In very simplified terms, there are three steps that can help businesses make more money: (1) get new customers; (2) get more money out of existing customers; and (3) improve margins. While financial risk managers have little to no control over the first two steps, they deal with the third step every day. The less money a company loses, the more money it makes and the more cash it has available.
In the course of performing risk mitigation, the risk manager confronts many vendors, credit choices, collection options and strategies. In the construction and building materials industries specifically, there are four key financial risk protection devices that every company should consider.
1. Credit Considerations on the Front End
A potential customer wants to buy building materials or sign a contract to construct a building. Although it may be tempting to sign on the spot, it is imperative to consider possible risk. The first key financial risk protection a company can’t live without is checking a potential customer’s credit on the front end of the relationship.
Savvy companies understand that some business is just not worth having. Don’t be a company with a portfolio of business includes clients that aren’t accepted elsewhere. Doing a front-end credit scan, asset scan or solvency scan will pay dividends. Find out which companies may be a payment risk before they incur debt.
2. Monitoring Company Health Throughout the Relationship
When a credit check is run on a customer, it simply takes a static picture of that company’s position. As time goes on, however, things change. A company with good credit may be cash poor and become risky in a short period of time. A contractor that doesn’t have the ability to monitor the client’s on-going health will be blind to hazards. Therefore, the second financial protection essential is a tool or procedure to monitor the health of its customers as the customer relationship grows.
3. Lien and Bond Claim Protections on the Back End
After the start of the client relationship (the credit check) and the middle of the relationship (health monitoring), is the time to discuss the end of the relationship. If problems never arise with customers there is no need to contemplate a sour ending to the relationship. It’s the very nature of the risk manager’s job to deal with and mitigate the risk associated with these inevitable situations.
A risk manager can reduce the number of relationships that will resolve poorly through the first two protective devices. This third device enables a company to handle and mitigate those other circumstances. Lien and bond claim rights are, by far, the best remedy available to a construction or building materials company in the event of non-payment. It’s cheap, it’s powerful and it’s likely to help avoid expensive and unpredictable litigation.
The trick is to preserve the rights to use them, and for that, a contractor or supplier needs some type of lien policy and competent lien service to automate and navigate the process.
4. Procedures and Ejections
The final protective device is less specific than the first three, but is the glue that binds them. A company’s fourth and perhaps most valuable risk protection device is to simply have procedures.
Create a funnel for accounts and decision trees. Disperse it across the company and follow those rules. Follow the rules and get consistent results that can be measured, iterated and measured again.
Note that this section also includes ejections. There are exceptions to every rule, so create certain ejection opportunities, where staff can eject from the rigid policy when common sense demands it.