Credit Reports DebtorLogic PPSR and PPSA
5 mins read

Difference between reactive and proactive debtor management

Getting on the front foot with your debtor management can mean the difference between healthy cash flow and potential insolvency. There are tools and insights available for proactive debtor management, which can alert you to the dangers of customers at risk of default ahead of time. This empowers the decision-making process for your business, increasing the likelihood of recovering that debt. By contrast, reactive creditor management exposes you to unnecessary risk, stress, and cash flow insecurity.  

The dangers of reactive debtor management  

Reactive debtor management means you only take credit-recovery actions in the period following adverse events for partner business. Such an event could be a late payment, default, or insolvency proceedings including bankruptcy or external administration. If that occurs, only then are steps taken by your company to address and hasten the recovery of the debt owed. In particularly dire situations, this may require contacting the administrator or liquidator involved as quickly as possible, seeking to lodge a ‘proof of debt’ or similar.   

The fatal error of reactive debtor management is that events, such as bankruptcy or liquidation, already imply either high debts, low cash-in-the-bank, low asset holdings, or a combination of all three for the partner business. At the point of declaration, it may already be too late for recovery of the credit owed. They may simply not have enough in the bank, nor hold enough assets, to be able to pay you. If the credit they owe is high, the cash flow hit to your business might be enough to derail the operation.  

For example: A building company, within the notoriously late-paying Australian construction industry, is contracted by a developer to build a large block of units. The builders purchase the materials, hire the labour, sub-contract specialist providers, lay the groundwork and commence construction – all massive outgoings to their business. This scenario is high-risk, as it creates significant cash flow dependency for the builder on that singular developer. It is their sole project, occupying the full capacity of their operations. If those invoices to that one client don’t get paid: the builder may be at risk of instant insolvency. Despite this exposure, they opt to be more reactive in their credit management approach, as they know the customers personally and have an anecdotal trust in them. 

Unfortunately, the developer in question enters liquidation – only after which it is revealed that the builder is but one of many creditors owed (a detail that might have been revealed ahead of time with a more proactive strategy). Recovery efforts ensue, but at this point it is too little, too late. The developer simply doesn’t have the assets, liquid or non-liquid, to cover the spread of their debt to so many creditors. The full recovery of the debt owed is simply not possible at this point. The resultant cash flow hit is enormous, and the builder was unable to maintain the payment of wages, bills and the like. The viability of the builder is now at risk. 

Take a proactive approach to debtor management with CreditorWatch 

CreditorWatch offers a number of proactive debtor management solutions, empowering the foresight and decision-making of businesses across a swathe of industries, from Small-to-Medium (SME) enterprise through to large corporations. With the right tools, you avoid the risk exposure to bad debt that the insolvency of a trading partner brings – as you were aware ahead of time. As such. you can take action to extract payment prior to the event and bring the trading relationship to a close, if necessary.  

DebtorLogic – The use of the interactive DebtorLogic trade platform from CreditorWatch is fundamental to proactive debtor management. All trading partners, and outstanding credits, are brought into the one, central, user-friendly location – from where they can be managed with ease. It is the essential tool to judge the creditworthiness of partners, standardise and prioritise collections, and analyse your Aged-Trial Balance (ATB) to ensure you’re aware of late-payment indicators as early as possible. There’s no telling when a partner business may experience default risk, even if you have a longstanding trading relationship.  

Our exclusive trade payment data available gives an analytical edge when predicting which customers may experience payment difficulties, including the analysis of their entire payment history. As part of the suite, Payment Predictor gives cutting-edge indicators of default risk, algorithmically determining high-risk debtors as early as possible. Further to this, DebtorLogic even incorporates 24/7 monitoring and alerts. As a partner’s trading risk increases, or payments deteriorate, this is recognised and red-flagged to you as an alert in real-time, creating essential space to get ahead of the challenge.   

Even if your entire ATB is creditworthy, the system works to reduce the Days-Sales-Outstanding (DSO) to your business – the time to payment. DebtorLogic standardises the collections process for your business, providing debt collection tools that follow up a customer the moment a payment is late, or they are shown to have increased in credit risk. Your business needs that cash flow to perform optimally, and this platform enables you to proactively take steps to secure it.   

Credit Reporting & Risk Score – The credit reporting toolkit offered by CreditorWatch provides a further layer in your proactive debtor management strategy. It is the one-stop platform for customer payment ratings, enquiry numbers, risk data, ATO tax defaults, and other crucial indicators. Contained within the credit reporting suite, RiskScore utilises three extensive sub-categories of data, including over 11 million monthly trade lines, to give the most predictive score indicator of a partner’s credit risk available to your business. The machine-learning involved incorporates social macro-data, industry conditions, business maturity, court judgements and so much more to ensure this market-leading accuracy.  

Search a trading partner with their ABN or ACN on the CreditorWatch platform, and their RiskScore will be revealed, from 0-850. The higher the score, the lower the credit risk to your business. The accompanying credit rating provided, from A1 to F, gives even further insights into a partner’s riskiness, allowing for the judgement of creditworthiness at a mere glance.  

PPSRLogic – In certain instances, such as the long-term leasing of assets, it is essential that any security interest on that asset is appropriately registered. Without formal registration on the Personal Property Securities Register (PPSR), the risk to your business in the event of the loanee’s insolvency increases dramatically. It is imperative you be recognised by the Australian Financial Security Authority (AFSA) as a priority creditor, otherwise you fall down the hierarchy of creditors owed. If you fail to do so, and are determined to be an unsecured creditor, there may be no way of recovering even a percentage of the debt associated with that asset.  

PPSRLogic, powered by CreditorWatch, simplifies both the registration process with the PPSR, through intuitive integration of one-click application tool ApplyEasy, and the searching of any existing security interests on an asset. It is a necessary process to engage with if your security interests are to be legitimately recognised, yet so many businesses fail to comply due to the perceived complexity of the system. Our tools take the confusion, time wastage and hassle out of the process, to ensure protection against this form of bad debt.   

The credit management suite offered by CreditorWatch safeguards the cash flow of your business, creating the ideal conditions for growth, performance and optimal decision-making. If you’re seeking to take a more proactive approach to your debtor management, speak to our expert team today 

debtormanagement proactive reactive
Head of Sales
Over the course of the last 10 years, Justin has helped some of the largest business in Australia and New Zealand make better, more informed decisions levering first, second and third-party data. Having worked across almost every industry, Justin’s passion from data comes from its ability to predict future risk and identify potential for the mitigation of that risk.
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