
so!
Better to take a lesson from XYZ Steel Company, which sells

its steel to multiple companies in different industries. If one
company or market falters, XYZ has relationships with many
others, allowing it to more easily absorb those losses.
Having all your eggs in one basket is dangerous even if that
basket is sporting a beautiful blue bow!
Keeping everything in balance
Ltd), which
Another features
factor a specialist
that influences thefraud-detection team.
credit limit is the price
of the product or service your business has to offer versus
the monetary amount or terms your potential customer has
Stick to Your Guns
requested. The two need to be in sync and realistic.
For
As aexample, if your business
credit professional, supplies
you hold fuelresponsibility
a great cards, you wont
for
grant a credit limit of 10 million to a oneman
the good of your company. Never forget that! Refuse taxi business.
to be
Likewise, if your
rushed into business
opening supplies
an account oil rigs
even to oil
if you exploration
have the head
businesses, you wont
of sales breathing downsetyour
a credit
neck.limit of 2,000.
Be diligent andIn thorough,
both
examples,
ensure thatthe credit limit
everyone is inconsistent
follows with the
the procedures, andprice
dontofagree
the
product or service.
36
Chapter4:
Understanding Credit Risk For Dummies, Setting
Graydon Credit Edition
Special Limits 23

Aim for the proper balance. Set a limit that benefits both your
customer and your company!

Investigating purchase patterns
Sometimes,
up or down)seemingly
based on out of thechange
an event blue, a business
perhapsbreaks from
the filing
its
of normal purchase
new accounts pattern. in directors. Using that system
or changes
For example,
months one
ago is ofrelevant.
still XYZ SteelIf Companys
your credit customers
informationhaspro-
been
viderpurchasing
doesnt have100a tonnes of steel
monitoring bar per
system month,
in place, andaround
shop then
suddenly
for a newincreases
one! And if the order
you donttohave
100,000 tonnes
a credit per month.
information
provider, get one!
Whats the first thing youd want to know if you were the
credit manager of XYZ? If you asked, Why is the customer

ordering so much steel this month? you get a gold star. You
need to know whats driving the request.
Dontfirst
Your keep thatisnew
step information
to contact youve collected
your friends all to your-
from the sales
self! Liaise with your boss and other senior management
department. They tell you that the customer was just awarded and
keep them apprised about the companys clients. Voice
a contract to construct a skyscraper taller than The Shard at your
concerns.
London No one
Bridge. Thatlikes nasty
puts the surprises!
customersHeres your
request in achance
whole to
become light.
different a hero or at least to say, I told you so!
This is where all the time you spent building a collaborative

relationship with the sales department pays off. The sales
department is closer to potential customers and regular
cDespite
ustomers alland
yourshould be able to
due diligence, answer
you yourbequestions
may still on a
taken in by
the spot or
fraudster. find happens
Fraud out for you.
all the time, and no one is immune.
Savvy credit
no signs managers
of abating. Andfind out theevery
it covers Why? behindsector,
industry their not
cjust
ustomers business
fastmoving requirements.
consumer goods (FMCG). Dont become
Take your investigation
yet, utilise several steps
a credit information beyond
provider (suchsimply learning
as Graydon UK
about your customer.
Ltd), which features aFind out about
specialist your customers
fraud-detection team.customer
and if need be, their customer as well. One break in the supply
chain be it goods or services can lead to the whole project
Stick to Your Guns

collapsing in a heap. Ask detailed questions, or get your
friends in sales to ask.
Utilising multiple reference points
of sales
Trade breathingcan
references down
giveyour
you neck. Beof
an idea diligent and limits
the credit thorough,
your
ensure that everyone
competitors follows
are trading to andthe
howprocedures, and dont
promptly theyre agree
being
24
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

