The beginning of the New Year is the time of making New Year’s resolutions, of summing up the past and also asking questions about the future. Is the profession of Credit Manager, which I’m practicing now, going to change, or is it going to stay the same as last year? If something changes, then what exactly? Am I ready for the change? What do I need to learn, and what should I eliminate from my everyday routine and habits of the job? Where should I look for inspiration, and where do I find knowledge necessary to keep up with the rapidly changing, modern, globalised world and its’ trends?
Personally, I believe that right question is not „if”, but „when” and „what” changes are awaiting us. Numerous trends are visible already, and many are just behind the corner. In this entry, I’ll try to direct your attention towards four that I consider the most important. I had the pleasure of presenting them at a conference organised by the PracticalEvents company in October last year.
Prevention – from reacting to preventing
Currently, Credit Manager is still focused on „punishing” bad payers – companies belaying payments. This usually happens in a form of reduction or total elimination of limit of sales with deferred payment. However, the attention of the Credit Manager should be focused on preventing overdue payments, as well as proactive approach of looking for opportunities for increasing sales and simultaneous decreasing risk with other departments of the company. Modern Credit Manager helps with choosing new clients and detects risk in advance. He creates credit policy of the company and helps with assessment of added value that new clients can bring. It is worth emphasizing that determining credit policy of the company is not difficult, but question is, is there any need for it? Sensible companies know that the answer is „yes”, and that well-defined credit policy is advantageous for them. Modern Credit Manager strides towards more proactive attitude towards credit risk management and looks for opportunities for safe increase of the sales. He prevents losses caused by overdue payments instead of reacting when they’ve already happened, since then it’s too late.
Individual approach – standard procedures don’t always work
Let’s start with explanation of two basic definitions. In credit analysis, we want to differentiate between clients who don’t want to pay (creditworthiness) from the ones who are not able to pay (credit rating). Thus, by credit rating we understand the financial ability of the company (the credit borrower) to repay taken credit with interest within the time limit stated in the agreement. Creditworthiness, on the other hand, is not only the ability of the obligor to repay the debt with interest, but also his will to do so, and presence of beneficial circumstances in obligor’s environment that are independent from his will and will not interfere with the repayment.
As you can see, almost every business partner requires not only individual analysis of lack of solvency, but foremost specific approach to choosing terms of business cooperation. What about the standard sale/payment terms, then? It is time to forget about them and instead, strive for separate agreements, perhaps with an exception of micro-clients, which will meet particular expectations. Here, one should embrace philosophy of focusing on individual needs of the client, his capabilities and our (salesman’s) adjustment to them. The customer focus stance is not only a product, but also convenient sale and credit terms. Good ERP system is capable of controlling it seamlessly, on the condition of presence of built-in point-based assessment system (a.k.a. scoring system). Individual approach will increase sales. Many Credit Managers fear, that such approach will increase the credit risk, as well. However, that is not true. Eventually, the company and the client will reach an agreement one way or another. This kind of approach is priceless, since satisfied client will buy from us more. This counts for more than standard terms of sale printed on the back of the invoice.
Together, but independently – cooperation with other departments of the company
Whom should Credit Manager be and what should be his part in the organisation? Modern Credit Manager will be coordinating work of different departments in the company, instead of only supervising timeliness of payments. In this area, automation of financial processes plays bigger and bigger role. Instead of penalising bad payers, Credit Manager will gain importance in developing business solutions in close cooperation with sales and marketing departments. His role is to provide appropriate economic information on the market, the clients, as well as the economic opportunities and risks. Strengthening the bond between finance and sales is the key to the successful credit risk management, which is why it is so crucial to prioritise this every day.
Skills of the Credit Manager will be divided among following roles in the organization:
Coach – it’s a part of an „explainer” of the influence of credit risk on financial results of the company as a whole. In most of organisations, sales department is focused on increasing turnover and can safely ignore other aspects of cooperation with the client during business negotiations. Thanks to the aid of Credit Manager, sales can be better equipped to understand financial aspect of cooperation with clients.
Salesman – it’s a part „tipping” the credit risk management more on the side of sales than finance. Credit Manager should focus on helping his company gain the maximal profit from the biggest possible (closed!) sale.
Optimist – it’s a part of seeing opportunities even in the direst situation. Bad payers are also an opportunity. It’s possible to negotiate quicker payment with them in exchange for e.g. discount. The client will pay a bit less, but the company still receives its’ money. However, such approach requires a bit different attitude towards payment management – certain mental adjustment, which is not always easy.
OK, let’s pause here. Consider yourself lucky if even a few of theories presented in this entry are used in practice in your organization. Remaining roles and significance of new technology in credit risk management (the fourth and possibly the most important trend) will appear in the next post.