As a Credit Manager, you manage a critical customer-facing department. The credit department is the company's first line of defense against customer credit risk. Collection results provide the cash flow needed to run the company and minimize borrowing needs. Knowing your customer is a key part of managing customer relationships, risks, and collection results. During the pandemic, it was all but impossible to perform on-site visits. This took away the opportunity to meet face-to-face with customers to gain a firsthand understanding of who your company is selling to. Now that travel restrictions have eased, it may be difficult to get management approval to spend the time and budget dollars needed to visit your customers.
It is up to you to help your management understand the many advantages of customer onsite visits. There are both quantifiable and indirect returns on the time and cost investment involved. By meeting a customer's senior management, you can develop a relationship of trust and transparency that is impossible on a Zoom or telephone call. This can be of great value if they are issues down the line. Avoiding one large write-off can more than pay for an annual travel budget. Developing strong customer relationships and loyalty will drive revenue and profit opportunities.
Following is a checklist of the potential advantages you can expect from a customer onsite visit. Not all may apply to you specifically, but you are likely to find many of the following points useful.
1. A chance to meet and observe: As firm believers in the 5 c's of Credit, Credit Managers understand the importance of sizing up the character of a company's management and gaining insights into its operation. An onsite visit provides an opportunity to meet your key contacts, and to observe the process flow, systems capabilities, level of activity, and professionalism of the staff.
2. Review and discuss financials:
- Meet with management face to face: Some customers are reluctant to share proprietary information. They refuse to provide financial statements. An onsite meeting can open the opportunity to review the company's financials in private, ask for clarifications, and look across the table to calibrate management's openness and honesty.
- Detailed financial review: A review of the income statement, cash flow statement, and balance sheet provides transparency to the reasonableness of reported results and trends. It also opens a window into the company's accounting practices.
- Review forecasts:
- By understanding management's forecasted budget, revenue projections, and operating assumptions you can anticipate future credit requirements. Forecasts may also raise issues of concern.
- Forecasts can reveal future reliance on internal cash generation and external funding, including Capital Expenditure (CAPEX) financing alternatives and contingency plans.
- You will gain insight into the customer's financial policies and performance goals.
- By understanding management's forecasted budget, revenue projections, and operating assumptions you can anticipate future credit requirements. Forecasts may also raise issues of concern.
3. Review of underlying corporate documents: Particularly if you are meeting with a new customer, you can review underlying partnership agreements or other governance-related documents.
4. Review marketing plans and sales strategies: A company's future marketing strategies play a big part in potential sales growth and competitiveness. Plans to increase purchases from your company will help you determine the conditions necessary for a higher credit line.
5. Assess and discuss customer Strengths, Weaknesses, Opportunities, and Threats (SWOT):
- Determine competitive advantages: A company's competitiveness is a function of its products, prices, efficiency, and customer service. The customer may be in a mature industry with few competitors along with a stable product suite and customer base. Or they may be in a fast-paced environment, with heavy research and development costs. Remaining competitive, in a landscape of new competitive entrants, may require costly and dynamic product strategies. Understanding these factors will help you with your credit and collections strategy.
- Review the critical factors impacting future success: What new product launches are planned? What research and development funding is required? Is the company expanding its customer base or regional scope? Are there large projects or contracts pending?
- Review industry position and dynamics: Gain insights to benchmark the customer's performance with competitors and industry norms. A probing discussion with a customer's senior management will deepen your understanding of their industry and plans for adapting to changing trends to remain competitive.
6. A chance to compare your company to your competitor's products, process accuracy, and timeliness:
- What does the customer think of your company? Your customer's feedback can reveal issues you can take back for corrective action.
7. Review accounts receivable performance:
- Who do they sell to? Do a deep dive into their customer's customer base.
- Are there liquidity issues? Their credit and collection performance results provide the liquidity to meet obligations.
- Look for risks: Identify their AR concentrations, collection risks, and collection strategies.
8. Gain a firsthand understanding of internal systems:
- Are they leveraging automation? Review the level of automation in the order to cash process.
- Their AP practices impact your AR: Deal with issues related to the customer's Accounts Payable system and practices integrating into your system requirements and limitations. Their AP practices and systems control the payment frequency and method of payment to you.
This last bullet point cannot be overstated. For example, your Credit Today editor was once having difficulty collecting from a retailer. They disputed many invoices and delayed payments constantly. A short flight to visit them in person helped unearth the heart of the matter: invoices were missing a cross-reference number they required for invoices to be paid. Problem solved. These days, it is common for major corporations to unilaterally reset their payments to 90 or more days from the due date on the invoice as a matter of policy, and they often get away with it due to their size and influence on their vendor's overall revenue. Their AP heavily impacts the seller's AR.
To be paid, a seller must integrate with a customer's portals and/or integrate with EDI requirements to be paid – this extends throughout the food chain. Another very common example is a cash-strapped customer who delays payment because they do not have the liquidity to pay. Remember - your AR is your customer's AP. (Thanks to Bruce Lynn, Managing Partner at The FECG LLC for this astute phrase)
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