Trade credit is a major source of capital for businesses buying from other businesses in the United States. During the recent recession, banks have tightened borrowing requirements significantly. This has increased reliance by both the seller and the buyer on trade credit terms for the working capital needed to operate their businesses successfully. A company's ability to extend reasonable credit terms to its customers and collect what is owed promptly has had an increasing impact on revenue and profit. The Credit Manager is responsible to ensure that the company's credit and collection objectives are met.
Unfortunately, often the Credit Manger's role is misperceived by the Sales team. The Credit Manager may be seen as an obstacle to closing the deals needed to make a quarter or year-end revenue goal. The Credit Department is looked at as an overhead cost center, there by necessity, embedded somewhere deep in the Accounting and Finance function.
Credit Managers can change that perception. Be a hero by showing Sales and other stakeholders how you can help them develop "smart" revenue and profit opportunities. A properly run Credit Department is both a profit center and provides credit products your company can offer to beat the competition and maximize sales. Yes, credit policies and on-the-shelf alternatives can be a product just as valuable to the sales process as your company's products or services.
Making these good things happen boils down to three action areas for a Credit Manager:
Policy: A well-thought-out and communicated credit and collection policy.
Options: On-the-shelf alternatives to maximize revenue and manage risk within the risk tolerance of the company.
Tools: Excellent systematic tools to analyze creditworthiness, collect AR, administer cash receipts, manage disputes and deductions and provide transparency with customizable dashboards and management reporting.
The following offers further explanation and some ideas as to how these concepts can be implemented to maximize your company's revenue potential.
Credit and Collections Management is an Art and a Science
Anyone who has managed credit and collections over time knows that this profession is a mix of science and art. The science gives you the facts needed to understand the risks, the art is how you use the tools available to manage that risk and aggressively work to maximize profit opportunities.
There is an interesting quote that applies here: "Someone who owes you a little money is your slave. Someone who owes you a lot of money is your master". (Anonymous) The "Art" of credit risk and collections management is to keep everything in balance.
To start you have to answer a few questions about your credit and collections department. Your honest answers will help determine the value your department adds to the sales and profit of your company.
1. Are you helping to maximize your company's working capital opportunities? If yes, is that the perception of other departments? Your boss?
2. Does your department address your company's financial and marketing/sales strategies? Do you consider profit objectives, competitive conditions, product sales goals, etc. in your credit decisions?
3. Can you articulate the simple compelling need for your department? Do you communicate the return on the Company's investment (ROI) for your function?
4. Have you examined your targets and objectives to determine if they measure what is truly important to the company and profit objectives?
5. Do you help identify issues and improve broken processes and control procedures beyond the walls of your department?
6. Do you communicate the "why of your decisions? What are the risks and opportunities for the company to keep or gain market share? Identify the customers or channels with the highest growth "risk vs. reward" potential? Integrate credit and collections policies and controls with sales and marketing strategies.
Get the Basics in Place
Before we get into specifics about how a Credit Manager can help drive revenue growth, there are preparatory steps that must be in place.
Establish the Credit Collections Department as a Profit Center
It is an unfair assumption that credit risk and collections management is an isolated overhead necessity. The department is an integral part of the company's working capital engine needed to meet financial goals. Put the department's value in context. Credit and collections are a critical part of the quote-to-cash process. The department touches on processes involving Sales, Operations, Customer Service, Accounting Finance, and Treasury. Properly managed each of these functions is tied together by interrelated processes, relevant "Key Performance Indicators" (KPIs), and supporting systems and information tools.
The department adds to the bottom line in three ways:
1. Credit policies and options help meet revenue and profit performance.
2. Prompt collections reduce borrowing costs.
3. Efficient processes lower overhead costs.
Be Seen as an Ally to Your Sales Team
Let's Start with the Credit and Collection Policy. Salespeople do not like surprises. They want a policy that is fair, consistent, and therefore predictable. They want to be able to anticipate how a new account or opportunity will be handled by Credit. It starts with a well-thought-out credit, collection policy.
The policy should be sensitive to Sales needs, and the company's overall business strategy and be in line with the company's financial objectives. Once the policy is determined and signed off by the most senior company executive it must be documented and well communicated.
Be Proactively Involved with Your Sales Team, Other Company Stakeholders, and Customers
As the saying goes, "To be understood, you first have to understand." It is essential to know your Sales team and customers, their goals, concerns, and challenges. This will help you prioritize your efforts to maximize revenue and profit for your company and the customer. You will be better able to offer workable alternatives and if needed, explain why some business opportunities are simply not good business for your company.
Here are several actions you can take to build these relationships:
1. Attend Sales Team meetings. Listen first and then provide information of interest to them on opportunities and issues where their involvement can help. See if you are providing the type of reports and analysis that are true of use to them. Encourage them to involve you as deals are being developed.
2. Do a ride along with your Sales Reps. See how they spend their day, and the questions and issues that come up.
3. Visit your customers regularly. With the tight budgets today this can be a tough sell to your boss. There is a definite return on the customer visit travel investment. By building a relationship with your customer you will stay informed of potential risks, selling opportunities, and process issues within your own company with a negative impact on customer service and profitability. By understanding their business and anticipating sales growth opportunities you can be prepared with credit risk mitigation tools to help grow the business. You become proactive, a collaborator bringing value to the table. Not the "Dr. No" of credit management lore.
4. Met with other departments: "Walk in their shoes". Keep up with how new initiatives may impact your department or how your policies affect other operations in the company. Cooperation between departments starts with a better understanding of what each department does and how they affect each other. Better coordination positively impacts effectiveness and the ability to drive revenue and profit.
5. Credit Managers, listen to your staff: They can keep you informed and help you prevent roadblocks.
Focus on Sales and Profit Objectives
A good credit policy is not a revenue-limiting document. It is a blueprint of how to maximize profits and manage acceptable risk. A good motto for an effective Credit Manager is:
"We never say no….. We say yes, but how?" Remember true risk all boils down to two critical concerns. There may be a risk of payment being delayed beyond the stated terms or there is a risk the amount owed will never be paid. Not every credit decision involves the latter. Examining the true risk it leads you to how to approach an issue and the tools you can use to get make the sale.
Think about the impact your decision has on cash flow and profit. A higher profit potential justifies the greater risk. Let's face it; in most cases extending the right amount of credit is a balancing act. Ask, over the next ninety days, what is my risk of loss or payment delay?" What profits can I generate during that time period? How much can I leave on the table and still make a profit on sales to the customer if the customer never pays? Set a credit policy that addresses the actual situation, delayed payment, or risk of loss.
Conclusion: Work with your Sales team. Be seen as a partner helping to close the deals needed to make your company's revenue and profit objectives. An effective Credit Department is a profit center adding valuable self-funded liquidity and improves the company's cash flow. You can be a hero by helping close profitable sales with a proactive approach and credit policies offering on-the-shelf alternatives that supplement your company's products or services.
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