Expert's Corner - What Is The Risk Score?
The Risk Score is designed to alert users to signs of potential distress for clients within their Portfolio. The higher the Risk Score is, the higher the perceived level of risk to the funder.
5 key areas influence the Risk Score:
- Sales – invoices assigned by a client (increases only).
- Cash – money received to pay assigned invoices (reductions only).
- Dilutions – credits other than cash that are assigned to the ledger.
- Cash Desperation – The apparent need the client has for cash.
- Debtor concentration – the spread of invoices amongst different customers on a ledger (Factoring and clients where we receive extracted data only).
Debtor information is not always received into EQ Riskfactor, for example, in the case of Invoice Discounting clients. For this reason, every client's Risk Score is 'normalised', as described in Q1 below.
The Importance Of Reviewing Your Target DSO (Day Sales Outstanding)
Our clients regularly send us datasets for businesses that have unfortunately failed or been put into collect-out. We often see one measure that could have alerted users to an issue earlier, if it had been calculated correctly: the Target DSO.
The Risk Score is calculated in the background without any user input. However, for it to be accurate, the Target DSO must be regularly assessed and updated within EQ Riskfactor. Each business has its own ideal DSO, and if EQ Riskfactor were to adopt a one-size-fits-all approach to clients, the score would not be accurate.
Therefore, it is paramount that the Target DSO be regularly reviewed and set in line with the actual DSO.
Your Questions Answered
During our recent Masterclass, we covered 3 questions that all our users wanted to know more about:
Q3 – Which Risk Score measure should we use and why?
There are two Risk Scores available within EQ Riskfactor:
- The standard Risk Score - the total of all the individual 7 or 8 scores.
- The normalised Risk Score – the same total normalised to a score out of 100.
We would therefore recommend that the "Risk Score (Normalised)" be used for comparing clients and the "Risk Score" be used to identify what is driving the change in risk.
How Alarms are set within EQ Riskfactor might mean that a standard Risk Score turns to Caution or Alert, whereas the Risk Score (Normalised) is given a lower risk.