Know Your Customer
Credit management is still often associated with outstanding invoices and customers who pay late. But by the time an invoice is due, a significant portion of the credit risk has already been taken on. The customer has been accepted, commercial terms have been agreed upon, and products or services have been delivered.
Effective credit management therefore begins much earlier: with the question of who we do business with, under what terms, and what level of financial risk we are willing to accept.
The goal is not to eliminate risk entirely. In fact, doing business on credit is an important part of B2B trade. The goal is to consciously take on risk and continually reassess it. This requires more than just a credit score from an external provider. External credit information, commercial customer information, and actual payment behavior must together form a single, up-to-date picture.
“Know your customer” begins before the first order
With a new prospect, the most important piece of information is missing: firsthand experience. The organization has not yet been able to determine whether this customer pays invoices on time, honors agreements, or regularly causes disputes.
External credit information therefore serves as a logical starting point. Consider the legal entity with which business is conducted, group structure, financial position, creditworthiness, industry, country of incorporation, and available payment history. Based on this, an initial risk profile can be established.
That profile is then translated into commercial terms. What credit limit is appropriate? Is payment within 14, 30, or 60 days acceptable? Is prepayment desirable? Should a portion be paid in advance, or is additional collateral required?
This makes credit management an integral part of the commercial process, rather than a control that only takes place when the Finance department identifies a problem.
Moreover, a credit decision rarely has to be a simple “yes ” or “no.” There are many options between supplying on open account with no limits and not supplying at all. An organization can set a lower credit limit, agree to shorter payment terms, invoice in phases, or require additional security. This way, a sale can sometimes proceed responsibly without accepting the full risk.
A credit report doesn’t tell the whole story
External credit information reveals a lot about a company, but not everything about the relationship you have with it.
Internal customer information is at least as relevant in this regard. CRM systems such as Salesforce often contain a large part of the commercial context: accounts, opportunities, future revenue, products, touchpoints, and service cases.
That context is important for credit management. Suppose a customer currently has €100,000 in outstanding invoices and remains within their credit limit. On its own, this seems unproblematic. But when Sales expects to close a new €300,000 opportunity at the same time, the potential exposure changes significantly.
That information should be available before the deal is closed, not after the order has been processed.
The same applies to other commercial information. How is revenue with this customer trending? Are there any new major contracts in the works? Have any exceptional payment terms been agreed upon? Are there any ongoing service cases or commercial disputes?
After all, an outstanding invoice that remains unpaid because the customer is experiencing financial difficulties requires a different response than an invoice that is being withheld due to a substantive dispute.
That is why a credit controller must look beyond just an accounts receivable report. The relevant customer profile spans Sales, Finance, and Customer Service.
Payment behavior personalizes the risk profile
As soon as a prospect becomes a customer, a new and particularly valuable data source emerges: the actual payment behavior with your own organization.
An external credit score indicates a company’s general risk level. Its payment history with your organization, however, shows how that company behaves specifically toward you.
Does a customer consistently pay within the agreed-upon timeframe? Do payments usually arrive ten days late? Are reminders necessary before payment is made? Are payment agreements honored? Are there regular partial payments? Do payment arrears develop gradually or suddenly?
That behavior can paint a different picture than external credit information alone.
For example, a financially strong company may consistently pay late because it takes full advantage of its suppliers’ payment terms. Conversely, a company with a modest credit profile may have been paying reliably and predictably for years.
That is why the risk assessment becomes more reliable as external information is combined with your own payment experience. This makes credit management a dynamic process. A credit limit that made sense twelve months ago may no longer be appropriate today.
Don’t just look at payment delays; look at exposure
A common mistake is to assess credit risk solely based on outstanding invoices. But the actual exposure may be greater.
In addition to amounts already invoiced, there may be, for example, deliveries not yet invoiced, ongoing projects, or new sales opportunities. For Finance, it is therefore valuable to look beyond current accounts receivable.
This is precisely where CRM and financial data converge.
Sales knows which deals are coming up. The ERP system knows what has been ordered or delivered. Accounts Receivable knows which amounts are outstanding and how the customer pays. External credit information provides insight into changes outside the organization.
Together, these sources answer a much more relevant question:
How much risk are we actually exposed to with this customer if the business plans proceed as expected?
That’s why credit management is also important for growth. A customer experiencing strong growth may be commercially attractive, but at the same time may require increasing amounts of working capital and credit lines. Without visibility into total exposure, revenue can grow faster than the financial capacity available to support it.
From Periodic Checks to Continuous Credit Management
Traditionally, creditworthiness is often assessed at fixed intervals: upon customer onboarding or during an annual review. This provides a clear overview, but financial circumstances do not adhere to a calendar.
A customer might lose a major client. Payment terms might gradually lengthen without anyone noticing. A large new deal could suddenly increase exposure. A protracted dispute could distort the outstanding balance.
Modern credit management therefore monitors changes and ensures that relevant signals reach the right person at the right time.
That does not mean that every change must automatically lead to a hold. However, it must be clear when a reassessment is necessary.
For example, an organization can define thresholds for maximum exposure, deviations in payment behavior, changes in creditworthiness, or exceeding an agreed-upon credit limit. Within those parameters, standard decisions can be automated, and exceptions can be referred to a credit controller.
This also makes the credit policy itself practical to implement. Instead of a policy document stating that “high-risk customers must undergo additional assessment,” rules become part of the daily process: what information is used, what limits apply, who is authorized to deviate from them, and what approval is required?
Credit Management Is Not a Hindrance to Sales
Credit management and sales are sometimes pitted against each other. Sales wants to generate revenue; credit management is primarily concerned with preventing risk-taking.
That contrast is unnecessary.
Ultimately, a sale is only successful when the revenue is actually converted into cash. At the same time, an organization that tries to eliminate every risk has little room to do business.
Good credit management therefore does not seek the lowest credit limit, but rather a responsible commercial margin.
To achieve this, Sales and Finance must share the same view of the customer. Sales must be able to see how much credit is available and why certain conditions apply. Credit management must know which deals are in the pipeline, how important the customer relationship is, and what commercial agreements have been made.
As a result, the final credit decision is not only better substantiated but also easier to explain.
Credit management thus ceases to be a mere final check after Sales has done its work. It becomes an integral part of the commercial decision-making process itself: know your customer, understand your exposure, and decide under which conditions you want to do business.
Consequently, a healthy Order-to-Cash process does not begin with the invoice, but with the first commercial decision.