Credit Management

Credit Management, meaning the management of credit granted to its customers is a discipline increasingly identified as strategic by companies.

What is credit management?

It is actually a very down-to-earth job whose purpose is the raison d'être of any company and any work whatsoever:

Get the income of its labor, which is to say in the economic world we live for the past few centuries: to be paid by its customers!

This concept is fundamental to the sustainability and development of any business.

It seems to be obvious! In fact it is not!

Hundreds of thousands of companies disappear every year in the world because they have suffered 1 or more unpaid invoices from their customers. Much more are impacted in their financial performance and development for the same reason. It is the same in all countries in the world.

Why do we hear little about Credit Management?

Credit Management is particularly developed in large companies around the world. It is not the case in small and medium companies especially in Latin countries where businesses are culturally focused on sales and tend to neglect this critical management.

This situation is totally paradoxical because the specialists in the Accounts Receivable management, the credit managers, are absent where they would be the most needed: in the SMEs and SMIs which are the most fragile companies in case of unpaid debts and late payment To integrate Credit Management in his business, it is first necessary to understand that making a sale with a payment term (even if only a day) is equivalent to granting a financial loan to your customer. A loan which is not remunerated (the interest rate is 0% unlike a bank loan), and that is not secured (you are not certain to be paid once the payment period elapsed).

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So why do we grant a deferred payment to our customers?

The reason is first of all historical and dates back to antiquity and the beginnings of commerce.
The slow transport and communications imposed a lag between the delivery of goods and payment. Nowadays it is so obvious to invoice with a payment term that we don't realize what that means: a transfer to your customer of a part of the vital element of your business: cash.

Either you absolutely trust your customers and pray that they pay you, or you apply Credit Management concepts.

Most of the tutorials of Credit tools are purely Credit Management as in below categories:

1. Evaluate customers solvency
2. Secure your receivables
3. Collect your invoices
4. Bad debts collection

This 5th section is intended to allow you to measure your performance in credit management by using the right indicators to manage your receivables and to give tips about organisations and strategies.

What does the Credit Manager ?

He / she intervenes in the full sales process of the company, from commercial prospecting to final payment of invoices. He works in collaboration with the sales department and the legal department. He is responsible for the good management of customer outstanding, that is to say the turnover recognized and not yet paid.

To read: Credit Manager, anatomy of an unusual species.

Sales process steps:

Pre-prospection

• Determination of customers segments and types of associated risks.
• Set up of standard payment terms (payment terms, payment method)
• Contribution to the realization of the sales conditions including key clauses (payment term, late payment penalties, clause of reserve of property ... etc.).
• Realization of a Credit Management procedure defining transversal operating rules in the company.

Prospection

• Rating the creditworthiness of customers.
• Set up the credit limit based on business needs and the credit analysis done.
• Orientation of commercial efforts towards solvent prospects.

Contractualization

• Ensure the balance of the contract regarding the level of reciprocal commitments of the seller and the buyer (limits of responsibilities).
• Negotiation of payment terms (down payments, billing terms).
• Integration of standard contractual clauses (retention of title, suspension and cancellation clause, penalties for late payment, etc.)

Billing

• Validation of the process of issuing invoices (who invoices, on what order and how, compliance with the terms of the contracts ... etc.).
• Validation of the content of invoices compared to the legal constraints (tax number, mentions about late payment penalties rate, ...)
• Management of billing disputes with the aim of resolving them as quickly as possible and to carry out the corrective actions to no longer reproduce the error.

Debt collection

• Management of debt collection, which aims to obtain payment of invoices on their due date applying collection scenarios. It begins with a preventive recovery action (before invoice due date) and continues until the sending of a formal notice, required for any legal action.
• Management of litigation recovery actions with appropriate legal actions carried out directly or through a collection agency, a credit insurance or other provider.

Performance and optimization of the WCR

• Definition of an Accounts Receivable management strategy to reduce the Working Capital Requirement
• Monitor the performance with the appropriate indicators (DSO, overdue %, bad debts rate, ...).

Evaluate your performance in Credit Management

Function resolutely transverse, its performance brings together many departments of the company, from trade to accounting, from logistics to after-sales service. It is in the entire sales process that the keys to improvement are.

The AR item is a transitional item. Invoices are not intended to stay as they are cleared as soon as they are paid by the customer. Therefore, AR can be seen as a box in which all invoices corresponding to cases that have been mismanaged at one or more stages of the sales process fall: poor customer risk analysis, poor contractualization, poor payment terms, supply chain problem, poor recovery ... etc.

All these reasons result in the inflation of the AR, the increase in the WCR and the decrease of profitability.

Improving performance means reworking each stage of the sales process. We call it the "quote to cash" process (from the realization of the quote to the payment of invoices). Evaluation of the performance with:

• The DSO,
• The overdue ratio or the % current,
• The bad debts ratio