The Credit Manager and Trade Credit Insurance- Tales from the Street

Ever question the value of your Credit Manager?

In my opinion, no single professional role has required a greater transformation over the past 50 years as the complexity of B2B trade and capital utilization evolved. Credit Management is a highly technical field and requires ongoing educational and professional development. Yet, I believe that both the Credit Manager and the trade credit insurance specialist still have a way to go in understanding how to best complement each other.

Hopefully the following recant (creditinsurance.com) of a story about this underappreciated asset will help encourage increased and improved dialogue among the various constituents.

The Credit Manager: An Under-Appreciated Asset

Ever wonder why the corporate credit manager always looks as though he/she needs a day off?

Stress...

Contemplate how many professionals hold the primary responsibility of driving a company's top line while at the same time ensuring that each of these "sales" end successfully having payment received within agreed terms. A case could be made that the Credit manager is the most important human asset within the organization apart from one.

Consideration could be made for the super sales guy, or the CFO, or the Ops manager, or the IT director, or the HR director....

I would suggest that no one in the organization except the CEO is measured on the multiple critical responsibilities entrusted the Credit Manager.

Credit management is equal parts science and art. The professional credit manager knows that not all companies are credit worthy, but simply denying credit takes little skill and constrains top line performance. Conversely, accepting all orders takes even less skill and will certainly lead to unacceptable bad debt losses and margin erosion. The Credit Manager is one of the most important assets of any organization.

A tale of a Credit manager's position within an organization

The year was 1998, I had the opportunity to illustrate this point to a long-term client. I have recanted this tale of the Credit Manager frequently over the years. Before retiring, I was the chief underwriter and commercial director of the world's largest provider of trade credit insurance in North America. This particular visit took me to Florida to meet with the CEO of a relatively large and growing jewelry manufacturing company and his management team. Late in the meeting he asked me a simple question as he knew that I had visited hundreds of companies over the years and held a broad perspective on the subject. During the wrap-up session he asked; "where should the Credit Manager be positioned in his organization"?

I responded, "your Credit Manager should be on your Board"!

His broader management team joining us that day seemed a bit surprised by my response. Then I started asking questions of them:

-If your #1 sales producer brings in the deal of the decade and the Credit Manager says "no" because his/her assessment indicates that the risk of non-payment is too high and unacceptable- who takes the heat for the lost sale?

-If your #1 sales producer brings you the deal of the decade and the Credit Manager says "yes" and the debtor ultimately defaults, who takes the heat for the bad debt charge-off?

-If your sales organization proliferates the credit department with challenging deals and the company's DSO is extended adversely affecting cash flow, borrowing capabilities, collection and legal costs, etc., who takes the heat for impaired cash flow and the added cost to fund operations?

Additional elaboration was provided, and the management team came to understand my point regarding the importance of having a highly skilled professional in the role of Credit Manager.

I had known the CEO of this company for severals years and reminded him that when he started the business, he wore multiple hats: CEO, CFO, Sales Director, Operations Director, Credit & Collection Manager, HR Director, etc. Effectively each hat represented a Board level position. As his company grew, he brought in credentialed professionals for each discipline. I asked him who he thought today most closely emulated his efforts and responsibilities during those formative years? He responded, "Dave, my Credit Manager."

When I asked the CEO what were his main reasons for investing in trade credit insurance more than a decade earlier, he provided a straight forward response. To paraphrase- I used the policy to help with my bank line as they advanced at a higher rate when my receivables were insured. However, the real driver was "sales" associated with credit lines and terms of payment I offered our customers that allowed me to be more aggressive and competitive. Also, at that time I didn't have the resources to staff a deep credit department, and it was more cost effective to rent one.

From lack of confidence to conviction, the story continues....

The Credit Manager (had a fancier title) approached me after the meeting and thanked me for my assessment and personal insight. He confided that he always believed that the CEO utilized trade credit insurance as a hedge against his capabilities. As such, he viewed it as a personal threat. Each year he would recommend against continuing to invest in the credit insurance program. Subconsciously, he viewed trade credit insurance as a lack of confidence the CEO held regarding his credit management skills. The Credit Manager's perception of credit insurance had always been the product best suited for companies with weak trade credit management capabilities. Following our meeting, completely new understanding and appreciation of the services being provided emerged as well as a new perspective of his value to the organization.

