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ASK THE EXPERTS CONTROLLING INFLUENCE Considerations in creating a strategic credit management department. Part Two AUTHOR – Matthew Godby MCICM IN the first part of this series, we looked at what a strategic credit management department is and what it should look like. We talked about traditional ‘reactionary’ departments – those that tend to deal with issues as they occur; and those who are more strategic and collaborative in approach – driving improvement with others and preventing problems occurring in the first place. Strategic credit management is not just about collecting money from customers. It is about working together across wider business, to ensure the whole Order to Cash (O2C) pathway is as efficient as it can be – and it is reviewed and adapted as the business grows and evolves. Let’s look at some of the considerations for developing a strategic credit management department, starting with leadership. EFFECTIVE LEADERSHIP Without effective leadership, failure is likely to be inevitable. It stands to reason, therefore, that having a credit manager with the right skills and capabilities is key. This takes someone who can lead from the front and by example; collaborative by nature; good communication skills and the ability to inspire others to succeed. They need to be able to present sometimes complicated financial information in a meaningful way, which can therefore be used to drive real change (this can be particularly difficult to do), and constantly review what works and what doesn’t, adapting and changing accordingly. ORDER TO CASH CYCLE It stands to reason that a more efficient O2C cycle tends to lead to increased company profit. • Onboarding and risk: a sale isn’t a sale until you’ve been paid, and late paying customers cost money. It should therefore be policy that all new customers are credit checked, without exception, which provides the best chance of having a portfolio of customers who pay on time. Ensure sales staff aren’t wasting their time on prospects with poor credit ratings by encouraging them to ask for credit checks as early as possible. Vary credit terms dependent on risk. Implement credit limits to mitigate your exposure to loss. Continue to risk assess existing customers through CRAs, payment patterns and your own continued commercial experience. • Invoicing: frequency varies from business to business but clearly, the more regularly invoices are issued, the more often customers will pay. Ensuring they are checked for correctness before being sent out on time, means customers will pay quicker. Invoice disputes are inevitable, which take time, resources and delay payment – carrying out regular root cause analysis of the typical ones prevents them from occurring in the first place. EDI invoicing is, by definition, electronic and the most efficient method. ‘Manual’ invoicing usually occurs where internal systems are inadequate, or customers request a particular format. It can become the norm and often takes a disproportionate time and resource – this should be avoided wherever possible. • Credit controlling: pro-active credit control should be standard. When done well, it enhances customer relationships, highlights issues early on and gets you paid quicker. Overdue letters (a suite of three is ideal) and statements are integral to this process and as with invoicing practices, should be sent out on time every time. This provides ample warnings and opportunities for customers to pay and if they don’t, orders should be placed on stop. Monitor payment patterns closely and use segmentation to prioritise those customers of most concern. Be honest and clear to customers about the consequences for continually paying late – revise payment terms or credit limits if necessary. Every day a customer pays late is an erosion on your profit margins, so question whether it is worth continuing to trade with those who never pay on time. SYSTEMS AND REPORTING It’s crucial to have the systems in place that can track, measure and report progress consistently, easily and transparently. Workflow dashboards allow credit Strategic credit management is not just about collecting money from customers. It is about working together across wider business, to ensure the whole Order to Cash (O2C) pathway is as efficient as it can be. Advancing the credit profession / www.cicm.com / May 2020 / PAGE 28
ASK THE EXPERTS AUTHOR – Matthew Godby MCICM controllers to schedule their calls, segment customers, flag disputes, monitor payment patterns and more. They allow management to conduct cashflow forecasts, understand risks, measure DSO, benchmark goals and set targets. There are also specialist organisations that provide on-line credit management dashboards. These vary in sophistication and cost, can be offthe-shelf or bespoke and can pull in additional information from CRAs, Companies House and more. This can allow businesses to build a much wider profile of their customers. I’ve often seen businesses that spend a disproportionate amount of time sending out the same reports, to the same audience, in the same format, because it has ‘always been done this way’ – only for a handful of people to read them. Reporting only serves a purpose if it is meaningful, useful, understandable and provided from a position of knowledge. PEOPLE POWER It never fails to surprise me to see staff in roles that they clearly aren’t suited for. This is completely counterproductive and inefficient. (Many years ago, I remember working with an organisation who had a credit controller who didn’t enjoy calling customers for payment). The effects to the business in terms of results The responsibility for business strategy comes from its leadership. How strategic a credit control department may become will be determined by the credit manager and the support of his/her leadership team. can be significant, as well as to the individual concerned in terms of their health and mental wellbeing. It is the duty of leaders to evaluate individual skillsets for the appropriate position. And then to provide the necessary support through induction, training and mentoring for them to achieve their full potential. CREDIT POLICIES Developing a credit policy places formally, and in writing, the role of the credit control department, the responsibilities of other departments and how the business interacts with its customers. This ensures tasks, responsibilities and actions are transparent, consistent and understood by everyone. It should be audited annually and ratified by the board. Creating a ‘Ways of Working’ document for the credit control department is an excellent idea. Distinct from the credit policy, it outlines very simply what the purpose and values of the credit control department are. Written and developed by the credit control staff themselves (with the support of the manager) gives it a lot more weight as a living, breathing ‘this is how we go about our business.’ COLLABORATIVE APPROACH We talked earlier about how traditional credit control departments tend to be somewhat reactionary, with a reputation that they are only heard from when there is bad news. Strategic, proactive credit departments rely on the support of all areas of the business to succeed: Credit managers should encourage an atmosphere of openness and transparency with and between their staff. They should seek honest opinions, ideas and feedback from staff who, after all, are often best placed to provide it. Team briefs are a must, should be at least weekly and provide the necessary space to have professional discussions. • Credit control staff should be encouraged and supported to work with other departments to solve problems. Working together prevents issues occurring in the first place, allows understanding of how other departments work and breeds confidence in staff of pulling together to getting things done. • Credit managers should build relationships with their counterpart leaders whose departments affect credit control (e.g. sales), which will drive change. The credit manager should attend board meetings. They should meet with customers and other external stakeholders. The responsibility for business strategy comes from its leadership. How strategic a credit control department may become will be determined by the credit manager and the support of his/her leadership team. Matt Godby MCICM (Grad), Director – Godby Credit Management Ltd Advancing the credit profession / www.cicm.com / May 2020 / PAGE 29
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