paid. You may discover a business typically pays within
90 days even when the credit terms are 30 days. Do you
want that business as a customer? Probably not!
tems
Or youfor clients
may use.that
find out Many credit information
a potential providers
customer has been have
a monitoring
denied system
credit by that automatically
the competition. alters acredit
If you extend ratingto(either
them,
up or better
youd down)be based on aninevent
strategic change
setting perhaps
a limit and termsthe filing
that pro-
of new
tect youraccounts
company, or and
changes in directors.
aggressive Usingmanagement.
in account that system
Amonths ago is still
good customer is relevant.
one that If your
not only credit
pays,information
but pays onpro-time!
vider is
Profit doesnt
reducedhave
byaslow
monitoring
payment system in place, shop around
or nonpayment.
provider,
Credit get one!
reports are another source of detailed information
about businesses. Just be sure you use a reputable credit
reference agency and one that uses sophisticated scoring and
analytics to rate the amount of overall risk.
A 21stcentury credit report should do three things:

Predict the risk of business failure
concerns.
PredictNo one
the likes nasty
willingness ofsurprises!
a businessHeres
to payyour chance to
to terms
Detect unusual patterns in a companys activities
Continue to Fight
Realising it isnt Fraud
as easy as 1-2-3
No hard and
Despite fast due
all your rulesdiligence,
can guideyou youmaythrough the
still be process
taken in byofa
setting credit
fraudster. limits.
Fraud Each case
happens is time,
all the unique,and with its own
no one set of
is immune.
circumstances.
Commercial fraud Those
is acircumstances
multibillionpoundare often
threatin that
flux. shows
You
just cant take shortcuts.
fastmoving consumer Setting
goodscredit limits
(FMCG). calls
Dont for extreme
become
due diligence Ensure
complacent. impeccable intelligencegathering
detection methods are in place skills, a
or, better
dash of good
yet, utilise common
a credit sense, and
information strategic
provider analysis.
(such After UK
as Graydon
that,
Ltd),you
whichcanfeatures
set those credit limits
a specialist with confidence.
fraud-detection team.
Setting a credit limit isnt a onceanddone activity. Situations
Stick to Your Guns

can change overnight. Keep tabs on your customers on a
regular basis to update their information (and your credit
limit assessment).
the good
Make sureof your
your company. request
customers Never forget that!
or limit Refuseticks
increase to beall
rushed
the into
boxes onopening an account
your assessment even
form, notifjust
yousome
haveof
the head
them!
Chapter5with a CIP
Monitor Customers
Spotting Trade Credit Fraud
In This Chapter
Understanding the prevalence of fraud
Shedding light onget
provider, why fraud often goes unpunished
one!
Unveiling fraud: tools for your toolbox

WDont keep
keep
thatto
elcome
self! Liaise with
new
apprised
theinformation
your
Digital Age! youve
boss
about
and
the
other
collected
The Internet
senior
companys
hasall
management
huge changes in the way we do business. Some are
them clients.
welcome such as the ease of looking up information online
concerns.
to your-
made
Voice
and
your
rather thanNo one likes
poring over nasty
stackssurprises!
of paper. Heres
And someyourare
chance
not soto
become a hero
welcome or at
like when least to say,
corporate I told you
fraudsters use so!
the Internet to
create a seemingly legitimate business thats really a scam.

Like it or not, dealing with corporate fraud is the reality
of doing business these days and its on the increase.
Fraudsters
Despite all are
yourusing
due more sophisticated
diligence, measures
you may still to appear
be taken in by a
legitimate,
fraudster. making them more
Fraud happens difficult
all the time,to detect.
and no one And theyre
is immune.
expanding
Commercial their product
fraud lines.
is a multibillionpound threat that shows
Ten
justyears ago if you
fastmoving asked agoods
consumer group(FMCG).
of people if theyd
Dont been
become
affected by fraud,
complacent. most
Ensure would have
detection replied
methods areininthe negative.
place or, better
Thats because
yet, utilise backinformation
a credit then, fraud provider
typically (such
involved small items
as Graydon UK
of high value such as mobile telephones or laptops.
Ltd), which features a specialist fraud-detection team. But these
days, fraud can involve any and every product line.
Stick to Your Guns

Lets not forget the reason fraudsters continue to thrive.
Although no one would admit theyd purchased an iPad from
a bloke in the pub for 50 or that their business had snagged
aAs
hota credit
deal onprofessional,
a truckload you hold a great
of plumbing responsibility
fittings, the reality for
is, it
the good A
happens. oflot!
your company.have
Fraudsters Never forgetmarketplace
a ready that! Refuse in
towhich
be
rushed
to intoillgot
sell their opening an account even if you have the head
goods.
26
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

