This Credit Crisis is Nothing New

As complicated and severe as the problems are with the Bear Stearns collapse and the government bailout, organizations remain ignorant as to how to manage their own credit risks. As a friend of mine said today, this crisis will separate the mediocre credit managers from those of us who have well-thought-out plans, processes, and strategies to manage the risk.

Why isn't risk managed well in corporations?

1) It's seen as inevitable that unpreventable losses will occur regardless of credit management practices.
2) Companies don't spend money to prevent anything (ie, credit work); they use all their resources cleaning up the messes (ie collections) which costs so much more.
3) Credit risk is an intangible until the losses pile up. It's hard to justify spending money to manage something you don't understand.

This week I received a call from a Chinese firm looking for information and assistance in collecting from a Russian customer. While I'm doing my best to consult with my client to successfully collect his 1-year old $300,000 receivable, the bigger question is "why didn't you contact me before you granted $300,000 in unsecured credit to a customer with unknown financial resources?" This client has learned his lesson the hard way. Unfortunately, this is a typical practice in granting credit for most companies. They're just betting on averages that their risks will pay off--just like Wall Street did.

We've got to change the mindset when it comes to managing trade receivables. It's not enough to ship it out and pray for payment. There needs to be an analysis performed on the risk to know whether it makes sense to provide credit before the deal is signed.

There are many more Bear Stearns-like scenarios out there. Some analysts are putting the eventual price tag at somewhere around $900 billion.

How much can you afford to lose before you transfer your resources to the smarter strategy that actually manages the risk--and not the strategy that simply reacts to the poor risk management decisions?