Posts Tagged ‘Credit Management’

maart 13th, 2015 · by John · Weblog EN

To many people, the term debtor carries a negative connotation like that of someone being guilty of a trespass or sin. Under ancient Athenian law debtors could pledge themselves as collateral for a loan. If they failed to pay, they would become the creditor’s slave. During the middle ages, debtors were locked up until their debt was paid. Conditions included starvation and abuse from other prisoners. Some debt prisoners were released from prison to become indentured servants.

Debt collection is the process to ensure that clients pay amounts, which they have not paid on time or even refuse to pay. Calling past due management debt collection however, given the aforementioned negative connotation, can hinder the resolution of the situation and endanger customer relations, future sales, customer retention, as well as harm the seller’s business reputation. The majority of past due customers are not trying to avoid payment; they have valid reasons why they have not paid yet.

Some customers pay late because they choose to practice cash management. These are often big companies who use their vendors as short term financers, and they will not pay any late fees. Other, companies and government agencies are slow payers because they are not well organized and can’t locate the invoice, or they are just plain lazy about taking care of accounts payable.

Other clients have not paid because something went wrong somewhere. One can think of sales or service disputes, shortages or overages, late delivery, lost paperwork, missing information, unauthorized purchases, returns, unissued or misapplied credits, damage, sales guys offering extended terms and failing to tell anyone in Credit, flood, famine, fire, oil spills and earthquakes. Underlying causes can be on the part of the customer, the seller or even come from an outside source. Murphy was an optimist.

Sometimes customers might be willing, but are not able to pay: they simply don’t have the money. This inability is short term and has an understandable explanation: they bill their customers at the end of the month, they have had an unexpected loss or expense, or their business may be of a seasonal nature. Most of these customers can, more or less accurately say when they will be able to pay. There can however, also be long term financial problems, for instance due to the divorce of principals in a small business, loss of a key person, new competition, a new product or service making the customer’s business obsolete. The latter customers represent a large risk of bankruptcy.

It is therefore important to determine why payment has not been made and resolving the matter so that customers pay and purchase again.

Nevertheless, in a limited number of cases debt collections will be needed. Depending on the quality of your credit approval process, a small percentage of customers will try to avoid payment. They are out to beat sellers out of what they owe. They will be un-cooperative and they will lie, break promises or even skip out altogether. Then it’s time for debt collection. Pity you can’t enslave them anymore……

John Greijmans


juni 17th, 2013 · by John · Weblog EN

Extending credit to customers is like offering clients an interest free loan. There is no immediate expense, but granting credit entails additional costs. Allowing clients to defer payments increases the risk of bad debts and drains your cash flow. The only reason therefore to incur these costs, is to get a profitable sale that would otherwise be lost.

It is the responsibility of Credit Management to make a sale possible and, at the same time manage the costs of extending credit: bad debt and interest. Credit management should therefore be involved in both the credit approval (before the product or service is delivered) and I past due management (after the product or service has been delivered).

If you are a credit manager, you therefore have a tough job to do. Sticking to the Golden Rules below will make your life somewhat easier, but still very challenging.

  1. Determine the creditworthiness of each customer before credit is extended. Assess the credit risk, and based on that set credit terms (days), credit limit (amount) and, if needed securities.
  2. Continuously and at least annually, review the credit rating of existing clients. Always evaluate creditworthiness when clients exceed their limit or when you seek and become aware of other relevant information.
  3. Apply a strict review, authorization and communication process for granting credit limits and setting credit terms. A credit application should contain full business and personal contact details, trading name, credit guarantors, referees, identification number and years in business. Obtain a credit report to determine whether the client is creditworthy.
  4. Send out customer invoices immediately, and allocate payments to outstanding invoices on the day of receipt of the bank statement or remittance.
  5. Have a management review of aging reports at least twice a month and take appropriate actions to resolve issues.  Set targets for improving DSO per client and follow up on plans.
  6. Put customers on credit hold when they exceed their credit limit or when they have past due amounts. Implement a system lock to prevent handling shipments of customers on credit hold.
  7. Follow up collection through reminders and dunning letters. Treat delinquent payment as debt, and decide on what in-house collection measures to take, and when to refer to an external professional.
  8. We are all in Credit Management! Work with sales, operations and other departments to stay on top of what’s happening with a customer and to resolve issues quickly.

