This chapter introduces the Credit and Collections risks in the firm, the main factors of risk and the key indicators to measure them, considering relevant information on the country economics. We will first consider macroeconomic factors like country risks and market specific risks, and we will drill-down until specific risks embedded in the product or the service provided by the firm. All these combined factors are important to assess the level of credit risk exposure of the firm, at any time. It is the role of the Credit and Collection Manager to include them in the considerations leading him to a credit decision.
We will first define the Credit and Collections risks management inside the general theory of Risk Management for the firm. The theory of risk management categorises the main risks of the firm as follows:
- Strategy
- Regulatory
- Finance and reporting
- Operational
Strategic risks
Startegic risks are associated with strategic choices (or lack of choices) that may cause losses or damage the firm. These risks are not under the responsibility of the Credit and Collections risk manager – the business strategy is defined by the firm management team and is set as a constant for him. We will further discuss the influence of the business strategy on the credit and collection risk policies.
Regulatory risks
Regulatory risks characterise the risks that firm activities do not comply with legal requirements. The term “regulator” describes all authorities that define the regulatory framework for the firm and its application.
Financial risks
Financial risks gather several types of risks with a potential financial impact on the firm. Among them, Market risks (currency, interest rates, raw materials, commodities and correlation between markets), Credit and solvency risks (credit and collections, cash-flow, insurance), Reporting risks, Capital structure risks and Model risks.
We consider Credit and collections risks as Financial risks. When we further relate to Market risk, Currency, Interest rates and others, it will relate to their impact on the Credit and collections risk. We have no pretention to address here all financial risks related to the banking systems, financial markets or commodities and currency markets.
When we address Operational risks in relation to Credit and collections, we assign to the Credit and Collections risk manager the overarching responsibility for the quality of all operational processes in the firm that may have an incidence on Credit and collections efficiency in the firm. This concept is wider than the common definition of the role, as it considers operational risks not only in the narrow field of Credit and collections processes but includes operational processes that occur before the collection stage – like product definition, sales process, customer setup, order management, delivery and customer service.
Therefore we do not limit the Credit and Collections risks definition as Financial risks but consider them also as a part of the Operational risks.