CREDIT INSURANCE, FINANCE & FUNDING
| Good business-to-business credit management has always involved people skills - often intangible qualities that let the effective credit manager sort out the wheat from the chaff, and which are the difference between a good decision and a bad one. But increasingly, credit managers have come to rely on databases of one sort or another to get the job done, and for many getting the edge is based on technology as well as experience.
When it comes to collecting cash from other businesses, the benefits of automated processes have been clear for a long time. Scheduling of letters, follow-up calls, tracking disputes and promises to pay are now well established in credit management systems. But few companies as yet have made full use of technology when it comes to handling applications for credit and the setting and maintenance of credit limits.
The result of this is that many credit managers are over used on tasks which don't make the most of their analytical skills and experience. Trying to decipher hand-written application forms, repetitive data entry tasks and laborious preparation of reports using spreadsheets are just a few examples of the things credit managers are called upon to do, and all can be substantially speeded up by the judicious use of computer systems.
The situation is becoming worse as new legislation forces companies to take a more rigorous approach to granting credit. Money laundering rules, Sarbanes-Oxley and Basel II are all in their various ways creating work, and companies risk being swamped in the not too distant future unless they take action now to ensure their precious human resources are protected from the worst of the additional burden.
The problem with paper
The problem often starts with the receipt of a credit application into the credit management department. Customers and sales people are not always as careful as they might be when completing a paper form, and simple errors that arise at this stage can prove disastrous later. The difference between a correctly spelt company name and one that is slightly wrong can be the difference between being paid or not, particularly if things end in litigation.
Clean data is not a luxury, it is essential for any organization. Business names apart, incorrect telephone numbers, contact names, delivery post codes and so-on all cost money to sort out, and the vast majority of errors are avoidable. Automated links to sales ledger and credit bureau systems make it possible to keep information up to date with little effort or cost.
Clearly, in an ideal world the information on a credit application should come direct from the source. In spite of this, very few companies attempt to provide an on-line credit application form on their web site. This can be a powerful, easily implemented tool that ensures from the outset that good quality information is captured. Better still; the form can be linked to other systems to improve the whole application handling process.
Another benefit of this approach is that a simple 'I agree' button on the web form can make your standard terms and conditions enforceable without the need for the customer to be sent a paper copy.
Most companies now use external information from a credit bureau to help them make a decision on new lines of credit. Ensuring that the company you are dealing with has a track record at companies house and has filed accounts which demonstrate solvency are vital steps to good credit management. Using this information can, however, still be laborious as it is often necessary to look up the new customer on the bureau database, get a report, analyze and annotate the information and then file it, all of which takes time. This effort is compounded if a case has to be escalated to a supervisor or manager, with paper documents passing between in-trays costing time and risking errors. If questions arise, requiring the involvement of sales or other personnel, the chain of information can become stretched to breaking point, and the delays involved may mean business is lost.
Comparing an application form and credit bureau data is also valuable in ensuring applicants are who they say they are. This is an area where an experienced credit manager can spot potential fraud before it happens, ideally aided by a computer system which highlights inconsistencies in the information and thus speeds up the process.
Companies who integrate application processing and credit bureau information see big rewards in terms of faster, more accurate application handling. They are also able to apply some aspects of credit policy to the information, perhaps setting credit terms using a scorecard-based system, which can help enormously with the consistency of decision making.
That does not mean, however, that every case can be automated. Business credit granting is a complicated subject, and there is no substitute for human experience. Making life easier, though, by taking out the drudge, allowing focus to fall on exceptions and ensuring skilled credit managers are working with clean, accurate information in a structured format can yield real benefits. As an example, Siemens PLC, achieves bad debt levels measured in tens of thousands of pounds on an annual turnover of £2.2 billion: "Without our automated systems we would struggle to achieve the results we do". With a staff of just 5 people handling a huge volume of business, it's hard to argue against the effectiveness of the approach.
Keeping application information, credit reports, credit management notes, correspondence and decision information all in one place is perfectly possible given the right system, and will pay dividends in the long run. And the benefits are not limited to just improved processing. Being able to show your auditors that you have a solid information trail to support decisions, complete with all the documentation in one place, will speed up audit and compliance checks and keep you on the right side of the ever-changing law.
Bringing in new staff becomes easier, too, as an integrated system is easier to lean than a raft of disparate policies and procedures. Good workflow means that inexperienced employees can be 'sandboxed', with their work is checked by more seasoned staff as they learn, and controls relaxed gradually as their knowledge builds.
Good information assets are also important when it comes to reviewing existing accounts. Being able to look back on the notes that were made when an account was opened, review the credit report and quickly request and update of the credit bureau information can save a lot of time. Electronic records are easier to find and share, and the benefits are felt across the organization. Contrast the poor credit manager having to send photocopied documents to a sale branch with one who can quickly E-mail the same information which has already been stored electronically.
Credit management systems can also make intelligent decisions about which accounts to review and when. Combining sales ledger data with credit management's records can enable, say, a credit policy that requires only high risk or over-limit accounts to be reviewed, and for these accounts to be checked on a more frequent basis as time has been freed from looking at low-risk accounts that are being paid to terms.
With any business relationship things can go wrong, and it may be that when serious problems have arisen that issues with data and records come to light for the first time. Having accurate, up to date information gives the credit manager two key advantages. First, early identification of the problem enables rapid collections action. Second, having the proper facts available and fully documented means that any claim can be pursued without hold-ups. "Successful litigation is based on timing. Being first in the process will always improve recovery".
And the benefits of combining ledger information with other data don't just stop at credit reviews. The ability to analyze your customer portfolio by the dual dimensions of risk and current credit exposure is a powerful aid to credit risk management. Reporting back to the board on a regular, objective basis on the segmentation of credit risk and likely costs in bad debt is just the thing to get their attention, and to give credit management a greater voice in company policy.
Performance measures such as account opening times, volume of reviews and so-on can easily be tracked with a workflow system. This is also powerful stuff, allowing credit management to prove its worth to the business and to demonstrate quantitatively the improvements brought about by better credit management practice.
Building the business case
Making the most of the information assets in credit control is not something that can be achieved overnight, nor is it something that should be attempted with a couple of spreadsheets and a few macros. Particularly for companies dealing with thousands of accounts, working towards a credit management process that is fully supported by technology should be seen as a strategic goal, and one which will continue to bring benefits as processes improve. Quantifiable benefits may not always be obvious, as they span everything from customer satisfaction with the account opening process to better staff morale to improved long-term collection rates. What is clear, however, is that a real competitive edge is there for the taking by companies prepared to make the technology investment.
Ian Finch is an IT professional with 29 years experience of sales ledger and credit reporting systems, including 10 years spent with Infocheck and Equifax. Ian is the managing director of CreditWatch Ltd, a company specialising in business to business credit management systems.
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