Proof of Insolvency

Feature Article | November 19, 2009 by admin

Lupe

When the dotcom bubble burst in 2001, a wave of insolvencies hit German booksellers. And the economic crisis also affected publishers C.H. Beck, headquartered in the German city of Munich. “We had no choice but to accept many cases of non-payment,” says Reinhard Strunk, head of accounting and controlling. C.H. Beck did not have reliable information about creditworthiness, especially for its 8,000 or so booksellers, which generated 80% of the company’s income. Although sales representatives sometimes provided information and Strunk and his team occasionally conducted research in the Börsenblatt magazine for the German book trade, the data was never used for proper evaluation purposes. It was background information, that’s all.

Often not in the picture

And anyway, the sales department was exclusively responsible for orders. “We often didn’t get the information at all. Agreements were drawn up directly between the sales representatives and the booksellers,” says Petra Martens, head of accounts receivable management. She explains that they often found out much too late that a customer was about to go under – which is also partly due to the industry’s structure. Many bookshops are owner-managed, which means that they inject private assets into their business to rescue it from impending bankruptcy. As a result, it’s difficult to get a picture of the business’s actual state of health.

Beck became particularly vigilant when several large bookstores disappeared in quick succession. “We knew that we had to install a system for risk monitoring, so that we wouldn’t get a nasty surprise one day,” Strunk explains.

Crefosprint tracks down insolvencies

“We were looking for a solution that detects gradual negative changes in payment history and creditworthiness at an early stage,” Strunk continues. After shopping around for a while, he and his team discovered Crefosprint. Crefosprint is a software package developed by ERP solution provider cormeta and business information service Creditreform for classifying customers, recovering debts, and managing receivables. All the modules are SAP-based. This was a stroke of luck for C.H. Beck, which had been working with SAP financials software for some years already. It meant the new modules could be seamlessly connected – which clinched the decision for Strunk and Martens. They didn’t want to have even more satellite systems that would only work with time-consuming and costly interface programming.

The modules, developed by Ettlingen, Germany-headquartered cormeta, meet C.H. Beck’s most important requirements: the transfer of external financial information straight to accounting, collection handling, and automatic assessment of creditworthiness and any changes to it (scoring). “Other solutions that we looked at only dealt with certain aspects, while cormeta covered all the processes for receivables management,” Martens explains.

A traffic light for every customer

The add-on Crefosprint Online enables users to access Creditreform’s database – with its 24 million data records from companies in 24 European countries. The financial information is obtained online from the SAP module for financial accounting and then linked to the customer. As a result, C.H. Beck can receive information about creditworthiness as early as the quotation stage and reduce the risk of having unpaid invoices. With Crefosprint risk management, other information can also be used, such as the company’s own experience with a customer’s payments, reports about the customer from sales representatives, or information from other credit bureaus. Each customer is evaluated using scorecards, based on statistical methods. The result of the scorecard evaluation is a rating for every customer, which puts each one in a risk category. The classification and rating depend on how individual criteria are weighted. With the click of a mouse, the user then accepts the credit limit suggestion generated by the scorecard result, and it is transferred to operational credit management. The scorecards have traffic light symbols. If, for example, a Creditreform message is received about a customer becoming insolvent, the light changes to red. This happens immediately, and current orders are cancelled.

If a customer fails to pay its invoices, it becomes a collection case. The Crefosprint module for collections supports and simplifies the procedure. It automatically recognizes outstanding items in the SAP solution for financial accounting, and displays the collection candidates in a list on the screen. The employee now decides which open items should be forwarded to Creditreform as collection orders using a special online communication tool. An integrated dialog function keeps employees in the accounts department up-to-date. Without leaving the SAP system, they can check out the current status at any time. Creditreform makes all changes available, with incoming messages displayed automatically.

Data from BAG also incorporated

Currently, four employees work with the new software. But the number could soon increase to ten, if risk management is extended to C.H. Beck’s 180,000 end customers and private customers. At the moment, it is only deployed for the bookstore division, because the volume of receivables is significantly greater in this area. Using the Crefosprint Online module, Creditreform information is sent straight to the accounting software. But that’s not all. With an add-on from cormeta, C.H. Beck is also able to include payment data from BAG – the German bookseller’s settlement association – in the risk classification. Every two weeks, BAG sends C.H. Beck a list of all defaulters. This list is then uploaded straight to the accounting solution – to the Crefosprint module for risk management – where the information is added to the scorecard. This is an important innovation for Martens and her colleagues: They used to receive the information on paper only.

Internal payment information is most important

As a rule, all customers are put in one of five risk categories, from category A (very good creditworthiness) to category F (poor creditworthiness). Then there’s a separate category for new and occasional customers. For customers with a high default risk, C.H. Beck protects itself with bank guarantees, advance payments, or assignments as collateral.  However, these forms of additional safeguarding are not automatic, for example, for all customers in a certain risk category. Instead, the sales department, company management, and the credit managers decide on a case-by-case basis.

Internal and external payment information is included in the assessment of creditworthiness, with internal payment information being weighted more heavily.  Then there’s data from Creditreform, Dun & Bradstreet (D&B), and from ZaC, Creditreform’s pool of information about company payment history. The D&B and ZaC information is not part of the Crefosprint solution, so cormeta set up the appropriate interfaces. From the Creditreform information, seven key figures are included in each customer’s scorecard: credit assessment, company prospects, legal form, number of employees, sales volume, age of the company, and payment method.

All changes in creditworthiness are displayed

Using all the data, the system calculates a score, which determines the risk category. In addition, the industry risk index from Creditreform is specified. Questionnaires filled out by sales employees are used as another instrument for categorization. These include questions such as: Are there any indications of negative developments at the customer, such as a large amount of warehouse stock or drops in sales? How are staffing levels developing? Is there high staff fluctuation? Each change that could impact creditworthiness is registered in the system. For example, a bookstore that always used to pay its invoices on time suddenly pays an invoice belatedly. Martens and her team would not notice such a change in payment history immediately. But an integrated software product such as Crefosprint spots it and calculates a new index, which immediately impacts the risk category. The system then suggests that the customer is reassessed, with an open activity automatically appearing in the credit manager’s worklist. If Creditreform revises its assessment of a company – for example, because it has merged with or been acquired by another organization – the scoring changes automatically, as does the credit limit if appropriate.

Speedy switch to advance payments

“We have significantly reduced default risk since we have been working with Crefosprint,” says Martens. She thinks back to several insolvencies where C.H. Beck spotted the danger in time and switched to advance payments or additional guarantees. Without the information from the new system, C.H. Beck would have lost receivables amounting to considerable sums. In the medium term, Strunk and Martens expect cases of non-payment to increase, among private customers as well as bookstores.

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