Receivables management and credit checks: how to set credit limits based on risk

The focus: how to set credit limits based on risk. A small set of four to six KPIs reported monthly works best: DSO, overdue share, payment behaviour of the largest customers, the resolution rate for disputed items, and cost per euro recovered.

Every KPI needs a target value, an owner and a trigger for action. A rise in DSO beyond a defined threshold should automatically prompt a review. A short written procedure is followed in daily practice more reliably than an extensive manual. A short note in the system replaces any later reconstruction from memory.

Clear responsibilities prevent friction between sales, accounting and legal. Sales knows the customer relationship, accounts receivable knows the payment status, legal knows enforcement. The process has to define who decides when and who escalates.

An escalation matrix based on amount and age of the receivable reduces one-off decisions. Small amounts run automatically, large amounts are reviewed individually. An annual review of whether the defined stages still fit the customer base is worthwhile. For the constellation set out here the rule is: how to set credit limits based on risk.

The system landscape determines the effort. Accounting software, ERP and payment processing should be connected so that incoming payments are allocated automatically and the remaining balance is always shown correctly.

An export in a clearly defined format is essential as soon as cases are handed to a service provider. An interface or a structured CSV file is far superior to a manual collection of documents. Effective receivables management combines prevention before the due date with consistent escalation after it. Standardisation reduces effort here far more than additional checking does.

Escalation rules should be written down: which stage applies from which day of default, from which amount an individual review takes place, and from when a case is automatically passed to collection or legal.

Four-eyes approval for write-offs and a documented sign-off for instalment plans belong here too. Both protect against silent receivable losses. In receivables management, a documented standard process pays off more than a chain of individual decisions. That brings the starting point back into view: how to set credit limits based on risk.

The start works best in two waves. By day 30: stocktake, ageing analysis and definition of dunning levels. By day 90: automated reminders, escalation rules by amount and age, and monthly reporting.

Fine-tuning against the KPIs follows. What demonstrably works is kept; what shows no effect is adjusted. KPIs such as DSO and the overdue share make the effect of process changes visible. Settling this point once removes the need to renegotiate it in every individual case later.