As the recession fear keeps rising, credit departments should start preparing for it by aligning their credit and collections policies with the changing times. But how do you get started? And, in times of such economic volatility, how do you mitigate credit risk exposure?
Join Andrea Wolfe, Robert Shultz, and Michelle Herman as they discuss how you could change your policies to manage credit risk exposure.
Dave Schmidt, Highako: Let’s start off by talking about policy changes.
It's essential for companies to get their credit and collections policies in line with the changing times. What changes or modifications can we make to our credit and collection policies to best manage credit risk exposure?
Andrea, why don’t you start?
Andrea Wolfe: First of all, your collection policy for your company is used in audits, and is used by the controller of the company to set guidelines for your company.
So it's always a moving target. So for us, we usually keep these factors as a guideline. And then we adjust them as and when we need to, based on current economic issues, current industry issues, and different things like that. For me, I also look at the delegation of authority, patrons, DSO, and percent currency. These are the key factors or key metric measurements that I look at when trying to adjust what's happening in the current industry.
Kelly Schmidt: I actually can play right off of that.
So most of what I heard her saying was, you know, you just want to pay attention to what's happening within the customers, as well as what's happening in the economy. The reason we're here today is because we're talking about customers going through a recession. And there are a lot of things that companies need to take into consideration when customers are going up and down to the recession.
For example, with Zillow, we also have to take into consideration the fact that, higher interest rates can have an impact on our customers. So it's important for us from a collection standpoint, to take a look at the trends with all of our customers. Whether it's our premiere agent, customers who are leads that we're sending out to agents versus our rentals.com, and various things like that. So we want to make sure that we're paying attention to all the trends. Such as DSO, month-over-month collections, what's happening with our top customers in the industry, those types of things.
We also want to make sure that we have the right people in the right place to be able to manage these things, and play off of who does what well within the company, so that we can also make sure that we're managing the teams internally well.
Dave Schmidt, Highako: Bob, Michelle. Do you have anything to add here?
Robert Shultz: Yes, I do have something to add to what has already been said. The first thing is to understand what's going on in the broader economy.
It depends on what's impacting your particular industry, or industries that you serve. It might even depend on the region that you're selling into. So you really have to get as much information as you can on what is really going on and what are the impacts on your customer base.
The other thing is to understand your company.
What's their risk? What level of risk are they willing to take to retain revenue? That's another thing to look at. So I would suggest, sit down with your senior executives to understand what is it that senior management's looking for. Understand what are their priorities.
And in terms of your credit policy, make adjustments. Like I would risk segment my portfolio and try to understand where do I have to ramp up the requirements for new customers. So that when I review my existing customers, I know that I'm really keeping my thumb on the on the risk, and understand where I need to crank up my collections.
In terms of the collections volume, I try to understand our policies. This helps me to explain them to my salespeople, and my customers. So that they too understand what do!
So in terms of the credit and collections policies, I think you need to incorporate all of these things and take a look at what you're doing. And maybe, what you're doing is perfectly fine! But if interest rates go up, if banking lending has changed, and if you have weak customers that are going to be impacted by that, then you need to adjust your credit and collection policies. The other thing is in collections. What are you looking at is a portfolio that's eighty-twenty. So you've basically got the majority of your cash flows from a very small proportion of your customers. So you really need to focus on those, and you need to handle the little ones. But if you don't have enough time to review a huge portfolio, then you could do what Kelly does! For example, if you have a huge portfolio, then your credit policy needs to reflect the reality of being able to maintain a connection with a massive amount of customers.
So that's how I would approach it and work it up from there.
Dave Schmidt, Highako: So what I'm hearing from the three of you is that you need to first align your whole company.
Alignment is the key and it's strategic! And then from there, you can move into the tactical solutions. Michelle, do you have anything else to add?
Michelle Herman: You know, the thought that came to my mind was, about the changing times, was, when you've got a credit and collection policy, I would have enlisted the youngest people on your team. The twenty-thirty-year-olds. They're accessing a bunch of different tools, websites, etc. See if they can poke holes in your policy, and identify weaknesses. Or use their help to see if there are other areas where you could enlist a barrage of tools that maybe we just don't even know about! This will make things rock solid and help us make sure that there are no holes that we're just not aware of, because we just don't have the time to explore every new alternative website and tool that's out there.
Dave Schmidt, Highako: That’s such a great suggestion!
This is part 6 of a 8-part series: Effective Managment of High Risk Customers. Watch the entire series below.
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