Abstract
M.Comm.
Many companies, especially in the steel industry, are today required to
dedicate much of their time to managing the risks they are faced with.
Risk can be defined as the uncertainty or probability of the potential deviation
from the expected or the norm. Risk management therefore encompasses all
activities undertaken by management, which seek to reduce either the
probability of a potential deviation and/or the quantum of the potential
deviation. The risk management process is therefore aimed at ensuring that
the steel company will deliver to its shareholders the earnings that are
expected of them.
In order to avoid these potential risks, the steel company has to make sure
that the clients that the company are doing business with have the ability and
willingness to pay their accounts. There is a very thin line between choosing
potential clients and the sales that will be gained from dealing with these
debtors, and the risk that these debtors has for the steel company. It is
therefore important to categorize the debtors into different risk profiles. After
the category of risk is identified, the steel company has to choose between
different credit insurance methods to cover risks. The methods that are
currently available in the steel industry are rigid, and are costing the company
money, that could have been invested elsewhere in the company.
It is therefore important to look at alternative methods to either avoid the risks
or cover the risks. It depends on the type of client the company is doing
business with. The clients can be classified as A, B, C or D risk profile. The
composition of the debtors book in terms of risk profiles will be the criteria for
choosing a method for credit insurance.