4Cs of Credit for Portfolio Analytics

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The New 4Cs of Credit: The Power of Portfolio Analytics

Most every business credit professional knows about the 4Cs of Credit – how character, capacity, condition, and capital are used to evaluate the financial risk of an applicant. Today, modern finance organizations should consider adhering to four new tenets, the 4Cs of credit for portfolio analytics.

Portfolio analytics (or portfolio analysis) is the strategic process of segmenting your customer base for review, analysis, and action. Segmentation can be by geographic region, industry, account size, business unit, or whichever is of value to your business; the insight gleaned from review provides a “big picture” view of your risk landscape. This knowledge-based approach to credit risk management provides organizations with an opportunity to effectively drive operational processes, enable strategic advantage, and ultimately place it in a position to enhance and drive profitable business results.

Finance and credit professionals have the unique capability of providing an introspective, insightful view of the behavior, characteristics, and profile of their customer base. This detail, when acted upon, is the foundation for confident decision-making and data-driven change in the credit and corporate realm.

How Customer Portfolio Analysis Can Drive Revenue

Credit portfolio analysts who do analyze their portfolio as a whole endorse the process because they’ve recognized the insight and the hidden, unique value such analysis offers. As a substantial business enabler, portfolio analytics allow credit professionals to create value and ultimately position themselves, their organization, and their companies for success. Here’s how: By analyzing the customer portfolio – whether for operational reasons, critical purposes, or both – a company that adjusts their behavior by one percent, one half of one percent, or even a quarter of one percent will significantly alter their company’s bottom line performance. Clearly, such diligence can easily pay for itself in a very short time.

The 4 C's of Credit for Portfolio Analytics:

Consistency – in the credit applications. Aggregation and segmentation of portfolio data lays the foundation for more strategic decision-making at all levels of an organization. A comprehensive portfolio analysis enables credit managers to implement a sound practice for establishing standards and timing for account reviews. This data-driven consistency also allows for the most unbiased credit decisions: enabling an objective approach for raising and lowering credit limits and eliminating the potential for subjectivity by person or a difference in output based on experience.

Compliance – with internal and external audit relationships. For example, consider audit requirements that are driven by corporate credit policy. Proactively sharing the insight learned from the portfolio review with internal auditors to witness the movement of risk – or lack thereof – can prove very powerful, virtually enlisting your audit team as a well-informed business partner (and eliminating a year-end interrogation). The insight provided by portfolio analytics also enables compliance and leverage with credit insurers and banks.

Consultancy – in relationships with internal business partners. Armed with this new insight, credit portfolio analysts now can collaborate with other stakeholders and take on a more consultancy role within the organization; it’s also critical if the company is considering any merger and acquisition activities.

Creativity – in using data to provide insight, uncover new opportunities, and drive value. When the customer base is properly assessed for risk and opportunity, the limits to creativity are boundless! For example, the credit team can identify the ideal customer profile that best suits the corporate or strategic needs and develop a risk-ranked and/or a profit-ranked list of potential prospects that can be shared with the sales team to pursue for buyer interest.

Strategic Customer Level Credit Management

Credit professionals should feel compelled to own, lead, and drive internal change. The discipline has moved from basic order management activities to more strategic customer level credit management and will significantly prosper when it applies the substantial operational and strategic advantages presented by portfolio analytics. The ability to segment accounts, profile customers, and ultimately drive business practices and results by applying portfolio analytics to their customer base will do just that.

Fully leveraging portfolio analytics may take some perseverance – especially at organizations where the internal understanding of roles and responsibilities are not clearly defined. However, these also represent the best environments, since they offer no restrictions on creating value and in some sense the “sky may be the limit.” Let’s face facts, at the end of the day, all quality initiatives, process improvements, and ancillary activities are ultimately judged by the value creation, and whether it results in a strategic or competitive advantage.

Click the link below to read the complete paper, 4Cs of Credit for Portfolio Analytics.

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