In this chapter, well discuss what fraud is, why it often goes
unreported or unpunished, and ways you can protect your
business from it.
Grasping How Fraud Flourishes

Fraud can be defined as an artifice by which the interests
of one party are injured by another party, or a stratagem
intended to obtain undue advantage over another party by
imposition or immoral means. It can also be defined as a
deception deliberately practised to secure unfair or unlawful
provider, get one!
gain or a piece of trickery. Its theft!

In 2013, the National Fraud Authority reported that the UK
economy lost around 52 billion to fraud. And while you might
think the biggest targets of fraudsters are major corporations
Dont gazillions
worth keep that of
new information
pounds, youve collected
most corporate all to your-
fraud victims are
self! Liaise
SMEs (smallwith
and your
mediumbossenterprises).
and other senior
Of themanagement
52 billion inand
keep them
reported apprised
frauds, about
almost 16the companys
billion related clients.
directlyVoice
to theyour
SME
sector.
The numbers become even more staggering when you include
unreported loss. Some financial experts say this brings that
52 billion figure closer to 80 billion!
Why would a loss go unreported? Well, some companies dont

want to admit theyve been duped. Theyd rather write the
loss off than reveal publicly that theyve been fleeced! (You
probably know a few people like that, too!) Other companies
dont want to take the time to report fraud because they
doubt the fraudsters will ever be caught and theyll be able to
recoup their losses.
With only a laptop, a fraudster can disguise himself or herself
as a multibillionpound corporation.
Stick to Your Guns

Knowing the Governments Role
Youre probably wondering why the police havent done more
to stop those fraudsters in their tracks. Sadly, police depart
ments have limited resources and other top priorities, like
solving murders!
36
Understanding Credit Risk Chapter5: Spotting
For Dummies, Trade
Graydon CreditEdition
Special Fraud 27

So if your local Bobby doesnt have time to investigate, where
does that leave you? Government intervention, perhaps? But
is the government serious about tackling corporate fraud?
Topnotch
Opinions credit
are information
divided, and heres providers
why. have monitoring sys-
In a monitoring
December 2013, system thenthat automatically
Home Secretary alters
Theresa a rating
May (either
up or down)
announced based
the Nationalon an eventAuthority
Fraud change would
perhaps be the filing
closed in
of new2014.
March accounts
A new orentity,
changes theinNational
directors. Using
Crime that system
Agency, was
ccan let you
reated knowa ifsingle
to bring the credit
focuslimit you
to the setagainst
fight for a customer
all crimes.six
months
Its missionagoisistostill
reducerelevant. If your
14 types credit information
of serious or organised pro-
vider doesnt
crime, of whichhave fraud a monitoring
is just one. system in tell
Time will place, shop
if this around
new
for a new will
approach one!be And if you dont have a credit information
effective.
provider, get one!
And if you think you neednt worry about fraud if the
companies youre doing business with are registered with
Companies House, think again. That would be nice, but that
isnt the case.
These are the two main functions of Companies House:
To incorporate and dissolve limited companies
become a hero
To store or at least
company to say, Iand
information told you it
make so!
publicly
available

Companies House doesnt guarantee the accuracy of the
information submitted to it. False documentation is often filed
with Companies House to give a fraudulent business an aura
of legitimacy. In fact, a large proportion of frauds are gener
ated from false documents being filed in the public domain.
Fraudsters create fictitious credit ratings, install false direc
tors and change address details to lull credit managers like
you into a false sense of security.
Creating a false company at Companies House is easy. A
company formerly based in Peckham, South East London,
listed three directors Bin Laden, Gadaffi, and Mubarak!
Stick to Your Guns

