How to build a world-class credit management system for your business?

Credit makes the world go around. Without this life blood of the economic system, many businesses would cease to exist.

If a company makes a sale on credit, only when the cash is collected that the sale is considered to be final and complete.

Credit department plays an important role in managing the cash conversion cycle of companies. If the sales department is the engine of a company, then credit department are its gears and oil that make the engine work.

Here are some credit practices to stay ahead of the curve:

Detailed credit policy

Does your business have a well-articulated goal for its credit department? Is it quantifiable and measurable? For instance, reducing DSO (Days Sales Outstanding) from 100 days to below 60 days is more definitive and clear than a mere generic statement of maintaining healthy portfolio of accounts receivables.

Furthermore, who takes credit responsibilities? Some companies link the bonuses of sales departments to collectability of accounts receivables to ensure sales executives are more mindful while soliciting customers. Some others put the onus of collections on the credit manager while also empowering them solely with assessment and approval of customers.

Are there credit limits and sign-off levels throughout the organization as part of risk-mitigation measures? For instance, sign-off level could be something like this:

Credit analyst – upto Rs 50 lakh of deal value

CFO – Rs 1 cr

President – Rs 5 cr

Board of Directors – Rs 10 cr and above

By having more senior employees involved in big deals, corporate can guard against potential risks and downsides.

Actively monitor customers and competitors

Recently, a south-based textile company was losing customers in certain geography. Their research found that it was losing to a single competitor which was matching its price but also giving abnormally long credit to its customers. Financial analysis of the competitor company found it to be in a precarious financial state and that it was using these desperate measures (like liberal credit) only to stay afloat. Armed with this information, the company stayed put with its pricing and as expected the competitor later filed for bankruptcy.

Cloud-based databases often give deep and critical financial information about customers, competitors as well as industry. By leveraging such data, credit managers can easily assess their credit worthiness and make informed business decisions.

In fact, many companies internally rate their existing customers based on their payment history and financial strength. By red-flagging those with a history of late payments, legal issues and bankruptcy, they reduce potential bad debts.

Organizational Buy-in

Any business credit policy needs a buy-in across the organization (including that of sales department) for it to be successful. Are the credit goals in sync with the larger goals of the organization? For instance, the company strategy might be to boost market shares. That in turn could require going down the quality curve and hunting for some difficult customers as well.

Are the credit terms flexible enough to reach out to them with ample safeguards in place? For instance, in this case, a corresponding credit term structure might insist on full prepayment for riskier customers as against the usual Net 30 days (of credit).

Clear communication of terms and payment conditions

Send invoices as soon as the orders are fulfilled and addressed to the right person. Email invoices rather than just sending it by post and ensure it is received by them by making courtesy calls. Make payments easier by accepting different forms of payment and by clearly stating out bank details.

If there are discounts for early payment, clearly spell it out. Some software facilitates automation of the entire follow-up process.

Takeaway

By leveraging online company data services, you can get more insight into customers and industry credit practices. Capitalize on it to keep credit risk under control.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

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