If CEO's, CFO's and COO's understand credit's strategic imperative it can add the highest value possible to a company.
The credit function is an increasingly important department in many businesses. The best organisations understand its ability to improve the financial performance of a business. But senior management support is required for credit to perform to the best of its abilities.
Paul Brandalise, chief operating officer of IP Solved, an intellectual property law firm, understands this well. He says the role the credit team plays is critical to optimising working capital.
"They ensure the liquidity position of the firm remains constant. That's by keeping the average collection periods and other key metrics where they should be."
Brandalise says a secondary role is in collaborating and mentoring people who hold primary relationships with customers. "The custodian of that relationship is usually the fee earner, in our case the solicitor or the attorney. They juggle both the operational relationship and the financial relationship.
"Our credit team works with our lawyers to ensure they build collection activity into their day-to-day workflow. Too often lawyers leave collections to the last day of the month, but it's not an isolated activity; it's something they should be doing constantly. Every time they talk or write to a client they should know the debtor position, and build that into the dialogue," he adds.
Brandalise says moving to a position where clients are billed on a progressive basis has been a focus, unless clients have very specific requirements. "Billing at the earliest opportunity is important because if you leave it and don't bill for a month or two and then send a very large bill, that's going to have a detrimental impact on the client's ability to deal with that quickly."
Another initiative has been working on clients' bills so they demonstrate value. He says clients should read a bill and understanding how much work's been put in, so they rush out to pay it.
"We've worked to improve the narrative component and the communication aspect of a bill, that's helped in removing the initial impediment to pay when a client gets a bill and thinks, 'That's a lot, I'm not sure what that's about, I'll call him next week,' as opposed to saying, 'Yep, got it,' and then move to put that in the payment schedule."
Brandalise says dispute resolution is a focus. "The soft skills are really important when dealing with professionals and their clients, its about building that relationship so that lawyers welcome input from the credit team and see them as an important partner in the receivables management process."
Automation ensures efficiencies
For Geoff Butcher, group general manager commercial for paper business Spicers, enhancing the credit function’s ability to do its job properly is about making processes as streamlined and as customer friendly as possible.
“We’ve automated our online credit application forms and processes, while retaining the necessary information, and put it online so customers can do it directly from the portal. That’s cut down time from the customer’s point of view and for us internally and has made setting up new accounts much quicker and easier,” he says.
According to Butcher the business is continually looking at automation. For instance, in the last 12 months processes have been enhanced around release of sales orders.
“It’s a seamless process where orders are automatically released and then blocked on exception if accounts are either outside terms or above limits. But as soon as a payment is made orders are released automatically, cutting out manual intervention. When an order is placed on hold, our sales representatives are kept informed of their customers’ status via smart phone applications.”
Spicers has also recently consolidated collection processes. “We have businesses in each of the capital cities and previously we’ve had credit functions in each of those cities. But in the last 12 months we’ve centralised and standardised those processes, which has helped identify and deal with slow payers quickly, rather than rely on one person in each state to do it. It’s now more of a team effort.”
He says the business uses settlement discounts to encourage customers to pay on time or in some cases earlier. “That helps reduce the amount of working capital tied up in customer balances.”
Where possible, the business allows credit card payments, which customers who collect rewards points appreciate.
“We also do regular customer reviews with the sales people, looking into whether credit limits are appropriate. Sometimes we increase them, other times we reduce them,” Butcher adds.
Spicer works closely with lawyers to help head off a problem before it starts. “We use our advisers to make sure we have our PPSR registrations set up properly so there’s no issue about retaining stock if there is a problem. But we work with our lawyers in a commercial way. It’s better than trying to go down the legal route.”
All about attention to detail
Running a successful credit team is all about empowering them to make effective credit decisions, using their skills and knowledge of the credit laws, says Bruce Anderson, managing director of Automated Retail Services, a specialist consultant to the downstream petroleum industry.
“Without that, vendors risk the validity of an invoice and its terms and conditions. Having credit arrangements and security properly in place before goods and services are supplied is essential. That’s the starting point,” he says.
Subsequent to that is sharing knowledge with customer-facing staff. “Staff must ensure credit documents are signed correctly by authorised parties and getting details such as the names of organisations correct is key,” Anderson explains.
He says making sure equipment is not loaned before the appropriate paperwork is signed and ensuring staff understand the ramifications of getting that wrong is important.
“The best credit teams know the current credit laws, in particular the practical requirements of the PPSA rules, and have adequate credit procedures in place to ensure the organisation’s credit position is secured.
“Sharing that information with staff is critical in ensuring all sales contracts meet current credit regulations. If staff understand the credit process they can add huge value,” says Anderson.
One way to ensure the credit team delivers an optimum performance is to encourage them to attend some sales and management meetings.
“I take the whole organisation through the credit results, various problems in the ledger and suggest initiatives to improve the results. We look at examples of what has worked and what hasn’t. We look at shorter payment terms in exchange for better commercial arrangements and to trade off with customers to reduce risk.”
Common topics in these discussions include how to ensure a customer has completed a credit application correctly when the entity is a discretionary trading trust, or what to do when there are concerns an organisation might be in financial distress.
Anderson says his focus is on empowering credit collectors. “They’re collecting the funds, so it’s important to make sure they’ve always got good tools and effective strategies available to assist customers to pay on time. Regularity is also critical. Don’t do the credit collection tasks all at the end of the month, do them each week. Then the customers become accustomed to getting a reminder if they don’t pay on time, which ensures prompt payment becomes more habitual with more customers across the organisation over time.”
Demonstrating effective credit management is essential when it comes time to negotiating debtors’ insurance premiums.
Says Anderson: “Insurers give a lower rate with more attractive deductibles when an organisation can demonstrate the credit book is well covered and the credit procedures are effective. That’s a big part of getting this right.”
In addition, having an empowered and effective credit team can assist in sales performance by negotiating higher insured limits for customers, which makes a difference to meeting sales targets with less risk.
He says having correct PPSR registrations in place with correctly completed credit applications with original signatures and dates is especially important when dealing with administrators and liquidators.
"A liquidator is not going to be able to recover funds easily from you in a claw back scenario when you’ve got your security in place and all your credit documents conform with the current credit regulations."
"More importantly, stock or equipment supplied on credit to a customer can usually be recovered from a customer’s site when an administrator is appointed. Ensure customers and suppliers correctly sign credit documents. Make sure stock or equipment has been identified and notified to the administrator at the time of their appointment.”
Anderson’s final piece of advice in the event of a major credit issue is to go on site and do a stock take of all goods or equipment that have been supplied and not paid for.
"As soon as you hear there’s a problem make sure you have staff on site to talk to the customer, find out where the stock and equipment is and ensure the customer or administrator understands that’s your stock or equipment."
"A good example in the petroleum industry is fuel stored in vehicles running tanks at the time of the issue, which is often overlooked and can add up to a sizable sum. By completing a complete stocktake on site, you’re in a better position to reduce any exposure before any action is taken by an administrator or liquidator,” he says.
*Alexandra Cain is a freelance finance journalist who has written for many leading Australian and international business publications.