This article breaks down all the data sources used to calculate your customers’ Risk Group and the current formulas used to assign a debtor their risk group from those data sources.
Currently, our three data sources are:
Predictive Late Payment Risk (LPR) scores and Failure Risk (FR) scores from Australian and New Zealand commercial credit reporting bureau, illion (formerly know Dun & Bradstreet)
The days past due of your open invoices (bar: ‘excluded’ invoices).
Two settings you can configure for past due debts to define their lateness as ‘reasonable’ or ‘critical’. These settings reflect when you would emphasise manual communications and legal actions respectively. (We explain this in more details below see: Reasonable-to-Critical Scale)
We apply a combination of conditions to present you with Debtor Risk Groups and actions you may want to consider for the debtors per group.
Not Enough Information
Business as Usual
Watch and Monitor
Potential Relationship Issue
Prioritise Collection
Prepare for Legal Action
Bad Debt Risk
These groups are colour graded in the gauge on the ‘Customers’ page by how difficult the suggested recommended actions are. The grading ezyCollect provides does not refer to any level of priority for action - this is up to you to determine, depending on your preferences and chasing strategies.
If a debtor’s risk group rating changes, it means that data from at least one of the above three data sources has changed.
Note: Data sourced from illion is updated once per month.
Terminologies
[ezyBand] Late Payment Risk
Aggregations of Illion’s scores on the likelihood of a debtor being over 90 days past due on at least 10% of debt in the next 12 months. ezyCollect aggregates Illion’s scores into 4 groups: Low, Moderate, High and Special. (Special refers to events such as Strike Off Action, In Liquidation etc.)
For each business entity, Illion assigns a percentage chance for a debtor being over 90 days past due on at least 10% of debt in the next 12 months. The following table shows the risk ranges our aggregation yields.
[ezyBand] Failure Risk
Aggregations of illion’s scores on the likelihood of a debtor seeking legal relief from its creditors or ceasing operations leaving unpaid debts in the next 12 months. ezyCollect aggregates Failure Risk scores into 4 groups with the same names as for Late Payment Risk.
Remarks: Failure risk data is not available for Foreign Registered Businesses and Businesses in industries that do not lend themselves to scoring through this type of model. These include Government departments, insurance companies, law firms, accounting practices and the banking industry.
Reasonable-to-Critical Scale
Here we outline five “Past Due Types” assigned to a debtor via their most overdue, not ‘excluded’ invoice. The range includes Reasonable, Moderate, High, Severe and Critical.
The beginnings and ends of these groups is a simple calculation from two settings you can configure:
(The end of the) Reasonable Past Due Type: This should reflect the maximum number of days you would allow an invoice to be past the due date before prioritising manual—rather than automated— communications.The default value for this setting is 30 days.
(The beginning of the) Critical Past Due Type: This should reflect the maximum number of days you would allow an invoice to be past the due date before you would prioritise legal actions such as sending a demand letter or calling a debt collector. The default value for this setting is 90 days.
The Moderate, High and Severe Past Due Types are just evenly spaced regions between those settings. Using the default values for these settings, the reasonable-to-critical types would be defined as follows:
The Debtor Risk Groups Explained
The following section expands on the explanations provided on the dashboard, referencing Past Due Types, Late Payment and Failure Risk groups.
1) Not Enough Information
Condition:
Either Late Payment Risk ezyBand or Failure Risk groups are “Not Available”
Past Due Type < Severe
More Detailed Description: illion couldn’t match these debtors to business entities with qualified Late Payment and Failure risks. The likelihood of matching increases if you improve the data quality of these debtors’ contact information (esp. Providing an ABN or NZBN) in your accounting/ERP system.
Actions to Consider: Review the data quality in your accounting software / ERP for errors and/or omissions. Include your debtor’s ABN or NZBN.
2) Business as Usual
Condition:
Late Payment Risk ezyBand is Low
Failure Risk ezyBand is Low
Past Due Type is Reasonable
More Detailed Description: These debtors both have their invoices in the Reasonable Past Due Type and have low Late Payment and Failure Risks. Hence, we have no data to suggest you should consider any manual communications or related actions in particular.
Actions to Consider: Debtors in this group are the lowest priority to chase for payment. You may even want to consider extending terms of business with these debtors if they rarely leave this risk group.
3) Watch and Monitor
Condition 1:
Late Payment Risk ezyBand is Moderate or High
Past Due Type is Reasonable
Condition 2:
Failure Risk ezyBand is Moderate or High
Past Due Type is Reasonable
More Detailed Description: These debtors have their invoices in the Reasonable Past Due Type but Moderate-to-High late payment or failure risk. If these debtors maintain their risks, they will move through groups that lead to the ‘Prepare for Legal Action’ group faster than those in the ‘Business as Usual’ or ‘Not Enough Information Groups’.
Actions to Consider: You may want to activate ‘Add to Monitoring’ to be alerted of adverse events or request a ‘Credit Report’ for information on the associated Late Payment and Failure risks.
4) Potential Relationship Issue
Condition:
Late Payment Risk ezyBand is Low
Failure Risk ezyBand is Low
Past Due Type is Moderate or High
More Detailed Description: This debtor has low late payment and failure risks but has invoices exceeding the Moderate or High Past Due Types. While these two features aren’t necessarily related, there may be more opportunities in approaching manual communications with the intent of improving terms, payment attitudes and plans with the context that illion considers these debtors a low risk for being significantly more overdue.
Actions to Consider: Contacting the debtor to review your relationship with them before their lateness becomes ‘Severe’ e.g. to discuss their payment intentions, resolve any disputes, adjust terms, negotiate a payment plan etc.
5) Prioritise Collection
Condition 1
Late Payment Risk ezyBand is Moderate or High
Past Due Type is Moderate
Condition 2
Failure Risk ezyBand is Moderate or High
Past Due Type is Moderate
More Detailed Description: These debtors have their invoices in the Moderate to High Past Due Types and Moderate-to-High late payment or failure risk. They will be fast-tracked to ‘Prepare for Legal Action’ or ‘Bad Debt Risk’ groups.
Actions to Consider: You may want to pursue contact with this debtor with the intention of collecting payment as soon as possible. There is a good opportunity here to communicate with your debtor to avoid legal action.
6) Prepare for Legal Action
Condition 1
Past Due Type is Severe or Critical
Condition 2
Late Payment Risk ezyBand is Moderate or High
Past Due Type is High
Condition 3
Failure Risk ezyBand is Moderate
Past Due Type is High
More Detailed Description: This debtor’s lateness is at least Severe, or High with Moderate-to-High late payment risks or Moderate failure risks. Based on your configurations, these debtors will soon be candidates for legal action.
Actions to Consider: More serious manual communication, sending a demand letter or engaging a debt collector.
7) Bad Debt Risk
Condition 1
Past Due Type is Severe or Critical and Failure Risk ezyBand is not High
Condition 2
Failure Risk ezyBand is High
Past Due Type is High
Condition 3
Late Payment Risk or Failure Risk ezyBand is Special
Past Due Type is High
More Detailed Description: illion has matched this debtor to a business entity undergoing a special event such as a Strike Off Action, Liquidation etc. or has met the criteria for Prepare for Legal Action risk group with an additionally high failure risk.
Actions to Consider: In the case of a risk of a Special Event, check the customer contact information provided is correct. Otherwise, you may want to prioritise early manual communications and legal actions as they may prove relatively difficult due to their Failure Risk.