These Golden Rules are only a high level overview of what you as a credit manager should do and, no less important what your organization should do to finalize the sale. And the sale is finalized no earlier than the moment the money is on your bank account. In future blogs I will go into more details on the various aspects of credit management.

John Greijmans

maart 25th, 2013 · by John · Weblog EN

The ancient Greeks called it Aretè, often translated as virtue, but “reaching our highest potential” or excellence comes nearer to the original concept. Excellence is about superiority in a good way, having an unusual degree of good qualities. We can strive for excellence but we will never reach it, because there will always be another business trying to outdo us. The journey for excellence therefore never ends, and we must keep on looking for new ways to improve our organization.

The Wealth of Nations

Business excellence in the sense of improving the performance of an organization started with Adam Smith. In his “Wealth of Nations” (1776) Smith recognized how division of labor could increase output. In a society where production was dominated by handcrafted goods, one man would perform all the activities in the production process. Smith described how that work was divided into a set of simple tasks, performed by specialized workers.

Scientific Management

In the last decades of the 19th century, Frederick Taylor started the scientific management movement.  Taylor believed in transferring control from workers to management. He increased the distinction between mental (planning) and manual labor (executing). Detailed plans specifying the job, and how it was to be done, were to be formulated by management and communicated to the workers. Scientific management had a huge impact on mass production principles. Henry Ford significantly improved productivity by organizing processes differently. He for instance introduced the conveyor to organize an assembly line, and standardized methods and tools to decrease variation and cost.

Toyota Production System

World War II left Japan a poor country. Scarcity of resources and technology forced companies to focus on efficiency and customer requirements. The idea of continuous improvement was one of the most important innovations of this era. These new principles became part of the most successful business case of all times, the Toyota Production System. The objectives of TPS were:

  • To design a process capable of delivering required results smoothly without inconsistency.
  • To ensure processes are flexible without stress or overburden since this generates waste.
  • To address waste (anything that does not advance the process or everything that does not increase value).

Total Quality Management

The 1980s showed the birth of Total Quality Management. TQM was a management philosophy for continuously improving the quality of products and processes. Its basic principle was that meeting or exceeding customer requirements is the responsibility of everyone involved in the creation or consumption of products and services.

Six Sigma

Two decades later Six Sigma came into being. Six Sigma aimed for an error free business performance with a rigorous focus on meeting or exceeding customer requirements. Six Sigma included the tools and philosophies of TQM, but also led to improvements.

  • TQM failed where management did not participate and backed it up. Six Sigma required management involvement.
  • TQM did not require teams to work on projects and creating a culture of continuous improvement. Six Sigma did.
  • TQM never defined a methodology for its implementation. Six Sigma provides an improvement model known as DMAIC.

Six Sigma also had more advanced statistical tools than TQM. Incorporating these tools created opportunities for bigger and better improvements.

Lean

Lean had its roots in the Toyota Production System. The core idea was to maximize customer value by eliminating waste. Lean therefore meant creating more value with fewer resources. It changed the focus of management from optimizing separate technologies, assets and vertical departments, to optimizing the horizontal flow of products and services through value streams that flow across technologies, assets and departments to customers.

Lean Six Sigma

Lean focused on reducing waste by creating efficient processes. The focus of Six Sigma was on creating perfection in the output of these processes. As both systems were complementing each other, Lean and Six Sigma were combined into Lean Six Sigma (LSS). LSS incorporates all proven tools and philosophies and, because it is open to new and better methods, it helps us in our continuing strive for excellence.

John Greijmans

 

januari 7th, 2013 · by John · Weblog EN

One of the most, if not the most, important activities in your company is credit management. Credit management is the process to ensure that customers will pay for the products delivered or the services rendered. Credit management is of vital importance to your cash flow: you can be profitable, but if you lack the cash to continue your business, you will either be bankrupt or taken-over by someone who knows how to deal with cash.

Customers that have not yet paid are called accounts receivables (AR). The problem with AR is that this is money owned by your company (AR is also called debtors!) over which you do not have any control. There are two huge disadvantages with AR.

