Credit management organization

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Date: 02-16-2017 - Author: Bertrand Mazuir
What are the different ways to organize credit management function? Advantages and
disavantages of each one.

Credit management
function can be managed in different ways. It is very interesting to see how it is organized
depending on the type of business and / or the country of the company.

Commercial culture is a key element in credit management. So there may have as many
credit organization as different business cultures in the world. It would be impossible to
identify every one.

However, we could see 3 main types of organization:

 The Anglo-saxon one.
 The Taylorist one.
 The back office one.
What are they and what are their advantages and disavantages? Which one(s) allow to reach
the best performance?

Credit Management policy

What is a credit management policy?

This is an operational document defining a number of operating rules for the sales process
that must be followed by the entire company including of course the credit team.

It defines the standard conditions of sale (standard payment terms, early payment discount
rate... etc.) and the processes to apply the rules (how to open an account, how to set a
credit limit, how to recover the bills ...etc.). Credit management policy
These rules are intended to do "good" sales and to converge business strategy, commercial
stakes and financial issues (credit risk, cash, profitability, working capital improvement).
Why implement a credit management policy?
The establishment of a procedure for credit management is necessary and critical in business
since the number of employees exceeds ten and unwritten rules that are no longer
appropriate. It defines the rules of operation at each stage of the sales process and clarifies
the responsibilities in line with the business strategy.

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Thus, it limits the internal conflicts that inevitably appear when the personal interests of the
people involved differ. For example, it is common that the commercial, focused by the sale,
cares little for the solvency of its potential buyer. However, an accountant or financial
manager care more of the cash position and the risk to grant a credit to an insolvent client.

The policy of credit management clarifies the objectives of the company and set best
practices that must be followed by the entire organization.

Key factor of success, it must be shared between vendors, business management and finance
department. It is a document which specifies operating "standard" modes for all stakeholders
while providing rules for exceptions.

Indeed, the principle of the trade is to be specific to a business relationship to another, from
an economic context to another. Each company must be able to adapt its offer to it and
sometimes depart from the rules of running operations it has set itself.
The credit policy does not include irremovable rules. It is not a static document for
financial controller which gathering dust in a corner office. This is an operational document
which sets operating modes in accordance with the interests of the company whose ultimate
goal is to be paid by its customers.
The division of tasks between employees can generate antagonists interests, as may be the
case between finance and sales department. But the supreme interest of the company must
prevail. This is the role of the procedure for credit management. It reconciles interests by
setting limits to each of them and providing for arbitration in specific cases.

Operating rules established by the procedure may in some cases be overridden but within a
framework defined in advance. Thus, it includes a chart of authority which determines for
each decision committing an additional risk to the company the power of validation of each
actor. For example, sending a new order for a customer who is in default of payment for
more than 30 days may be subject to the validation of the CFO.
In addition to clarifying responsibilities, adherence to such a procedure is used to circulate
information in the vertically (hierarchically subordinate) and horizontally (across multiple
services).
It promotes communication and mutual understanding of the different stakeholders. It
therefore avoids the "silos" generated by the withdrawal of each service who does not
understand the attitude of other services.
Finance and commerce are not intended to quarrel but to understand each other because
everyone has a share of the primary interest of the company.

Of course a company must sell and develop its sales, obviously it must ensure its
sustainability by avoiding overdue and bad debts. These issues are not exclusive, quite the
contrary. This is what helps the establishment of a procedure of credit.
Which the rules for which processes?
The purpose of the credit management policy is to define rules on all steps that are likely to
generate business risk by committing financial resources. This is done in order to manage this
risk and to minimize them.

Well managed, a risk can become an opportunity. For example, if you have evaluated a
customer as insolvent, you can request a payment in advance against an interesting discount.
This helps to improve cash flow of the business while avoiding any credit risk.
Main stages of the sales process
Timing diagram of the sales process:

1) commercial prospection
Business development incurs costs and should be well oriented to be effective. It is for
example against-productive to spend time and money to win an order with an insolvent
potential client:
 The financial position of the buyer intends more to regression or disappearance
through a bankruptcy rather than becoming a key player in the market,
 Win a business with this company will result in payment delays or even unpaid
invoices and losses,
It is therefore essential to take into account the financial situation of companies before
prospecting them. Better canvass companies in good financial health and with good
potential.
2) Quotations
These deals can be engaging for the seller, it is necessary to include commercial conditions
(conditions and mean of payment, guarantees... etc) coherent with the context and the
creditworthiness of the buyer. Credit risk starts at this stage. It is therefore necessary to
define how it is assessed (financial analysis, credit rating etc ...) and how it is managed.
3) Customer account opening
The customer opening account must follow certain basic rules to obtain necessary
information in order the administrative flows are fluid and do not disrupt the business
relationship. Defined rules specify what documents / information to be obtained prior to
account opening and who must obtain them.
4) Payment terms and credit limit set up
This stage occurs during the trade negotiations and may be before or after the opening of
account. It is here that are approved payment terms (payments, deferred payment, method
of payment, invoicing schedule ... etc), and any guarantees (bank guarantees, parent
company guarantees, delegation of payment, documentary credit ... etc.. ).

This is the heart of the prevention of outstanding risk. These conditions should be an integral
part of commercial negotiations and result from risk analysis that was done previously. The
credit management process defines the standard conditions, checks if it is possible to grant
them to the client and manage any deviations from this rules.
5) Delivery and invoicing
This step should not be overlooked as it is often a source of disputes that generate late
payment and have negative impacts on the business relationship. The credit management
process specifies the prerequisites for billing in a timely manner and the key steps to check
to do a good billing and not make errors (price, date of invoice, customer name, etc ...).
6) Friendly collection
Essential phase not to suffer late payments, the cash collection should be structured and
professionalized to be effective. Well done, debt collection lends credibility to the seller,
significantly improves cash flow and contributes positively to build a commercial
relationship.

The recovery process must be defined in a combined result of recovery actions (phone calls,
email, mail return receipt, intervention of the sales representative ... etc) and agreed
between the recovery service or accounting and sales managers.

It also specifies how are used late payment penalties to get customers to pay in a timely
manner.
7) Litigation
In case of failure of amicable collection that ended with sending a letter of formal notice,
collection action continues but with other means. These are numerous and depend on the
organization of each company and its customer types:
 Lawsuits handled by the seller with the contribution of a lawyer (referred provision,
payment order or assignment payment),
 Collection agencies,
 Bailiffs,
 Credit insurers.
Conclusion
The credit management policy includes all the steps above, describes how they are
implemented and by whom. It must be operational and concrete and therefore be adapted to
each company. There should not be two identical procedures as each business is unique and
has its own strategy.

It represents the application in practice of a business strategy and management of customer

credit defined by the direction of the company. It allows to structure the business, improve
performance and relationships between the different services that compose it.

In a complex and difficult economic context, the implementation of such rules gives a
direction to the company and its employees and helps protect as much as possible his
company from overdue and losses, responsible of a business failure on 4 and many broken
dreams of entrepreneurs.

Well established and applied it will help to improve cash flow and working capital needs of
the company and to preserve its future and fostering its development.