Best manage credit with a Credit Management System

Factors affecting credit collection

The importance of the Credit Policy for the company (not only for the Credit Manager)

In times of crisis, many companies tend to focus on Credit Management issues , identifying cash generation as the main outcome (and in some cases the only one) expected from Credit Management.

This initial misconception has often led to concentrate efforts and investments only on recovering outstanding debt, starting from the erroneous assumption that the increase in operational capacity (often outsourced) leads to a directly proportional improvement of results.

In reality, the outcomes that can be expected from credit management are much broader, and their correct identification cannot disregard a structured business approach that starts from the analysis of the entire Credit Management process and is reflected in an effective Credit Policy sponsored by the Credit Manager.

But what is the Credit Policy? The Credit Policy is the set of activities and procedures for the prevention, monitoring, recovery and accounting of credit whose goal is to minimize the difference between what is invoiced and what is collected compared to the established payment terms. In other words, the Credit Policy favours the containment of losses on receivables in order to contribute to the improvement of the operating result, the improvement of the company’s liquidity, the reduction of capital costs due to the reduction in the demand for short-term loans.

An effective and efficient credit management strategy, thanks to a clear and shared credit policy leads to an increase in expected collections and a decrease in the cost of capital, resulting in an increase in net cash flow with positive repercussions on investments aimed at identifying new products and business lines that cause a growth in turnover and an increase in market share.

A scarce attention to credit management involves a decrease of the expected collections and consequently complications of financial resources supply by the banking system, determining, in some cases, the company’s state of insolvency.

The path to the optimization of Credit Management, with a continuous improvement of the Credit Policy, must be a business goal and not only a specific function, as for its realization, investments in technical and human resources and a strong sponsorship from top management are necessary.

Credit management is therefore one of the strategic levers for the company’s financial control and it is on the correct credit cycle that the cash flow balance of current operations depends.

The credit crunch by financial intermediaries in times of crisis leads to a strong lack of liquidity, a situation that has now become sadly widespread. In order to minimize risk, avoid high financial exposure and be timely in recovering outstanding balace, it is necessary to react with adequate arrangements, dedicated tools and a corporate credit policy that guarantees adequate controls and timely management.

Even today, due to the pandemic that has hit us, we are experiencing a situation of difficulty similar to past crises and the companies that manage to deal with the financial risks arising from such a discontinuity (liquidity risk, market risk and credit risk) are those that have implemented an effective Credit policy that minimizes the risk of incurring losses resulting from default or insolvency through the following phases:

  • Prior assessment of the creditworthiness of customers
  • Periodic reviews carried out on the evaluation of customers
  • Punctual and timely management of outstanding amounts and recoveries

The relationship between Sales and Credit Manager: the customer is always right, all he has to do is pay in the end.

Between Sales and Credit Management there is often a difficult relationship: the two areas fall into conflict easily because, if on one hand you try to acquire as many customers as possible by focusing on the overall turnover, on the other hand you try to evaluate all potential new customers so to avoid having to manage whom may have little or no creditworthiness.

The comparison, coordination and close collaboration between these two sectors becomes essential for the proper functioning and growth of the company, but despite this, the credit function, while working side by side with the commercial function, often suffers the work of the latter, which is reflected in having to manage financial tensions caused by behaviors such as:

  • Conclude the deal by “negotiating” the billing and payment conditions not always consistent with corporate finance
  • Aiming to search for new customers by concluding agreements without having certainties on the solvency of the counterparty

These actions risk aggravating the Credit Manager workload who finds himself managing uncertain receipts, complaints on turnover and extended collection times.
These critical elements must be managed through structured procedures that aim to increase the financial awareness of the commercial function and which, specularly, allow the credit function to program the necessary financial flows. In order to obtain the correct level of collaboration from the commercial function, it is therefore not enough just to share the respective objectives on cash (e.g. DSO on the incentive cards) but IT tools are needed to implement the management procedures and avoid payment delays or, worse still, insolvency.