Fraud is more likely to be committed under the guise of a
private limited company than under a nonlimited entity.
Isthe good of your
Companies Housecompany. Never
to blame? Notforget
really.that! Refuse
Its just to be
following
rushed into
protocol opening an
by receiving account scanning
documents, even if you have
them thethe
into head
of sales and
system, breathing downfor
filing them your neck.
public Be diligent
viewing. and
It files thorough,
thousands
ofensure that everyone
documents daily andfollows the procedures,
cant verify each one. and dont agree
28
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

So who is responsible for the gigantic job of protecting
companies from fraud? You guessed it: credit managers!
Protecting Your Business

If the police and even the government have been ineffective at
stopping fraud, what chance do you have?
Youd be surprised. You can use many tools to combat fraud
sters. Here are some to put in your toolbox!
provider, get one!
Validating VAT numbers
If you have the businesss VAT number (Value Added Tax
ID) and you know the country of origin, validating the VAT
number
Dont keeponline
thatisnew
incredibly simple.
information Heres
youve how: all to your-
collected
keep1. Go to
them the VIESabout
apprised VAT Number Validation
the companys European
clients. Voice your
Commission Europe site (http://ec.europa.eu/
becometaxation_customs/vies/).
a hero or at least to say, I told you so!
2. Select the alleged country of origin in the Member
State dropdown box and enter the alleged companys
Continue to Fight Fraud VAT number.
3. Select your country from the Requester Member State
Despitedropdown
all your due
boxdiligence,
and enteryou may
your stillnumber.
VAT be taken in by a
4. Click the
Commercial Verify
fraud button.
is a multibillionpound threat that shows
For
justeasy reference,
fastmoving bookmark
consumer the European
goods Commission
(FMCG). Dont become VAT
Number Validation
complacent. Ensuresite!
detection methods are in place or, better
Another wayfeatures
Ltd), which to determine if a VAT
a specialist number is genuine
fraud-detection team.is to
use this simple, threestep calculation:
Stick to Your Guns 1. Write the number vertically, as shown in Figure51.

2. Multiply the first of the 7 digits by 8, the second by 7,
the third
As a credit by 6, andyou
professional, so on.
holdThen sumresponsibility
a great the total. for
the good of your company. Never forget that! Refuse to
3. Deduct 97 from the number you got in Step 2, until you be
rushedobtain
into opening an account
a negative even
figure. This if you have
negative figurethe head
should
of salesmatch
breathing down your neck. Be diligent and
the last two numbers of the VAT number. thorough,
36
For Dummies, Trade
Special Fraud 29

Step 1
GRAYDON UK LIMITED
Step 2 Step 3
VAT Number: credit information

Topnotch VAT Number:
providers haveVATmonitoring
Number: sys-
GB 238for
tems 7491clients
29 use. GB 238 7491
Many 29 information
credit GB 238 7491 29 have
providers
a 2monitoring system 2that automatically
* 8 = 16 alters
2 a rating
* 8 = (either
16
up3 or down) based on3 an event
* 7 = change
21 perhaps
3 * 7the
= filing
21
of8new accounts or changes
8 * 6in=directors.
48 Using
8 that
* 6 system
= 48
7 7 * 5 = 35 7 * 5 = 35
4 4 * 4 = 16
vider doesnt have a monitoring system in place,*shop
4 4 = around
16
* 3 =have
9 a new one! And if 9you dont
for 27 a credit * 3 = 27
9 information
1
provider, get one! 1 *2 = 2 1 *2 = 2
2 2 2
9 9 165 9 165 -97
Loop in Line Management 68 -97
Dont keep that new information youve collected all to -29 your-
Figure How
keep 5-1:
them to find a legitimate
apprised about the VAT number. clients. Voice your
companys
become
For newlya established
hero or atcompanies
least to say,with
I told
VATyou so!
numbers begin
ning with the number 1, you must add 55 to the number you
get in Step 2 before deducting 97 from it.
Going
Despite all online for info
your due diligence, you may still be taken in by a
You can utilise
Commercial the is
fraud Internet to check out other
a multibillionpound details
threat that that will
shows
give you an idea if the company is legitimate or not.
Looking at the
complacent. companys
Ensure street
detection vieware in place or, better
methods
yet, utilise you
Sometimes a credit
can information provider
find out about (such
a business as Graydon
simply by UK
Ltd), which
looking at itsfeatures
physicalalocation.
specialistFollow
fraud-detection team.
these steps:
1. Go to Instant Street View at www.instantstreet

