Credit Engineering

creditworthiness: the earlier assessed the lower the cost The attitude toward creditworthiness in the economy varies among different individuals. Our recent polls have revealed some intriguing statistics: 50% consider credit risk to be as significant an obstacle to export as a lack of financing. 20% of executives, 30% of credit specialists, and 40% of finance directors do not perceive any credit risk in cash-in-advance transactions. 40% say that their management doesn't have true and fair picture of credit risk their company takes. To top it off, it's important to note that a proper assessment of credit risk doesn't always ensure wise decisions. Signs of Enron's impending bankruptcy were evident well before it occurred, yet none of the creditors withdrew their facilities. This mixed picture leads to the unfortunate conclusion that a credit risk culture is still under development. Especially in the realm of trade credit. Businesses are always focused on cost reduction, and it's equally apparent that every expense must be incurred wisely. To achieve this, those responsible for making credit decisions must have a clear understanding of the true cost of creditworthiness for a business. The following points shed light on the complexities of managing credit risk: #1 Cost of data: Following the essential 'garbage in, garbage out' rule, the quality of data for analysis cannot be overemphasized. Regardless of whether the data is collected by internal employees or an outsourcing supplier, it incurs a cost in terms of paid work time. #2 Cost of analysis: The need for professional analysis work is determined by factors such as the number of customers, transaction value, and more. As the importance of a transaction to a business increases, a higher level of analyst qualification is required, resulting in increased costs. #3 Cost of analysis time: The real cost of credit analysis can only be fully understood by those who deal with bad debts. This type of cost can be divided into three categories: i. When analysis is conducted before the transaction with subsequent monitoring, it includes costs related to data and analysis. ii. When analysis is performed after the first payment delay, the cost of collections must be added. This cost can vary, ranging from employee work time to collection services, which may exceed 10% of the transaction. iii. When analysis becomes a part of legal action (surprisingly common), it should encompass all legal fees and court expenses. This becomes the cost incurred by a company for not assessing the risk earlier. The principle 'there is no free credit' has two aspects: it's never free when you acquire it, and it also carries costs when used in business. Moreover, credit charges its fees regardless of one's willingness to pay them. So, the earlier you consider the credit and associated risk, the lower charges you will pay. Bon Crédit?? #credit #creditmanagement #creditrisk #creditworthiness #creditengineering

credit management and EBITDA Many companies rightfully prioritize budgeting from an investment perspective, recognizing that strategic spending yields tangible results. Over the past decades, a significant number of companies have focused on EBITDA (earnings before interest and taxes) as a key performance indicator (KPI). This choice is just as valid as any other, and a Credit Manager should not be positioned to challenge a company's chosen KPI. If a company opts for EBITDA, let's explore how we can optimize it. Addressing the requirements of the business credit function involves four primary objectives: #1 Overdue payments – ideally, minimized or eliminated. #2 Bad debts – ideally reduced to zero. #3 Lost sales – ideally reduced to zero. #4 Cost of Accounts Receivable (AR) service – ideally kept at a reasonable level. Overdue Payments: Given the focus on 'earnings before interest,' the impact of overdue payments and Days Sales Outstanding (DSO) on EBITDA is relatively minor. While timely payments are crucial, unfortunately, they are not factored into this metric. Bad Debts: From an accounting perspective, changes in the Provision for Bad Debts directly impact the Profit & Loss. An increase in this provision reduces EBITDA, while a decrease has the opposite effect. Therefore, minimizing Bad Debts translates to more favorable tangible results. Lost Sales: EBITDA is closely tied to turnover, making higher turnover preferable from various perspectives. Credit professionals actively contributing to sales efforts stand a significant chance of making a substantial positive impact. Service Cost: Even if receivables were zero, the cost of AR service could never be zero. However, achieving more with fewer expenses is always commendable. Often, a small number of highly qualified individuals can contribute more than a large group of highly motivated newcomers. In conclusion, the answer is both "Yes" and "No." YES, credit management can undoubtedly enhance EBITDA performance. NO, this doesn't imply anyone who identifies as a 'Credit Manager' can achieve this. Those promoting 'No money, no honey' credit policy, DSO reducers and overdue percent followers are surely the least. Businesses require individuals who can simultaneously boost sales, minimize bad debts, and do so at a reasonable cost. Every company must seriously re-consider: i. ?The targets set for credit personnel. ii.?The individuals they hire. iii. The training programs chosen to develop their skills. Bon Crédit ?? #credit #creditmanagement #creditrisk #creditworthiness #creditengineering #QuestionForGroup