The use of IT tools becomes decisive in the management of the relationship with the commercial function in order to achieve that close and fruitful collaboration to:

  • Create and promptly make available effective reporting to the commercial function for a single and authoritative view on credit
  • Define roles and responsibilities in credit management procedures both in the prevention phase and in the collection phase and in escalation in the face of critical issues.

The speed of the “abatement” of the expired credit (time is money!)

Profit and cash flow are not the same thing: a company can obtain a positive economic result and a negative cash flow and vice versa. The time lag between the realization of the profit and the generation of a positive cash flow generally leads to a financial requirement (also working capital) that must be monitored for a correct management of the business.

The “quality” of the circulating capital can be measured in days through an index denominated Cash-to-Cash Cycle (also known as Cash Conversion Cycle); this indicator expresses in days how much time does the company utilize to “transform” the purchases in sales and, subsequently, in collections.

The Cash-to-Cash Cycle is comprised of the following 3 indicators:

  • DPO: average days of the company to pay the suppliers
  • DIO: average days of stock in the company
  • DSO: average days to collect credit from customers

If the DPO is a coefficient that measures a company’s speed in paying suppliers and the DIO represents the warehouse’s turnover, the DSO is the best known measure of effectiveness in debt collection. This represents the customers payment timeframe expressed in number of days, defines the level of payment deferment, allows you to assess whether invoice deadlines are met.
By creating a historical series, it is possible to verify the trend of collection times; applying filter criteria it is useful to analyze them by territorial and commercial area or by customer category.

To check the delays with which customers pay their invoices and therefore the seniority of the credit, a report called Ageing analysis is commonly adopted. This is a periodic report that provides a reclassification of the outstanding amount according to the time that has elapsed since the due date of the invoice.

The classes are formed on the basis of the overdue days, generally divided into monthly intervals and by customer type, geographical area, sales channel, payment method, product sold, etc..

The speed at which the report is produced and the time needed to do the analysis on critical clusters, the timeliness with which to agree and implement corrective actions (such as preparing and sending reminders) have a direct impact on the DSO and therefore the ability of Credit Management to compress these times becomes essential. Having a solution that allows the automatic processing of data and the extraction of different seniority classes allows to recover valuable time and to be able to anticipate the implementation of corrective actions.

This result is now easily achievable thanks to the digitization that has changed the way we work. In fact, the market offers dedicated IT solutions, ready to replace old spreadsheets, with time evolved into complex DBs to maintain (on which more and more complex queries are created and on which actions and outcomes are historicized, filters are applied, and personal information is added) that risk becoming a tool that wastes time and not recover precious time.

How to increase Cash Flow

Some practical tips to increase the Cash Flow of your company

As mentioned, one of the primary objectives of the Credit Manager is to increase cash flow. Based on what analyzed in the previous paragraph, we can summarize below the immediate and most effective levers to optimize the Cash Flow available:

  • Implement effective and efficient policies and procedures for debt collection and put at the service of the appropriate resources automatic tools to monitor performance.
  • Define and share with other business functions (especially sales) a strategy for customer management by constantly monitoring performance, disputes and outstanding payments
  • Have a credit management system at the service of the credit policy, to integrate all the organizations involved and to generate reports that can be used in the shortest possible time and generally improve the performance of the credit management process.

In addition to these we cannot forget that the Credit Manager can affect, although with less force, the following two streams:

  • Enable automatic payment methods (e.g. credit cards) to give certainty of the collection date
  • Be precise in issuing and sending invoices, make clear conditions, payment methods, deadlines and company contacts, encourage advance payments of invoices to facilitate their collection

The ability to promptly collect its receivables is fundamental for any company, because it directly affects the “good payer” behaviour, which is one of the most qualifying elements of its image and which determines economic-financial repercussions:

  • Company rating
  • Access to the banking system
  • Access to supply credit
  • Market reputation
  • Marketing costs

Evaluate the investment in a Credit Management System at the service of the Credit Policy

One of the essential operational levers that the Credit Manager has at his disposal to make effective interventions aimed at optimizing Cash Flow is the adoption of a credit management system appropriate to the credit policy adopted by the company in order to minimize, if not even neutralize, the credit risk.
In spite of all these obvious advantages, some companies maintain that it is not necessary to spend money on specific management software for credit management.