Stick to Your Guns view.com.
2. Enter the street address of the business in the
As a credit
fillinprofessional,
box. you hold a great responsibility for
rushed
You can into
viewopening an account
the building in which even if you have
the business the head
is located,
of well
as salesasbreathing down your
the surrounding neck. Be diligent
neighbourhood. If theand thorough,
business is
ensure that
supposed to everyone follows thefacility,
be a manufacturing procedures,
but itsand dont agree
obviously in a
to credit account
residential facilities
area, you may wantuntiltoyoure 100 more
do some per cent sure. You
investigating!
30
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

On the other hand, dont be paranoid about every business
that operates from a residential address. Many small busi
nesses do, especially oneman bands. Alarm bells should ring,
Topnotch
however, if credit information
the order providers
value is above whathave
you monitoring
would expect sys-
temsafor
from clients
small use. Many
business credit
trading frominformation
a home. providers have
up orprobably
This down) based on an event
goes without change
saying, perhaps
but beware the filing
of delivering
of new
large accounts
orders or changesaddress!
to a residential in directors. Using that system
Determining
months ago isifstilltherelevant.
addressIfisyour
physical or virtual pro-
credit information
Sometimes an address is a virtual address as opposed to a
physical address. A virtual address is often an address, usually
provider, get one!
in an upscale or wellknown area, utilised by many businesses.
The problem is that none of them are actually located there!

Mail and phone calls are forwarded on to well, who knows
where! Fraudsters love the credibility of a virtual office. They
can appear to have genuine offices, whilst remaining outside
the jurisdiction
Dont keep thatin newwhich the fraudyouve
information is being perpetrated.
collected all to your-
You
keepcanthemverify business
apprised addresses
about at the Royal
the companys Mail
clients. site by
Voice your
following
concerns.these steps:
No one likes nasty surprises! Heres your chance to
1. Go to: http://www.royalmail.com/postcode
finder.

2. Enter the name of the alleged company to see what
address comes up, or enter the entire address to see if
Despiteitall
matches thediligence,
your due Royal Mail
yousearch.
may still be taken in by a
Virtual officesfraud
Commercial can be
is arented by phone or over
multibillionpound thethat
threat Internet
shows
without
no signsthe criminal And
of abating. everitsetting
coversfoot at the
every location.
industry sector, not
PO Box addresses
complacent. arent
Ensure valid addresses
detection methods are on in
their own
place or,and
better
fraudsters
yet, utiliseoften hide
a credit behind them.
information They arent
provider (such permanent
as Graydon UK
and can
Ltd), easily
which be changed
features without
a specialist the change going
fraud-detection on the
team.
public record.
StickFinding
to the
Your Guns
registration date of its web address
Be sure to find out when the company registered its web
address. If the
As a credit company claims
professional, to have
you hold been
a great in business for
responsibility for
athe
decade
goodand its website
of your company. wasNever
registered
forgetlast May,
that! thattoshould
Refuse be
raise a flag.
rushed intoWhoisSearch.com
opening an account can help if
even you find
you thethe
have registra
head
tion date.breathing
of sales Follow these
down steps:
your neck. Be diligent and thorough,
1. Goaccount
to credit to http://www.whoissearch.com.
facilities until youre 100 per cent sure. You
36
For Dummies, Trade
Special Fraud 31

