Credit Management
Did You Resolve To Be More Proactive With Your Credit Management In 2024?
By Wasilwa Miriongi
For those well versed with credit management issues it is a known fact that once you decide to sell to a customer on open credit terms, then most of the debtor management tasks that follow have a reactive component.
The need to know how to react to debtor’ s challenges is the likely reason topics about responding to credit and collections risks are so popular. However, the better one is at being pro-active and strategic in the approach to credit and collections, the less will be your need to react.
Some companies are fortunate to have financially strong customers who account for most of their sales. This reduces the risk of bad debt and delinquency loss substantially, along with the cost of credit and collections activity required. Even in this fortuitous state of affairs, it is imperative that you confirm that perceived financial strength and check it at least annually. There are a number of devices credit managers employ to facilitate sales even to higher credit-risk companies on a profitable basis.
One area to evaluate is the whole process of ordering by customers to subsequent payment of the order, know in short as the order to cash being proactive can reduce downstream issues in the process streamlining processes and workflows as it is very likely that there are process gaps that require manual intervention. The credit manager needs to start with mapping out the order to cash process. It may involve the process of identifying the logjams: the activities that are consuming the most resources and taking the most time to complete. By flow-charting the current processes and activities, the manager can more readily see where the problems are. This will also show any unnecessary or low value tasks being performed. Then it is just a matter of defining a better process and applying automation if possible.
The debtor portfolio needs to be segmented, as a credit manager one mistake you can do is using a uniform approach when handling your customers. Segmenting receivables can be based on any number of criteria: industry type, distribution channel, customer risk rating or score, credit limit, debtors aging and so on. While these are all useful as a secondary segmentation, the place you want to start is with customer annual purchases from your firm. Once you have segmented for
The need to know how to react to debtor’ s challenges is the likely reason topics about responding to credit and collections risks are so popular. However, the better one is at being pro-active and strategic in the approach to credit and collections, the less will be your need to react. revenue, you can then look at secondary factors. This slicing and dicing of debtors portfolio generates insights that you will not be able to otherwise comprehend. Based on those insights you can then make adjustments that will improve debtor’ s performance.
Having segmented the debtor’ s portfolio if follows that adjusting credit and collection strategies becomes the next course of action as it should not be difficult to see the action one should take. This often requires a change in strategy, not just tactics. If the focus is first on tactics, the quick fixes, this may be done at the expense of overlooking more strategic opportunities to improve debtor’ s performance.
From a credit perspective, the goal is consistency in risk assessments that align with risk tolerance. Most sales driven organizations tend to be overly permissive, especially with their key accounts. As a result, their exposure to risk can exceed their level of tolerance. In contrast, profit driven enterprises often miss opportunities because they are too restrictive out of a fear of bad debt losses. A segmentation analysis will definitely help in refining the credit policy guidelines and thereby improve the efficacy of credit decisions made. On the flipside the collections perspective, performance is improved by the proper allocation of resources. Collections is a time management challenge. It is time to adjust the activities.
Going forward it is advisable to automate repetitive issues such as payment deductions or applying payments which can become bottlenecks that require a process solution. The repetitive issues can also just be something that is required to be done repeatedly. Whenever that is the
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