The investment in a credit management software adaptable to the needs dictated by the evolution of the activity, customizable according to the needs of the business model and integrable with any pre-existing company software, allows to obtain such benefits in terms of cost reduction and cash improvement whose return should always be evaluated by each company.

The advantages of automation in the debt collection process with a Credit Management System

Improving the efficiency and effectiveness of credit management means greater recovery

The tool to segment customers into clusters, the automatic assignment of risk profiles, the automation of recovery procedures, the activation of reminder channels, automatic dunning activities or with processing lists for collectors are the must-have of any management system.

Automating credit management also means making the Credit Verification Policy (CVP) efficient, whose management is delegated to Credit Management. An efficient CVP has a positive impact on turnover as it affects a company’s ability to quickly acquire new customers and therefore the ability to speed up revenue generation.

Managing relationships with other organizations with a single dedicated tool

Another advantage of having a credit management software is the guarantee that the Credit Management, Customer Service and Sales organizations are constantly aligned with a unified and centralized view of customer information, commercial information and the history of recovery actions made with the related outcomes.

The configuration of the roles of each actor, with specific responsibilities in credit management procedures, both in the prevention and collection phases and escalation in the face of critical process issues simplifies the relationship between organizations.

The automation of the credit policy therefore makes it possible to integrate all the resources involved in a single digital work environment“, making it more stimulating.

Automation no longer gives an alibi for not achieving the expected results (and MBOs).

The automation of credit management brings with it a clearer internal communication, accessible at every level and constant. It allows you to define and share objectives by aligning personal goals with those of the company, encouraging greater development.

In addition, entrusting dedicated software with credit management ensures from an organizational point of view that company personnel can concentrate only on the business and its objectives, freeing up internal resources from “back-office time consuming” activities.

Many days less on the DSO, even only with the automation of the As-Is

The DSO is one of the most important indices to assess the credit management of a company, in a way it gives the measure of the company’s well-being and the objective of the Credit Manager is to keep this parameter as low as possible and compare it with that of competitors.

In the presence of clear terms of payment shown on the invoice and consistent with the contract signed and without any improvement in the management process, with a dedicated software you can recover up to 30 days of DSO.

Efficiency leads to a reduction in costs for Bad Debt, operating costs, bank charges and personnel costs.

The adoption of Credit Management Automation software allows a saving on the costs that the company sustains for personnel (and not only those dedicated to credit management), a reduction in losses on those receivables that due to seniority, complexity of substandard loans or unavailability of the debtor are considered no longer recoverable, lower charges for access to financial resources.

The company, in fact, will make greater use of self-financing determined by the punctual collection of the turnover within the set terms without having to resort to external sources of financing which will obviously apply an interest rate.

The advantage of faster reporting is enormous, and not only for the CFO

The adoption of digital technologies also responds to the need of the CFO, Credit Manager and Corporate Management to obtain increasingly accurate, immediate, easily accessible and able to make accurate decisions, improve operational and management efficiency of the company, while reducing costs and risks.

How to choose credit management software

Identify the most suitable outsourcing model

The outsourcing, that is the delegation to the outside of the company of a service, represents a convenient and profitable solution, more and more chosen from the companies that have need to improve their Cash Flow.

The level of delegation to external companies is a service easily customizable: it can be decided if to totally entrust the management and the recovery of the credit or only a part of it. It is up to the company to identify the most suitable outsourcing model with respect to its needs by intervening in several phases, from the initial collection of information on the customer, to the recovery of credit both in court and out of court, passing through the real management of its customer portfolio.

The defined outsourcing model is reflected in the technologies for the automation of the credit management process and therefore it would be preferable to have defined which model to adopt before choosing the supporting technology.