2. Enter the companys URL in the text box.
3. Click Go.
Checking the documentation
up or
The down)isbased
Internet on an for
a godsend event change
quick perhapsand
factchecking theinforma
filing
of new
tion accounts
gathering, butoryou
changes in directors.
need to delve into Using that system
paperwork as well!
canclose
Pay let you know if to
attention thethe
credit limit you set for a customer six
following:
vider doesnt have
Signatures a monitoringfiled
on documents system
withinCompanies
place, shopHouse.
around
for aDo
newtheone! And if you
signatures dont
from the have a credit
previous information
years accounts
provider,
matchgettheone!
current signatures? Have there been recent
appointments at the director level? If so, compare
the directors appointment dates to the dates on the
submitted documents.
Accounts figures. In particular, look at the first years
Dont keep thatIf new
accounts. information
the company youvemaking
reported collected
a 20allper
to your-
cent
self! profit
Liaisein with
its first year, that should raise a flag! Look toand
your boss and other senior management see
keepifthem apprisedreserve
a revaluation about thewascompanys
included in clients. Voice
the first your
set of
concerns.
accounts.No one likes nasty
A company surprises!
shouldnt useHeres your chance
a revaluation reserveto
becomein itsa first
heroyear.
or Also,
at least to say,
does I toldcapital
the share you so!stated in the
accounts match the amount stated on the annual return?

Anything that sounds too good to be true probably is!
Unusual
Despite filing
all your duepatterns.
diligence, Companies generally
you may still filein
be taken around
by a
the same
fraudster. Fraudtime of the year
happens every
all the time,year.
andHas the company
no one is immune.
changedfraud
Commercial its office
is a address several times
multibillionpound in a that
threat shortshows
space
of time?
no signs Has it filed
of abating. Anddormant
it coversaccounts followed
every industry by annot
sector,
just amended
fastmoving trading set for
consumer the same
goods period?
(FMCG). Dont Has it submit
become
ted accounts
complacent. Ensureshortly after methods
detection yearend?areAreinaccounts
place or,filed
better
yet, for different
utilise trading
a credit periodsprovider
information within a(such
short as
period of each
Graydon UK
Ltd),other?
whichDoes the stated
features level fraud-detection
a specialist of issued share capital
team. in the
accounts match that recorded in the annual return?
Application versus credit report. Does all the informa
Stick to Your Guns tion match the VAT number, telephone number, email
address, business activity, website URL and other data?
Hotmail,
the goodYahoo
of yourorcompany.
Gmail used for aforget
Never business
that!email
Refuseaddress
to be
should
rushedraise a red flag!
Trade
ensure thatreferences. You may
everyone follows thebe tempted not
procedures, to dont
and bother agree
checking references. After all, no company lists a refer
wontence thats
totally going
avoid todebts,
bad say anything badavoid
but youll about it, right?
most But
of them!
32
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition

thats what fraudsters are counting on! Fraudulent busi
nesses usually use fraudulent references. And if they use
a genuine reference, chances are youll get an earful!
Orders. Fraudsters often change the mode of delivery on
the order from deliver to to will collect. They also may
schedule orders for delivery early in the month to give
them more time to disappear! If your credit terms are
30 days or monthly, theyll be long gone by the time you
start to collect!
Never let new customers collect their order unless theyve
prepaid!
provider, get one!
LoopWrapping
in Line itManagement
up
Due diligence is the key to avoiding fraud. Check everything
thoroughly. And new
Dont keep that dontinformation
let a sales representative
youve collected orall
anyone
to your-
else
self!pressure you
Liaise with intoboss
your giving
andanother
ordersenior
the green light untiland
management
youve thoroughly
keep them apprised investigated the potential
about the companys client.Voice
clients. You dont
your
want to be put into the position of explaining how
concerns. No one likes nasty surprises! Heres your chanceyou got to
snookered by a fraudulent
become a hero or at leastcompany, now,you
to say, I told do you?
so!
Youre the one wholl take the heat if you approve credit for a

sham company. So be thorough. A comprehensive check can
help you beat fraud in most, if not all, cases!
Who said it?
Here are just fastmoving
some consumer
interesting state- goods (FMCG).thats
B. Because Dont where
becomethe
complacent. Ensure
ments about crime and fraud from detection methods
money is. are in place or, better
yet, utilise a credit information
three totally disparate sources: the provider (such as Graydon UK
Ltd), which features a C. Evidence
specialist is sometimes
fraud-detection team.all that
notorious criminal John Dillinger,
separates the criminal from the
American business magnate Warren
successful businessman.
Buffett and comic book villain par
Stick to Your Guns
excellence Lex Luthor. Can you
guess who said what?
A. Its As
onlya when
creditthe
professional,
tide goes out you hold a great responsibility for
that you learn whos swimming
why he robbed banks). C: Luthor
naked.
A: Buffett. B: Dillinger (when asked
Chapter6with a CIP
Monitor Customers
Ten Key Ways to Keep
Up the Good Work

