“Beyond the Fundamentals: Anatomy of The Perfect Credit Department” ICTF April 7, 2014 Pamela Krank President The Credit Department Inc. (TCD) [email protected].

“Beyond the Fundamentals: Anatomy of

The Perfect Credit Department”ICTF

April 7, 2014

Pamela Krank President The Credit Department Inc. (TCD)[email protected]

Agenda

• Characteristics of “Perfect” Credit Departments

• Efficiencies vs Effectiveness • Process/Technology/Resource

Maximization• Strategies for Moving toward

Perfection:• AR Valuation• Bad debt Analysis

The Credit Department, Inc (TCD) Background

•Manage global trade credit for 52 mid-market companies all over the world•70,000+ bill-to customers•150,000+ open invoices daily•Consulted in nearly 500 global companies’ Credit Departments

“A Perfect Credit Department”

A Generalization:Smaller vs Larger Credit Departments

•Smaller Credit Departments (less than 10 members) tend to be more efficient and less effective•Larger Credit Departments (10+ members) are usually more effective but less efficient

Top Consulting Observations onCredit Departments

1. Insufficient focus on managing top risks

2. High cost per credit analysis, collection account, deduction management

3. Work arbitrarily assigned4. No retrospection on missed

opportunities5. Write-offs common practice6. Poor/incomplete use of internal

data7. Lack of sophisticated

tools/technologies8. Inconsistent decision-making9. Policies/procedures not

followed/enforced

How do we get our Credit Departments more effective while meeting our CFO’s lower cost goals?

Profile of Perfect/IdealCredit Departments

1. One Standard Process flow2. Credit Scorecards Utilized3. Credit Committee Formed4. Maximize

Automation/Paperless 5. Department of Specialists6. Best-in-Class results7. Efficient cost structure8. No surprises

Process Flow

• Credit Policy directs each process• Only those who add value are a

part of the process.• Credit resources are defined by

impact of risk on the receivables portfolio

• Collection activity is driven by default risk and cash flow priorities

• Value in diagramming processes

Credit Scorecards

Credit Committees

• Representatives from Credit, Finance, Sales, Marketing, Executive

• Build consensus on credit policy and updates

• Meet regularly to deal with sales forecasts vs existing credit limitations

• Deal with inter-company process issues

• Create a path for approving lines beyond credit recommendations aka, business decisions.

Technology Expectations

•Automate routine processes (letters, scheduling, statements, small lines)•Allow the system to determine daily work queues, not individuals•Expect analysts to spend time working risks alerted by the system•Code every past due item with status, review dates•Focus is on reporting risks and customer information to top management

Staff Resource Utilization

Current Resource Utilization Example

Most Effective Resource Utilization

Staff size determined by history of account management

Process & technology maximized first before replacing/hiring new staff

Employees are all “generalists” who do the same tasks regardless of asset allocation needs. Work generally divided by alpha, region, or division/product line.

Duties assigned to specialists (ie credit analysts, collectors, deduction specialists) based on numbers of credit files, past due accounts, #’s/complexity of deduction files, etc

Obstacles to a “Perfect”

Credit Department– Lack of upper management support– Existing team members unable to

identify process change needs/implement scorecards

– Insufficient budget for technology– Change reluctance by employees– Limited resources

“No Surprise” Reporting Example

No Surprise Tool: Valuation

of the Receivable Asset•Assign risk probability to every credit customer•Compare probability of default to exposure•Assign statuses to every past due item with historical probability•Calculate the risk

Existing Exposure Example

Based on Risk Probability

Total Aging: $16,610,000:

Customer A/R Totals in these categories from scorecards:•Very high VH (20%+): $500,000•High H (10%+): $760,000•Medium high MH (5-10%): $1,250,000

A/R Asset ValuationRisk of Credit Default

•Very high VH (20%+): $500,000 * .20 = $100,000•High H (10%+): $760,000 * .10 = $76,000•Medium high MH (5-10%): $1,250,000 *.05 = $62,500

Total reserve (part 1) based on Customer Risk of default in Credit process: $238,500

Value so far: $16,610,000-$238,500 = $16,371,500

Delinquent Account Status Reserve

ExampleStatus Past write-off

experienceExisting Status Balance

Predicted Defaults

Bankruptcy 95% $122,000 =$115,900

Bad debt 100% $115,000 =$115,000

3rd party 85% $80,000 =$68,000

Collection Attorney

60% $48,000 =$28,800

Final Demand 40% $180,000 =$72,000

Installment Note

20% $350,000 =$70,000

Total Probable Status Bad debt =$469,700

A/R Total Valuation Report Example

•$16,610,000 gross value•($238,500) Default Risk Probability•($469,700) Account Status Default probability

Total Net Value of the Asset:

$15,901,800

Bad debt Analysis Example

Customer name/acct #

____________________ ___________

Bad debt written off

$______________

History of risk changes

__/___/__ date ____score $________ line amt

__/___/__ date ____score $________ line amt

__/___/__ date ____score $________ line amt

Within policy limits?

___ yes ____ no

Missed Opportunity

__________________________

Comments __________________________________________________________________________

_____________________________________

Conclusion

• Perfect Credit Departments are both effective and efficient

• We need to ensure our process, technology, and people resources match the needs of the asset

• There are changes and enhancements we can all make to strive toward perfection in Credit.

• Surprises ruin perfection….our job is to prevent them from happening

Thank you!

Pam Krank

The Credit Department Inc (TCD) [email protected]

800-451-0164 X 203

www.tcd.com