If you were to ask ten people what the credit function is you will get ten different answers. Most notably, those answers will be predominately based on some form of collection work. This is true even if the mix of ten people are unskilled or at executive level. It is probably true if ten credit professionals were asked the same question.

Recently, during a lunch with a number of other credit managers, a question was asked, “Do you think Credit Managers are valued by their organisations?” What quickly became a more pressing question was, “is the Credit function understood by organisations?” How can something be valued if it is not understood?

After this lunch, and before my flight was to board, I had a fair bit of time at the airport to think on this topic in depth. I have heard it said by a number of credit managers that their job was to prevent bad debt. And while I agree this is an important part of the credit function, it seemed to me to be a simplistic view of the world, of the function itself. I believe preventing bad debt is the result of performing the credit function, rather than the basis of the role itself.

So what is the credit function’s role? What do we do?

Putting such a large question into words is quite difficult. The credit function is unique in the organisational universe, as it touches every part of the business on a daily basis. However, it touches parts of the business in different ways at different times. It is because of the scope of these interactions that there is such an array of perceptions about what the credit function is and/or does.

Most people see the activity we call ‘collections’ (efforts to collect payments of amounts already passed due) because it comes with at times a high emotional cost, a biased/opposite view of the intent from the customers perspective, legal action, and of course, a high level of confrontation on occasion. These are perceived to be negative traits of the function, but also tend to be the loudest or most visible. Interestingly, it may be the lack of the count of these things that make a credit department go unnoticed, adding in some cases to the devaluing of the function because it appears there is little happening when in fact great work is being done. This reduces these perceived negative effects and thus the perception of action. It is a bit like a duck in water; there is a lot of activity that goes unnoticed under the water to move the duck so effortlessly through it. At times, it may appear to simply be floating. This calm serenity does not remove the fact that the duck’s legs are going like nothing else.

While sitting at the airport I thought over this perceived understanding, that the credit function is no more than a ‘collections’ function, and wondered at all of the other activities that happen in a day that are not directly concerned with collecting. I counted only twenty percent of my day was directly dedicated to any collections work (although that’s mainly legal and liquidation issues these days). The majority of my work was knowing my customer, building relationships, working with limits etc in order to move product smoothly within the risk appetite, and reading and deciphering market intelligence on our current/new customers.  

It occurred to me that the majority of my time was spent in prevention mode, not only to prevent bad debt, but to prevent collections. The idea being if I could prevent collections I would by default prevent bad debt. I have always believed that the risk of slow payment was as great if not greater (at times) than the risk of no payment. So the majority of my day is dedicated to ensuring customers have good payment behaviour (through relationship building) and understanding if there is going to be any hurdles to payment so I am able to remove the hurdles before we get to them.

This led me to form a view about the credit function and the underlying principle: the prevention principle. That is, the credit function is dedicated to the prevention of slow and bad debt. It does this by ensuring the organisation deals with financially healthy customers for as long as they are customers and creates an environment where ‘pay on time’ is the norm.

There are a plethora of actions and variables that go into upholding this principle, and dare I say it, an application of a mix of artistry and science by the credit department personnel. While there are a number of approaches that can be employed to get to the same result, the underlying principle remains constant.

Where there is a full service credit function employed by an organisation, there is the vast majority of activities that work to prevent slow and, by extension, bad debts. It is in this application of the eighty/twenty principle of the credit function that many misunderstandings occur.

It is in the best interests of all credit professionals to get the word out about the value the credit function gives when applying ‘The Prevention Principle’. It has such a large impact on the lifeblood of the organisation: the cash flow. When this is properly understood by the organisation, then the value craved by credit professionals across the globe will be given freely. Even celebrated.

How much of a difference to the market would there be if all organisations understood the synergy between this underlying principle and their underlying cash position? As credit professionals, we help to shape the market by rewarding good payment behaviour and punishing bad payment behaviour. The more organisations in the market that understand ‘The Prevention Principle’, the more influence credit can have on good payment behaviour and therefore stable and happy markets.


By Paul Burgess BBusCom CPA CMgr FIML MICM CDec Qld

National Credit Manager Steelforce Australia Pty Ltd

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