In This provider, get one!
Chapter
Rolling with the changes

Keeping current
Sharing your expertise
Moving forward
I
f youve scrutinised the preceding chapters (or at least
honed in on the parts of particular interest to you), youve

learned new skills or sharpened old ones. And thats great! But
dont stop now. Back in the 60s, legendary songwriter/artist
Bob Dylan told us the times they are achangin. His lyrics are
Despite
even alltoday.
truer your due
Ourdiligence,
world is inyou may stillstate
a constant be taken in by a
of change,
and to stay at the top of your game, you need to keep up! is immune.
no signs
Here of abating.
are ten ways toAnd
keepityour
covers every industry
expertise current.sector, not
Stay Abreast of New Legislation

As a credit professional, you need to be aware of new legisla-
Stick to Your Guns

tion that governs business conduct so you understand how
it affects your job and your businesses. Credit management
associations often provide valuable education on legislation
As aother
and creditrelevant
professional,
topics.you hold a great responsibility for
rushedout
Check into
theopening an account
Chartered Instituteof
even if you
Credit have the head
Management
of sales breathing down your neck.
(http://www.cicm.com). It keeps members upBe diligent and
to thorough,
date on
new legislation, changes to existing legislation, anddont
ensure that everyone follows the procedures, and otheragree
hot
to credit
topics account
through facilities until
publications, youreand
training, 100other
per cent sure. You
resources.
34
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Know Your
Monitor Clients News
Credit management
Topnotch isnt a onceanddone
credit information providers have deal!monitoring
Historical sys-
information is essential,
tems for clients use. Manybutcredit
you need to know providers
information whats going haveon
with your client
a monitoring today.that
system Gather information
automatically about
alters how well
a rating (or
(either
not!)
up oryour client
down) is performing
based on an eventinchange
todaysmarket
perhaps asthe
well as its
filing
prospects for the or
of new accounts future at least
changes in the short
in directors. Usingterm.
that You
systemdont
want to you
can let be bushwacked by your
know if the credit boss
limit youasking,
set forHow did we not
a customer six
know
monthsthat XYZ
ago Ltd was
is still goingIftoyour
relevant. fail credit
a month after they pro-
information signed
the contract?
Keeping
provider,current
get one!isnt just a preventive measure. Learning that
a company is expanding or has gained a lucrative contract,
and then alerting your sales department to potential opportu-

nities, can make you a hero!
Maintain Customer Contact

Communication
concerns. No one is likes
key tonasty
maintaining
surprises! good relationships
Heres your chance with
to
your
becomecustomers.
a hero Andor atcalling them
least to say,every
I toldmonth to find out
you so!
where that cheque is doesnt count! Make your customers feel
wanted and valued by making regular courtesy calls. You may

be able to pick up on early warning signs that portend poten-
tial problems on the horizon. Or, you may find out that the
company wants to increase its business with you!
Talk to The Competition

You may compete
complacent. Ensure against a business
detection methods for are
sales, but that
in place or, better
doesnt mean
yet, utilise you shouldnt
a credit interact
information with (such
provider your competition.
as Graydon UK
They
Ltd), may
whichhave the scoop
features on a customer
a specialist that canteam.
fraud-detection help you
decide whether to extend credit or not and vice versa.
Sharing experiences benefits everyone. If you advise a com-
Stick to Your Guns

petitor about the impending failure of a business, chances are
hell reciprocate next time round. Plus, youll earn a reputa-
tion for being an expert!
the good
Credit of your
circles and company.
forums areNeveralso aforget
greatthat! Refuse
source to be
of informa-
rushed
tion. Youinto
canopening
share your an account
concerns even if you have the
with likeminded head
individu-
of sales breathing down your neck. Be
als and take advantage of learning opportunities. diligent and thorough,
36
Chapter6:
Understanding TenFor
Credit Risk KeyDummies,
Ways to Keep Up the
Graydon GoodEdition
Special Work 35

