Credit and ‘holes in a wall’

By Andriy Sichka, originally published in Credit, Collections and Risk Magazine, www.CCRMagazine.co.uk.

What needs of business credit management satisfies? What does that mean serving a company in a best possible way?

The benefits of professional credit management seem to be very obvious. Usually they go without saying. Yet, looking at annual reports of some multinational corporations I got surprised. Companies with hundreds of headcount have growth of overdue over last five years. The same dynamics for Bad Debts reserves and Write Offs. At the same time there are companies without credit team at all and whose receivables are better. To me there is something wrong here!

Champion Needs No Excuses

Let us get right to the source and see what are the most essential business needs related to receivables. Philip Kotler, marketing professor, used to say: "People don't want a drill machine, they want a hole in the wall”. If we adapt this phrase to credit we will see that business actually has no need in any credit personnel. No analysts, no controllers, no collectors. Business needs its products and services be Bought, Paid For and Re-Ordered. This cycle should spin smoothly and constantly and there should be people who make sure it is. But how should this look in results?

Companies operate in different environments, they also may have different goals and cultures. But they also have a lot in common. For example they use the same accounting principles. They all dependant on consumer demand and and want cash in the end of every transaction. As such, deliverables of credit management could also be common for every business. And they also should be clear, tangible and sustainable.

Sales Support

Receivables exist to support sales. Full stop. Once I had an interesting chat with a business owner. I asked him if he has any issue with receivables and if he needs any help. His answer was as drastic as impressive. ‘I can make my receivables perfect tomorrow. The only issue is how much sales I would lose to achieve that!’ - he said. Right to the point! 

Bad debt on a transaction could kill profit on several sales. But, lost sale cannot bring the profit and negative impact may be much more bigger than a write off. Especially if we take into account future sales potential of a counterpart. Cash Is King but it comes from Sales!

Furthermore, real proactive credit managers always look for possible sources of growth together with sales and marketing. Such an attitude, by the way, removes notorious sale-credit conflict once and for all times.

Overdues: face and a honour.

Like it or not, credit job linked to overdue. Regardless all nice efforts in evaluation and structuring - if there is no payment, there is no result. Every day of overdue costs company money. This is not only general perception, it makes perfect sense for any business! 

As such, credit manager will always be responsible for continuous reduction of overdue. Whatever negative event occurs - we have to repair and prevent from recurrence. The more customers pay on time the better job we do.

Henry Ford used to pay his repairing teams for the time they spent sitting in the room doing nothing. If they have nothing to do all the machinery work as expected and production goes smooth. Similarly, if credit has nothing to collect trade cycle works as expected. This may sound as utopia. But, striving to it always helps to improve current results. The ultimate long term target for overdue should always be 'zero'.

A Tightrope in a Game of Chances

Every moment of our life we deal with forces outside of our control. Business is not an exception - our customer will always be beyond our full control. Thus, our capability to predict future precisely is definitely very limited.

Scientific researches gave us great probabilistic tools to predict bankruptcy. Their accuracy grew up from 65% in 60-s last century to 90%. However, as George Box rightly said: "All models are wrong, but some are useful". Model predicts the number of defaults in population, while manager takes decisions. In other words, puts bets. 

Yet, this is not the end! Existence of risk does not remove the responsibility for sales support. Credit job always includes finding right balance between sales opportunity and financial loss. That’s why word “management” in this profession actually mean “twist between a hammer and an anvil”. And this makes it great. No one other has "impossible" stated in a job description! 

Nobody is perfect and mistakes are unavoidable. But even though bad debts continue to occur, there is always a difference in their frequency and total sum. Real professional brings less write offs with lower cost of security. And this is exactly what business needs!

Who pays for the party?

Cost is a serious matter for every manager. Credit is also expected to "achieve more with less". And this is not as trivial as use less office supply or stop using them at all.

Business' viewpoint is simple and cynic: credit manager is a cost incurred to bring all the other costs down. This definitely includes achievement of results outlined above. But it is equally important to deliver them at reasonable cost. For example, cost of security coverage, like bank guarantees or insurance, may be higher than write offs. 

Credit Terms are major factor affecting cost of company's financing. Thus, they are subject to special credit manager's care and optimisation initiatives. 

Concept of Shared Services is a modern trend which and may reduce labor cost down. But its benefits are not always straightforward. There are examples of credit managers delivering great results in small teams or even alone. While huge teams of analysts and collectors hardly reduce overdue by single digit per cent. 

Wisely calculated cost could prevent a huge mistake, or, at least, let top management take a conscious decision.

What about future?

Ok, - one may ask, - imaging I’ve done all said above. Will business still have any need of me? 

The essence of credit manager's role is to constantly transform credit portfolio, adapting it to changing needs of a business. Nothing is forever with except for changes. Economy, legislation, business models and other factors are changing faster and faster. At the same time credit will remain a basic element of the economy. As such, demand for real credit professionals, able to deliver tangible results, is very unlikely to disappear!