5 must have functionality of credit management software

Below are the “must have” features of an advanced Credit Management software:

  • Optimize strategies with ad-hoc tools, manage outsourcers and external lawyers with a single platform, enable the entire organization to interact according to the organizational model and business procedures
  • Manage operations in multi-channel logic with dedicated specialist work queues and decision support workflows, automating and simplifying recovery activities
  • Easily generate dynamic and flexible reports even on different levels of performance analysis with predictions of running costs and expected revenues;
  • Collaborate and communicate in real-time, assign and manage tasks directly from the platform
  • Access the software from any device, including apps

Preliminary” practical advice for the adoption process

The choice of the application solution to support the Credit Management process must be included within a specific project that, according to our experience, includes the following preliminary steps:

  • Cost/benefit analysis
  • Sponsorship of the different business functions involved
  • Defining a joint project team
  • Preparation of a project plan
  • Mapping of credit processes

The cost/benefit analysis is functional to the definition of a business case to support the company management in the decision to choose the possible investment and on which often some technology vendors can support the company in the preparation.

In the definition of the project team it is necessary to identify a Project Manager who has technical and functional skills and who ensures an integrated vision of the project, the monitoring and coordination of the project program; establish a corporate governance structure of the project and finally integrate the internal organization with that of the supplier.

In order to guarantee the project the best conditions for success, it is essential to involve in advance the following functions impacted by the credit management process and obtain their sponsorship:

  • Sales
  • CRM
  • Administration

In order to obtain the necessary adherence by these functions it is essential to share the project methodology and evaluate together both the impacts that the project to adopt a Credit Management Automation solution can generate in extra-cost terms (human resources to be committed to the project), and the common benefits that can be derived from it.

During the project phase it is important to identify the existing credit management processes, identify the critical issues of current management, define and formalize the Credit Policy that will be the document on which to base the analysis phase of the implementation project.

Not having clear and formalized internally the Credit Policy to be implemented can lead to uncertainty in the analysis phase during the project, with significant impacts on time and therefore on project costs.

Once the available budget has been defined, the process of selecting an application solution is normally divided into the following phases:

  • Definition of functional macro-requisites
  • Identification of technological constraints/opportunities
  • Scouting possible solutions
  • Supplier selection

In order to ensure the success of the project, it is essential to evaluate not only the economic component, but also the proposed design approach from which the delivery capacity of the supplier itself can be inferred.

Always ask for a system tailored to your needs

In choosing of a software must always be evaluated in advance the practicality of customization based on the changing business model, and must be integrated with any existing business application.

Once the recovery strategies have been defined and collection operations have been automated, the software chosen must be able to bring together all the structures involved in credit recovery, guarantee compliance with collection times and minimize the risk of outstanding credit as well as losses in the revenue generation process.
All the main features of the platform must also be accessible from mobile devices.

Buy a vision, not just a product

Integrating a software for credit management does not only mean relying on a System Integrator able to dialogue with the technical structure: it also means being able to talk about credit with technology experts as if they were Credit Managers, but at the same time experts in digital products.

In this way, misunderstandings are reduced during the design phase, critical issues are anticipated by identifying the best solutions, the process of digital integration and transformation is started keeping to the project plan, new innovative business models are built and new levels of efficiency and agility are quickly enabled through the introduction of digital technologies.

Choose flexibility and competence

Who wants to undertake this process must rely on an experienced company with a deep know-how in the Credit Management System.
This company becomes the partner able to support the evolution of the needs during the project and accompanies the Credit Manager with the right competence to respond to the needs with innovative technologies.

Crabb is the product able to respond to all the needs in the field of Credit, created by Balance, for over 10 years in support of Credit Managers in the adoption of the best dedicated technologies.

Crabb is the only market solution developed on Salesforce technology, leader in Cloud Computing. Crabb ensures the automation of credit management, is highly customizable for all business needs, is able to ensure performance, reliability, scalability, security and compliance with privacy and data processing regulations for the management and automation of all credit processes.