To avoid potential legal pitfalls, choose a credit circle or
forum carefully. Make sure it has the right credentials and
follows strict guidelines. Ensure that your forum or circle
Topnotch
adheres credit information
to legislation, providers
particularly the Datahave monitoring
Protection Actsys-
tems
and theforCompetition
clients use.Act.
Many credit information providers have
Keep Your Paperwork Up to Date

Are you still using the same application form you used
20 years ago when you started working with the company?
Remember what we said about change? Changes in legislation
provider, get one!
may make forms outdated. Ensure all your paperwork, not
just the forms, is relevant and meets the legal specifications

for todays market. Even better, have a lawyer or a member of
your own legal team review your paperwork. Its for your own
protection.
self!while
And Liaisewere
with your
on the boss and
topic of other
creditsenior management
applications, its and
keep them that
imperative apprised
theyreabout
100 the
per companys
cent complete.clients. Voice your
Ninetyfive per
concerns.
cent No one
isnt good likes nasty
enough. surprises!
Complete Heres help
applications your you
chance
avoidto
become
future a hero or
headaches suchat least to say,
as slow I told and
payments you bad
so! debts.
Continue
Peruse thetoPress
FightRegularly
Fraud
Despite
The press allreleases
your dueondiligence,
a companysyou website
may stillare
be ataken
great,inand
by a
fraudster.
often Fraud
the first, happens
source all the
of good time,
news and no oneYou
information. is immune.
can find
Commercial
notices fraud is
of contract a multibillionpound
awards, expansions, and threat that shows
new products.
no signs of
Everyone abating.
loves And it covers
to announce every to
good news industry sector, not
the world!
complacent.
The Ensure
general press detectionjournals,
business methodsnewspapers,
are in placetrade
or, better
yet, utiliseaiscredit
magazines also ainformation
great source provider (such asespecially
of information, Graydon UK
Ltd), information.
now which features And a specialist
thats the fraud-detection
kind youre lookingteam. for,
right? The press offers a more balanced view of a company,
reporting adverse news as well as good news. And online
Stick to Your Guns
forums and chat rooms often discuss specific problems busi-
nesses and individuals have encountered with businesses.
Simple research can uncover a plethora of information that
can help you make better credit decisions.
Use Google Alerts (https://www.google.com/alerts#)
to keep tabs on particular businesses or topics. Youll receive
email alerts about them when they make the news. (Set the
frequency of alerts so you dont get overwhelmed!)
36
36 Understanding
UnderstandingCredit
CreditRisk
RiskFor
ForDummies,
Dummies,Graydon
GraydonSpecial
SpecialEdition
Edition
Monitor
Monitor Customers
Customers with
with aa CIP
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Despite
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fraudster.Fraud
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andno noone
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Commercialfraud fraudisisaamultibillionpound
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no signs of abating. And it covers every industry sector,not
signs of abating. And it covers every industry sector, not
just
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(FMCG).Dont
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fraud-detectionteam.
team.
Stick
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Your Guns
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As
Asaacredit
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professional,youyouhold
holdaagreat
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tobe
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thateveryone
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to credit account facilities until youre 100 per centsure.
credit account facilities until youre 100 per cent sure.You
You
wont
wonttotally
totallyavoid
avoidbad
baddebts,
debts,but
butyoull
youllavoid
avoidmost
mostof
ofthem!
them!
WILEY END USER LICENSE AGREEMENT
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These materials are 2016 John Wiley & Sons, Ltd.

. Any dissemination, distribution, or unauthorized use is strictly prohibited.

Graydon Special Edition

Stick to Your Guns

Monitor Customers with a CIP

Loop in Line Management

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHOR HAVE

Continue to Fight Fraud

Stick to Your Guns

Development Editor: Shari Held Business Development Representative:

Loop in Line Management Questioning Changes................................................................................................ 8

Continue to Fight Fraud

Ten Key Ways to Keep Up the Good Work. . . . . . . . . . . . 33

The secret to doing business and getting paid is, of course,

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About This Book

Stick to Your Guns

Take a holistic approach to credit risk that values your

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