  • As long as your client has not settled his amount due, capital remains tied in AR and does not even carry interest. Capital is cash, and you can use that cash for many other, far more useful and profitable purposes.
  • As long as an amount is outstanding, there is a risk that the customer will not be able to pay. The longer it takes the customer to pay, the higher the risk of non-payment. Non-payment or bad debt means a loss of 100% on that account.

At first glance the solution is simple: do not extend credit to customers. If a customer wants to purchase something from your company, tell her that she should either pay in advance or pay at delivery. In that way you will not have AR, meaning all your cash is ready available and you do not run the risk of bad debt.

If life were only that simple! The problem is that in many cases where you decide not to extend credit, the customer will go to competition. This makes credit management not only an important process, but also an interesting activity. In all your dealings with a customer you will have to weigh two risks: (1) the risk of late or non-payment, and (2) the risk of losing the sales.

Again this is easier said than done. Credit management is not only an important and interesting activity, but also an extremely difficult job. In future blogs I will therefore discuss in somewhat more detail the three important steps in the credit management process:

  • Reviewing credit worthiness and deciding whether or not to extent credit.
  • Monitoring amounts that are not yet due, but on which you nevertheless run the risk of late or non-payment.
  • Collecting the cash of amounts that are past due, but have not yet been settled.

John Greijmans

 

september 29th, 2012 · by John · Weblog EN

Life could be so easy! A customer places an order, we deliver the product or service and issue the invoice, and then the customer will pay the bill. All parties end up to be happy. Quoting Shakespeare, “all is well, that ends well”. Alas, in the real world it often happens that a client, or debtor as she is called by then, does not always pay in time. Sometimes she bluntly refuses to pay. In these cases, how can we get back in the “don’t worry be happy world”?

First of all we should be careful using the word debtor. The term carries a negative connotation of someone being guilty of a trespass or sin. Under ancient law debtors could pledge themselves as collateral for a loan. If they failed to pay they would become the creditor’s slave. During the middle ages, debtors were locked up until their debt was paid. Conditions included starvation and abuse from other prisoners. The client is king, and she should behave as an emperor and pay the amount she is due. Unless she has a valid reason not to pay yet, that is!

If we issue an invoice, which the customer pays too late, or doesn’t pay at all, we are entitled to take some kind of action. Calling past due invoice management debt collection can however hinder the resolution of the situation, and endanger future customer relations. Fact is that the majority of past due customers are not trying to avoid payment. They often have good, or at least acceptable reasons why they have not yet paid.

Some customers pay late because they choose to practice cash management. Big companies use their vendors as short term finance. They want cheap credit. Other companies and many government agencies, pay slowly because they are not well organized, can’t locate the invoice, or just are lazy about taking care of accounts payable. 

Other clients have not paid because something went wrong somewhere. Think of sales or service disputes, shortages or overages, late delivery, lost paperwork, missing information, unauthorized purchases, returns, misapplied credits, damage, sales guys offering extended terms and failing to tell anyone, flood, famine, fire, oil spills, and earthquakes. The underlying causes can be on the part of the customer, we can be to blame ourselves, or even come from an outside source. Indeed everything that can go wrong, will go wrong. Murphy certainly was an optimist.

Sometimes customers are willing, but not able to pay: they simply don’t have the money. This inability can be short term, and have an understandable explanation: they bill their customers at the end of the month, they have had an unexpected loss, or their business is of a seasonal nature. These customers can, more or less accurately say when they will be able to pay. Next to that, there can be long term financial problems. Possible causes are the loss of a key person, new competition, or a new product making the customer’s business obsolete. This is often the times where the bankruptcy notices will come.

When investigating past due amounts, always remember that collection is there to complete the sale. And the sales is completed when the cash is collected. Therefore, first determine why payment has not been made, and then resolve the matter so that customers will pay and purchase again.

Nevertheless, some customers will try to avoid payment. They are out to beat us out of what they owe. They will be uncooperative, they will lie, break promises or even skip out altogether. Then it is the time for real old-fashioned debt collection. Pity we can’t enslave them anymore for not paying……

 

John Greijmans