Back in February after I published my article, “When Credit Managers Understand the Mind of Sales,” I received several requests from credit managers around the world for an article supporting their perspective.
As I mentioned last time, when sales and credit professionals walk in each others’ shoes, they soon learn to appreciate the challenges that each faces. As a collection professional myself who has interacted with literally thousands of other credit professionals over the decades, I would like to share the difficulties that credit and/or collection managers often grapple with at their companies.
What is the meaning of credit?
To those who don’t work in credit, I think there’s a tendency to have relatively simple answers like:
- keeping up cash flow
- not releasing the product until payment is confirmed
- trusting the customer
These comments together more or less encompass the layman’s view of what credit entails. However, on a more full scale basis, when thinking about the meaning of credit, we really have to think in terms of what a “Credit Risk Management System” is. In my view of the universe a Credit Risk Management System is the coordination of “before and after sales” tools, controls, procedures and policies that will:
- maximize sales
- maximize cash flow
- maximize the protection of assets
- minimize the risk of selling on credit
Now, to every sales professional reading this, I know these might sound a little intense; but I can envision credit professionals nodding their heads in agreement with these credit commandments to which they must always try to adhere.
As previously mentioned, without customers purchasing the company’s products and services, the engine of opportunity to create income can’t even begin. With no way to increase market share, hire and keep employees, brand the company, or generate team spirit and goodwill, it’s like everything in the company is in place to do nothing.
But once that sales negotiation and transaction process gets rolling, the credit operation needs to roll alongside making sure the company gets paid. Not ensuring payment can:
- bring cash flow to a halt
- impact the company’s productivity
- create and/or exacerbate financial losses
To be a credit professional within this process takes a certain mindset in a particular type of person. I’ll be honest with you, if you’re the type of individual who needs to be loved by a lot of people, working in the credit and collection field is probably not a good career choice. It’s unfortunate but realistic that we credit professionals can often be known as the person who says “NO” to the customers and terms to whom sales professionals are dying to sell.
What are the traits of a credit professional?
Having managed and worked with dozens of credit and collection professionals over the years, I’ve observed some very positive traits, but also several characteristics that need improvement. Traits that work well in credit include being process-oriented, analytical and precise, circumspect and guarded, well organized, disciplined, protective, vigilant and a calculated risk-taker.
On the side of weaknesses, credit professionals can often be perceived as: inflexible, not comfortable wheeling and dealing, not familiar with business courtship and protocol, too numbers oriented, unable to see the big picture, and overly cautious.
Like I said, being in the credit field is not about winning a popularity contest, but someone has to be there to step on the brakes in the event that sales starts driving the car a little bit too fast.
So what exactly does a credit professional need to do?
Depending on the makeup of their particular company, a credit professional has many possible responsibilities including, but not limited to:
- evaluating new customer credit applications
- obtaining and verifying supporting third party credit information
- setting new credit limits as appropriate
- periodically reviewing credit limits on existing customers
- ensuring compliance with the corporate credit policy
- controlling bad debt exposure and expenses, through the direct management of credit terms on the company’s financial records
- maintaining strong cash flow through efficient collections
- monitoring the accounts receivable portfolio for trends and warning signs
- enforcing the “stop list” of supply of goods and services to customers
- initiating third party collection and legal recovery actions against delinquent customers
In some cases, credit managers are also asked to assist in the sales process by communicating directly with customers about credit terms and conditions in advance of complex sales transactions and visiting them to negotiate arrangements if payment becomes delayed.
What are the main challenges that impact the credit professional?
In a credit professional’s quest to grant credit on a customer, there’s definitely a relationship between the complexity and price of the product or service being sold and the amount of time and effort that goes into verifying the credit worthiness of a customer. For products or services that are simple and low cost, credit can be granted very quickly. As the product’s complexity and price increase, the time it takes to gather and evaluate credit information to structure and negotiate credit terms and conditions can take several weeks.
When a credit decision, especially on a new customer, turns out to be a bad one and the customer doesn’t pay, particularly if it’s based upon an inability to pay, the credit professional will probably feel disappointment, concern, anger, and at the same time a strong desire to get it resolved quickly. Although they tried, using all of their experience and professional judgment, to ensure that the customer would be creditworthy, it’s exasperating to see what was considered to be an evaluated good customer, go bad.
Although credit professionals want to support the sales department in obtaining new customers, expanding sales opportunities with existing customers, and attaining sales goals, it’s always important to not rush certain sensitive credit decisions. One of the most frustrating credit scenarios for credit professionals is the 4:00 p.m. mammoth order received from a brand new customer on the last day of the month that must be approved in order to achieve that month or quarter’s sales goals. At that point the entire company is descending upon the credit professional to quickly and effortlessly provide his consent.
But what can really undermine a credit professional is when the decision to refrain from granting credit to a particularly circumspect customer is overridden, resulting in a significant payment default. While the credit professional tries not to blurt out, “I told you so,” he or she is often still entrusted with cleaning up a difficult non-payment situation.
Credit and sales professionals are two compartments of the engine driving a company. Understanding the needs and challenges that each one deals with brings both parts closer to powering the company into a dynamic, successful, profitable and highly reputable organization.
This article was edited by Steven Gan.