This was the first time this Credit Manager had ever heard anyone speak about the trade credit insurance sector being so supportive of a strong Credit Manager role and the fundamental need of sound credit & collection management. He never thought about how the services associated with the trade credit insurance provider would be effective beyond the obvious indemnification of a loss which he never expected would occur under his watch. He never considered how an external company would operate as a partner in credit management, risk management, sales development and asset utilization. He now saw a partner emerge fully committed to helping him alleviate stress and to optimize each important decision he and his team took every day.

More than a partner, his trade credit insurance company was a fully integrated resource which brought additional manpower to his team, globally positioned in the management of risk, sales growth, debt recovery, and operational effectiveness. A partner with a local presence in each market he sold, expertise in their legal system, understanding of cultural & language differences, having economic insight, customer information, and the ability to apply analytics well beyond his capabilities.

He began to see the challenges of running his under-funded, under-staffed, under-appreciated, and over-stressed credit & collection department from the perspective of his CEO. It was never about him, only about the business and how to most effectively utilize his limited capital. The CEO was making the decision to invest in trade credit insurance on the basis that it represented the most cost effective and cost advantaged solution for the organization. This Credit Manager became a believer that day, transformed from having a lack of confidence with trade credit insurance to a new conviction of understanding its importance, capabilities and benefits.

Credit Managers and the trade credit insurance myth

This Credit Manager became a convert that day; the myth that trade credit insurance being a threat to his existence and an unnecessary added cost dispelled. No longer feeling threatened, he was now emboldened to more comprehensively utilize the services and resources of his trade credit insurance partner to drive top line growth, improve DSO, maximize working capital utilization, create flexible payment plans, and protect the company's cash flow, earnings and capital.

Dave called me a few months after the meeting on a cold day in January 1999 to tell me he had been promoted, received a nice raise, given more responsibilities, and found his stress level a bit lower. The perils and pressures of being a competent Credit Manager can never be eliminated because all risks can never be. Risks can be mitigated and managed, however. He confided that trade credit insurance took on a new meaning and importance from that day forward.

This Credit Manager became a creative user of the services provided by the trade credit insurer while addressing more complex trade issues as the company continued to grow and his sector became more challenged. Together, solutions such as pseudo-PUTs, transactional supported L/Cs, pre-payments, leveraged risk sharing, consignment transactions were developed among other forms of trade and finance.

Fast forward 20+ years, Dave would ultimately ascend to CEO/President of that company, and he remains a strong advocate of trade credit insurance. The product and services continue to morph to align with changing business needs. His company is publicly traded today with a very strong balance sheet and P&L. The founder and Dave's reasons for utilizing trade credit insurance evolved over the years. Its value and ultimate cost benefits supported the growth and prosperity of their company... a mutual objective.

Credit Management has evolved... embrace it

For many years, Agents, Brokers and 3rd party purveyors of trade credit insurance avoided the Credit Manager for many of the reasons noted above. The belief that the Credit Manager was not empowered to make a purchase decision of an "insurance product", and at best would be neutral to negative to such a decision steered the dialogue to the CEO and CFO.

Today's credit professional is more than the person calling a few references from a credit app, pulling a D&B report and contacting the buyer for financials or a bank reference. They have an arsenal of tools to facilitate getting a sale executed. Sound credit management is beyond simply hammering the phone to collect payment. Today, neither the Credit Manager or trade credit insurer resembles your father's Oldsmobile, time to take a fresh look. Today's credit professionals are waiting to be educated (creditinsurance.com) on the vast array of new solutions the trade credit insurers provide, and these pros will become advocates. Add them to the list of professional contacts- CEO, CFO, Sales Director, Credit Manager, Risk Manager- and keep the dialogue going.

Trade credit insurance is not a product, it is a financial service that happens to guarantee its own performance. Its benefits, direct and indirect, go far beyond a claim getting paid for a buyer which defaulted. Time for a fresh evaluation.

Joe Ketzner, Sr. Executive Vice Prsident (retired) Euler Hermes NA