From a CFO perspective, the credit and collections department is an important arm of the financial function.
From the perspective of the Board member, it indeed is an important financial function.
And it is more.....
The credit and collections department is constantly interacting with the company's customer base. This provides those who deal with customers to identify customer needs.
A competent credit and collections department is an assist to the finance function. A superlative credit and collections department is also an assist to the sales and marketing functions.
Is your company thinking along these lines?
I will outline several questions leading to opportunities to improve the
What type of people are employed in the credit and collections department?
What training does the company provide, how is the staff motivated, and what systems are in place to monitor the department?
What is the company's policy on updating customer credit files?
What reporting systems are in place to identify changes in paying patterns or ratio's to identify signs of trouble ahead?
Has the company reviewed its remittance processes with an eye toward decreasing collection time and increasing cash flow?
steps has the company taken to improve customer satisfaction via the
Does the credit department understand how the customers' process invoices and what is being done to assist the customer in processing the information?
Training, and Motivating
If the company views the collection department's task as chasing slow paying customers then it is loosing out on opportunities to generate additional revenue. Collection calls can be distasteful, or they can be part of the customer service process. Companies always face the challenge of attracting and maintaining a highly effective and professional collection staff. It is essential that the professionals are empowered to enhance the company's image.
The department is on the front line with your customer base. Failure to handle the customer properly can leave a stigma with the customer, causing slowness in future payments and lost revenue. Are the people in the credit and collection department empowered and motivated to service the customer or are they expected to make collection calls all day? Is your credit and collection department empowered to solve problems and recommend changes to enhance customer satisfaction? A properly trained department can enhance the company's performance via increased cash flow and improved perceptions among your customer base.
Are the credit files up to date:
Do not let your credit department fall asleep just because economic life has been good. Life will return to normal and the company should be in the forefront of identifying trouble. Maintaining an updated credit file on your customers is critical. It will help you in identifying problems before they turn into bad debts. Customers refusing to provide timely financial information via comprehensive financial statements is an early warning sign that things may not be well.
Does the company have systems in place to track changes in the
customer's acid ratio, current ratio, working capital ratio, inventory
turns, days outstanding, etc.? Does the company maintain a data base of
these ratios by customer to better understand how a specific customer
ranks? These ratios will better help the credit department understand
changes taking place at the customer. Profits alone do not provide a clear
picture of a company's ability to meet its obligations.
Tracking your customer base by risk category and payment history will
allow the credit department to more efficiently prioritize the collection
effort and customer trends. Understanding why your customer's
payment history is changing can lead to opportunities of increase revenue
and collections while conversely curtailing your bad debts.
What is the company's
systems for identifying troubled companies?
Someone in the company needs to maintain a constant vigilance over the
accounts receivable. Having systems in place to identify slow paying
customers early in the process is important. A good system should minimize
the company's exposure to trouble. Companies usually do not
disappear over night. Early detection of problems will allow you to
reduce your financial exposure with the customer before other creditors
start their collection process. Hopefully, if the company is the "First
One In" they will not be part of the unsecured creditor list if the
customer files for Chapter 11.
Are the company's systems such that a monthly list of delinquent
accounts is made available to the sr. management team in concise
What steps has the company taken to streamline the remittance process and reduce risk?
Technology is rapidly changing how we do business. Is the company still waiting for the check to arrive in the mail? Does the credit and collection department understand how the customers process their invoices? Has the remittance process grown to the point were it is consuming too many resources? What does it cost to process a remittance? How many days does it take to process a remittance? Does the department have trouble reconciling remittances with customer balances? Are the company's customers local, national or global? If the customers are global what is the currency risk exposure and do they engage in hedging? Instead of waiting for the check to arrive the company my want to consider:
The company's bank can be a good source of ideas on how to reduce remittance time, and secure letters of credit or trade acceptances to reduce risk. Credit insurance is a good alternative to monitor customers credit worthiness and for establishing credit limits. Credit insurance can be a useful tool for growing companies exposed to high credit limits by a few customers. Credit insurance can be a lot cheaper than trying to save your company after a major customer gets into financial trouble.
Look for ways to shrink the time it takes your customer to approve your
invoice, process it for payment and making the funds available for you to
Is the credit
department trained to meet the customer's needs?
A key component of any successful company is customer satisfaction, for without customers there is no economic activity. Does the company look at its credit department as bill collectors or a team empowered to solve customer problems? Does the company have disputes with customers over:
Disputes in these areas may indicate quality problems. Continued problems with the product, operations or the finance department will spell trouble and lost customers. Has the company looked into applying TQM principals to eliminate these problems?
Is the credit and collections department trained and empowered in handling customer problems? Does the company understand its problems? Industry leaders work with their customers and seek feedback on all aspects of their business including the billing and collection processes.
Does the credit and collections department understand the needs of its customers? How can it be hard for a customer to remit payment? You say, just send the check. The internal control processes undertaken by some companies make the remittance process difficult. Understand your customers' processes and requirements. A customer oriented approach is increase customer satisfaction, cash flow, and revenue. Understanding your customers needs and requirements can result in additional business as the customer turns to suppliers willing to help them be successful.
Smaller middle market companies may not have a credit and
collections department. The function can be part of the controllers,
administrators, or presidents monthly task. That does not minimize the
training and effort that should go into converting the person into a
customer service representative.
Not large enough for a full time senior credit person then consider out sourcing the function to a part time credit manager. If you select this road be sure the person is trained in providing customer service not just in making collection calls. Out sourcing does not mean giving up control. Be sure the systems and structure are in place to monitor this segment of the business. An appropriate feedback system needs to be established to provide essential information to management on how to better service the customer while ensuring the collectibilty of the company's assets.
To succeed and seque into the twenty-first century companies need to maintain a competitive edge. Part of that competitive edge will come not from new technologies but from applying solid business practices to every aspect of your business. Credit and collections departments are not looked upon as a source of customer satisfaction and revenue, but a cost center necessary to collect your revenue. Credit and collections department are in daily contact with your customer base. Empowering them through training, motivation, and professionalism will add to the bottom line not detract from it.
If you have questions or want to communicate
Capital Restoration LLC
45 Belcher Drive,
Sudbury MA 01776