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Use customer scoring for better credit decisions

Creating a customer scoring process is the first step towards segmenting your customers and helping you to make better credit decisions.

Within your customer base you’ll have a vast range of customers – from those who place regular orders and are the bread and butter of your business to those who make occasional, one-off orders – of whatever size. Dividing them into categories will help you manage these relationships better and create credit processes that support better revenue generation.

Once you’ve segmented your customer base, you can attach suitable procedures to each group to ensure you’re approaching these relationships in the best way.

Personalised processes

It makes sense to create more favourable terms and conditions for clients who account for a significant share of your turnover, compared to those who don’t. You may already differentiate between your customers without being aware of it, but if you do this in an organised and structured way through a customer scoring process, you can enhance your company’s efficiency and profitability.

Customer scoring process

Your clients will fall into different categories. Those who are the most profitable may not be those who generate the most revenue. In fact, the most profitable could be those who spend less but pay on time, so your cash flow isn’t affected and you don’t have to use resources chasing them for payment. Clear customer segmentation will enable you to take the right decisions more swiftly.

Customer scoring in five steps

First, you need to determine your scoring criteria, such as customer size, creditworthiness, payment behaviour, order size and frequency, and sector.

Next, create a simple matrix. Choose two criteria that are important, such as customer size and payment behaviour, and divide these criteria into categories. For instance, for customer size this could be: fewer than 20 employees, between 21 and 50, more than 50. You can then add weight to the various criteria, according to your business priorities. You can even score businesses for things like turnover, growth potential, alignment with your strategy and gross margin.

Once you’ve done this, you can decide a policy for the different scores. You may give those with higher scores a more flexible payment process. However, remember to pay close attention to those who absorb the most resources. Credit management expert Frans van den Heuvel estimates that Credit Managers spend over 60% of their time to merely one third of turnover.

Now you’ve established a customer scoring process, it’s important to review your customers’ score on a regular basis. They may have improved their finances and be paying on time, or the opposite may have happened. You may need to move customers into different segments or create different categories as your model evolves.

Finally, automate your customer scoring process – particularly if you have thousands of customers. Not only will this save you time, it will also reduce risk by eliminating the likelihood of making mistakes. There are a number of software programmes available that can help streamline your customer scoring process – which in turn will enable you to make better credit decisions and help your business grow.

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