|The division of tasks between employees can generate antagonists interests, as may be the case between finance and sales department. But the supreme interest of the company must prevail. This is the role of the procedure for credit management. It reconciles interests by setting limits to each of them and providing for arbitration in specific cases.
Operating rules established by the procedure may in some cases be overridden but within a framework defined in advance. Thus, it includes a chart of authority which determines for each decision committing an additional risk to the company the power of validation of each actor. For example, sending a new order for a customer who is in default of payment for more than 30 days may be subject to the validation of the CFO.
In addition to clarifying responsibilities, adherence to such a procedure is used to circulate information in the vertically (hierarchically subordinate) and horizontally (across multiple services).
It promotes communication and mutual understanding of the different stakeholders. It therefore avoids the "silos" generated by the withdrawal of each service who does not understand the attitude of other services.
Finance and commerce are not intended to quarrel but to understand each other because everyone has a share of the primary interest of the company.
Of course a company must sell and develop its sales, obviously it must ensure its sustainability by avoiding overdue and bad debts. These issues are not exclusive, quite the contrary. This is what helps the establishment of a procedure of credit.
Which the rules for which processes?
The purpose of the credit management policy is to define rules on all steps that are likely to generate business risk by committing financial resources. This is done in order to manage this risk and to minimize them.
Well managed, a risk can become an opportunity. For example, if you have evaluated a customer as insolvent, you can request a payment in advance against an interesting discount. This helps to improve cash flow of the business while avoiding any credit risk.
Main stages of the sales process
Timing diagram of the sales process:
1) commercial prospection
Business development incurs costs and should be well oriented to be effective. It is for example against-productive to spend time and money to win an order with an insolvent potential client:
It is therefore essential to take into account the financial situation of companies before prospecting them. Better canvass companies in good financial health and with good potential.
- The financial position of the buyer intends more to regression or disappearance through a bankruptcy rather than becoming a key player in the market,
- Win a business with this company will result in payment delays or even unpaid invoices and losses,
These deals can be engaging for the seller, it is necessary to include commercial conditions (conditions and mean of payment, guarantees... etc) coherent with the context and the creditworthiness of the buyer. Credit risk starts at this stage. It is therefore necessary to define how it is assessed (financial analysis, credit rating etc ...) and how it is managed.
3) Customer account opening
The customer opening account must follow certain basic rules to obtain necessary information in order the administrative flows are fluid and do not disrupt the business relationship. Defined rules specify what documents / information to be obtained prior to account opening and who must obtain them.
4) Payment terms and credit limit set up
This stage occurs during the trade negotiations and may be before or after the opening of account. It is here that are approved payment terms (payments, deferred payment, method of payment, invoicing schedule ... etc), and any guarantees (bank guarantees, parent company guarantees, delegation of payment, documentary credit ... etc.. ).
This is the heart of the prevention of outstanding risk. These conditions should be an integral part of commercial negotiations and result from risk analysis that was done previously. The credit management process defines the standard conditions, checks if it is possible to grant them to the client and manage any deviations from this rules.
5) Delivery and invoicing
This step should not be overlooked as it is often a source of disputes that generate late payment and have negative impacts on the business relationship. The credit management process specifies the prerequisites for billing in a timely manner and the key steps to check to do a good billing and not make errors (price, date of invoice, customer name, etc ...).
6) Friendly collection
Essential phase not to suffer late payments, the cash collection should be structured and professionalized to be effective. Well done, debt collection lends credibility to the seller, significantly improves cash flow and contributes positively to build a commercial relationship.
The recovery process must be defined in a combined result of recovery actions (phone calls, email, mail return receipt, intervention of the sales representative ... etc) and agreed between the recovery service or accounting and sales managers.
It also specifies how are used late payment penalties to get customers to pay in a timely manner.
In case of failure of amicable collection that ended with sending a letter of formal notice, collection action continues but with other means. These are numerous and depend on the organization of each company and its customer types:
- Lawsuits handled by the seller with the contribution of a lawyer (referred provision, payment order or assignment payment),
- Collection agencies,
- Credit insurers.
The credit management policy includes all the steps above, describes how they are implemented and by whom. It must be operational and concrete and therefore be adapted to each company. There should not be two identical procedures as each business is unique and has its own strategy.
It represents the application in practice of a business strategy and management of customer credit defined by the direction of the company. It allows to structure the business, improve performance and relationships between the different services that compose it.
In a complex and difficult economic context, the implementation of such rules gives a direction to the company and its employees and helps protect as much as possible his company from overdue and losses, responsible of a business failure on 4 and many broken dreams of entrepreneurs.
Well established and applied it will help to improve cash flow and working capital needs of the company and to preserve its future and fostering its development.