Credit scoring: the future of decisioning in the A/R process.(NACM's 110th Credit Congress & Exposition)

Credit scoring can be defined as a method of evaluating the credit worthiness of your customers through the implementation of a formula or set of rules. Testing the credit worthiness of your customer base via credit scoring or a statistical model is by no means a new science, but it is a methodology that has evolved over the last quarter of a century.

CRF performed detailed studies of credit scoring and its impact and application by American business on extending credit to other business customers. The studies revealed that the impact of current technological change in today's business arena are changing what credit functions are performed and how they will be fulfilled; margin pressure will affect credit function size and value; economic pressures will force the need to harness sophisticated technology to fill the void of fewer people doing the same job; and there will be a reduced emphasis on the role of the traditional credit manager and more emphasis given to management of the revenue chain process.

Another driver affecting the need for businesses to adopt credit scoring are requirements placed on companies relative to the new compliance issues. As receivables represent such a significant portion of the asset base it is important to adequately state the true value of the portfolio. Also, it is also inevitable that as the web begins to play a greater rote in the order process, businesses will be required to adopt credit-scoring methodology to remain competitive in their ability to meet customer needs and expectations.

Credit scoring provides clear benefits to the credit department; including speed, accuracy, consistency, reduction in bad debts, prioritization of collection activities and reduction in time required for risk assessment. Accuracy is assured because the review process is exempted from human error. Consistency is attained by using the same set of rules and weighted variables for review of the entire portfolio. Scoring permits regular review of the entire account base--quickly and efficiently identifying those accounts that require immediate attention for collection activity and isolating those customers that warrant further consideration through human intervention in the risk review process. The net effect is a substantial reduction in time required for risk assessment and a more systematic approach to the collection effort.

Credit scoring can also serve as a tool to identify accounts that represent the potential for fraud, and it can provide an overall evaluation of the receivable portfolio by identifying its quality and the ...