Managing risk single-handedly in today's uncertain business climate is virtually impossible, notes Juan Colina of REL Consultancy Group. So what do you do? He suggests initiating the formation of a cross-functional "SWAT Team" that has a shared understanding of your company's strategic objectives and responsibility for achieving them. The SWAT team should be led by the CFO, Treasurer, or Controller to indicate the importance of the team.
"Risk must be addressed at the very beginning of the sales process," he says. "Therefore, the SWAT Team should include a representative from Sales, as well as from all relevant segments of the business including Manufacturing, Fulfillment, and Customer Service. Team members should be seasoned professionals with decision-making power--their authority and practical experience will enable better decision-making during crunch times ahead."
The SWAT Team should review the quality of the receivables on a monthly basis. To facilitate this, you should assume responsibility for designing and producing reports that prioritize workloads based on dollar value and credit risk. The team should establish a dispute resolution process that assigns responsibility to specific individuals and escalates responsibility for uncollected disputes to increasingly senior members of the company.
Success breeds success. The SWAT team's power will reside in its ability to operate in moments of crisis. This ability will be dependent on the level of trust built over many successful meetings.
Plan for Action
Turning strategic objectives into bottom-line results demands that the SWAT Team devises a practical, hands-on risk management plan with tactics that can be implemented now, says Colina. A risk management plan that avoids bad debt, the number one enemy of profitability, will include:
Strict customer segmentation -- Customer segmentation is not achieved simply by allocating overdue accounts to collectors. It must be addressed before the sales process begins with a sound sales approach that protects profitability by using appropriate sales channels for different customer segments. For example, once risky prospects have been identified, consider serving those segments through distributor channels rather than selling to them directly.
Enforceable credit policies - The recent string of corporate bankruptcies has renewed attention on the dangers of selling without credit controls. Putting shipments on hold for clients who haven't paid their bills is one of the most powerful weapons in a credit manager's arsenal -- although often the most difficult to implement. Collaborating with sales and operations to produce a clear credit hold policy can prevent credit managers from being perceived as overly cautious and will save indecision, heartache, and valuable time later.
Sales force incentives -- Align the sales force's compensation plan with the firm's strategic direction. Ideally, commissions should be paid only after the invoices are paid. If sales commissions are paid upon shipment, a mechanism must be created for reversing commissions for seriously delinquent payments or invoices that end up in bad debt write-offs.
Creativity - Thinking strategically means thinking creatively, says Colina. For example, one REL client recognized that start-up dot-com companies without credit histories were a risky customer segment. At the same time, the segment represented 10 percent of sales and was growing fast. To mitigate risk, a creative treasurer invested in insurance to cover sales made to e-business start-ups. This creative solution protected the client from bad debt write-offs when many dot-com firms went belly up.
REL Consultancy Group specializes in helping companies manage working capital and cash more effectively. Juan Colina is REL's global leader for the Capital Intensive Sector, which includes the pharmaceuticals, forest and paper products, biotechnology, commodity, and specialty chemicals, containers, and packaging, medical supplies, and devices industries. He has 10 years of consulting experience working with senior executives to design and implement Total Working Capital Optimization strategies to improve customer service, optimize operational processes and generate cash flow.
Join us live for our upcoming live session to learn how you can reduce financial risk for your business using a cross-functional team approach.
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