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A client who generates high turnover is not always the company’s most valuable client.
They may regularly delay payments, need many reminders, use long payment terms or leave a high overdue balance on the account. In that case good sales do not have to mean an equally good financial position.
That is why assessing clients should take into account not only the value of the invoices issued, but also when the money actually reaches the account and what risk comes with continuing the cooperation.
Why turnover alone does not show a client’s value
Two clients can generate similar sales but behave completely differently.
The first pays regularly, ahead of the due date. The second delays every invoice by several weeks, so the company has to finance the project, salaries and taxes from its own funds.
On paper both clients look similar. From a cash flow perspective, however, their value is completely different.
When assessing a relationship, it is therefore worth analysing:
- the value of sales
- payment punctuality
- the average number of days late
- the number of overdue invoices
- the total receivables balance
- the frequency of reminders
- the trend in the client’s behaviour
- the cost and scope of the service delivered
What is counterparty scoring?
Counterparty scoring is an assessment of a client’s payment risk prepared on the basis of their behaviour to date.
In Administy every business partner receives a rating that takes into account, among other things:
- payment history
- punctuality in settling invoices
- the number of days late
- the current overdue balance
- the value of open receivables
- the direction of change in payment behaviour
This lets the company tell apart a client who was late with a single invoice on one occasion from a counterparty whose delays are regular and gradually growing.
Who can you safely trust?
A deferred payment term is, in practice, a form of financing the client.
The company performs the service, bears the costs of its team and subcontractors, and still waits 14, 30, 60 or more days for payment. If the counterparty also regularly goes past the due date, the real credit period is even longer.
Scoring helps answer the questions:
- who can be offered a longer payment term
- who should pay an advance
- for which client it is worth setting staged payments
- whose trade credit should be limited
- when to put further work on hold until the overdue amount is paid
The terms of cooperation do not have to be the same for all clients. They should match the real risk.
How scoring helps with collections
Not every overdue invoice requires the same response.
A client with a good payment history who is a few days late can receive a neutral payment reminder. A counterparty with several overdue invoices and a growing debt balance should move faster to the next stage of recovering receivables.
Scoring lets you prioritise collection activities according to:
- the level of risk
- the value of the debt
- the length of the delay
- the client’s earlier behaviour
- the payment trend
This way the company does not waste time assessing each receivable by hand and can focus its efforts where the risk is highest.
How does Administy support the assessment of counterparties?
Administy analyses clients’ payment history and updates their rating on the basis of real data.
The system helps to:
- recognise clients who pay regularly
- detect worsening payment behaviour
- compare counterparties in terms of risk
- control the balance of open receivables
- set collection priorities
- make decisions about payment terms
- limit financing of risky clients
- include likely inflow dates in the cash flow forecast
This way decisions do not rest solely on the commercial relationship or a salesperson’s intuition. The company sees how the client actually behaves after an invoice is issued.
Can a client with late payments still be profitable?
Yes. Late payments do not always mean that the cooperation is unprofitable.
You do, however, have to take into account their impact on the whole company. A long wait for payment can mean:
- a larger cash gap
- the need to finance delivery of the project
- additional administrative work
- more frequent reminders and collection activities
- the risk of lacking funds for the company’s own liabilities
That is why it is worth combining payment analysis with client profitability. Only putting revenue, cost of service, margin and payment behaviour side by side shows a client’s real value to the company.
Summary
The most valuable client is not always the one who generates the highest sales. Payment punctuality, the overdue balance, the level of risk and the impact of the cooperation on cash flow also count.
Counterparty scoring in Administy helps you assess who can be trusted with deferred-term invoices, which receivables need a faster response, and what terms of cooperation will be safe for the company.
This way decisions about trade credit, advance payments, payment terms and collections can be made on the basis of data, not solely intuition.
The biggest client is not always the most valuable client. Only putting revenue, cost of service and payment behaviour side by side shows the real profitability of the cooperation.
