In the past, I have talked about Risk-aware culture and Enterprise Risk but have not so far talked about a risk that is part of the business. In the same vein without taking that risk companies can’t survive. This situation becomes a reality as soon as a company or a lender issues Credit or lends money.Now as a CFO, this is a difficult balance to strike as credit risk is linked more to potential bankruptcy of a customer. So do you say no to a potential transaction because the financial metrics of a customer are weak or do you take the current benefits associated with the transaction to be executed and hope that bankruptcy situation doesn’t arise?

As you establish your credit practices there are many challenges to wrestle with. These challenges include:

• How do you price credit risk?
• Do you view credit at individual transaction level, customer level or portfolio level?
• Is credit practice to be looked at from time to exposure or over an extended period of time?
• Should credit be viewed as a cost or a way to enhance margin?
• What should be the management system of a company to drive common set of behaviour around credit practices?
• If you get stuck on a credit issue with customers, what mechanisms should you employ to complete collections and what’s the best way to balance these actions whilst maintaining good customer relationships
• When is the right time to take action and what are the triggers?

I have just listed a several questions that I am sure you do tackle on a daily basis. Most or all of these questions will have a different answer if you are in different economic environment. If some of these are not addressed correctly then the risk incurred can bring a company down and one of the example that comes to my mind is that of AIG. Prior to Lehman Brothers’ collapse, AIG was not only in the business of Insurance but it also took an important position in the credit default swap market. They acted as a prop desk for other financial institutions and held positions to allow for other banks to hedge their credit exposure. Though AIG benefitted from carrying that risks years prior to the financial crisis but when the financial crisis landed in 2008, AIG had to be rescued by the US Government.

Now all this could have been better managed if CFOs used advanced analytics to look at credit exposure from different dimensions. Today with analytics, CFOs will be able to see if the risks involved are beyond the company’s normal risk tolerance level. Today’s CFOs can look at strong credit evaluation, measurement and management practices all under one roof with the help of credit risk and cash flow analytics. This will allow CFOs to balance cost from those associated with giving credit to risks associated with giving credit. Though credit can be a difficult topic for finance and business but the fact remains that as long as bankruptcy risk exists, there are going to be costs, risks and benefits associated with the extension of credit.

Based on the questions that I have raised above, have you found the right balance and how are you using analytics to address evaluation and measurements of credit risks?