5 News and Views M ost people have ac- tually no idea what you are talking about when you mention the word credit management. In my opinion, there are two main reasons why credit manage- ment is so often so poorly un- derstood: 1) credit manage- ment is inconsistently or incor- rectly explained and 2) inter- esting stories and case studies are mostly distributed via spe- cialized media only. Credit peo- ple talk to other credit people, wondering why the outside world does not understand the importance of their work. ‘Preken voor eigen parochie’ and ‘onbekend maakt onbe- mind’ typically applies to credit management. As a new over- seas member of the Dutch Chamber of Commerce in Hong Kong and as an intro- duction, I feel honored to write this article about my profes- sion, B2B credit management. I hope this article will give you a better idea what credit man- agement is about and how it can help organizations to opti- mize cash flow, operational performance and results. Introduction When B2B companies do busi- ness, they often do so on an open account – invoice – basis. This basically means that we lend money to our customers and trust that our customers will pay us for the goods or services we have delivered or will deliver. However, with doing business on open ac- count we run two mayor risks that may affect our future per- formance and results: 1. the risk of not getting paid, because the customer has no money (for us) - and 2. the risk of not getting paid in time, because the cus- tomer does not want to pay us (for legitimate and illegit- imate reasons). Credit management tries to deal with these problems by managing and optimizing what we call ‘the order to cash cycle’. Not getting paid or late payments, no matter what the reason is, has a negative impact on your cash (in)flow, your ability to pay others, your need to finance working capital, your costs and ultimately your bottom line. Furthermore, late payments often have a negative impact on our relationship with the customer (two ways!), which, on its own may have a Cash, Profits & Credit Management: Bringing Finance & Sales Together By Marcel Wiedenbrugge, Founder and principal of WCMConsult marcel.wiedenbrugge@ wcmconsult.com ALL CUSTOMERS (1000) start here PAY IN TIME: 75% (750) ALL CUSTOMERS (1000) PAY IN TIME: 75% (750) DO NOT PAY IN TIME 25% (250) DO NOT PAY IN TIME 25% (250) DO NOT WANT TO PAY 20% (200) DO NOT WANT TO PAY 20% (200) REASON? REASON? COMPLAINTS 5% (50) COMPLAINTS 5% (50) INVOICE / PRICE 2% (40) INVOICE / PRICE 2% (40) DELIVERY / PRODUCT 2% (40) DELIVERY / PRODUCT 2% (40) COMMERCIAL ISSUES 1% (10) COMMERCIAL ISSUES 1% (10) DELIBERATE (CASH MANAGE- MENT) 6% (60) DELIBERATE (CASH MANAGE- MENT) 6% (60) LAZY / SLOPPY ADMINI- STRATION 4.5% (45) LAZY / SLOPPY ADMINI- STRATION 4.5% (45) UNRELIABLE / OBSTRUC- TIVE 4% (40) UNRELIABLE / OBSTRUC- TIVE 4% (40) FRAUD 0.5% (5) FRAUD 0.5% (5) REASON? REASON? RISK RISK VALUE VALUE HIGH LOW AVERAGE LOW HIGH AVERAGE illegitimate legitimate illegitimate legitimate CANNOT PAY 5% (50) CANNOT PAY 5% (50) TEMPORARILY 4% (40) TEMPORARILY 4% (40) STRUCTURALLY 1% (10) STRUCTURALLY 1% (10) Ideally we like to do business with customers who can and will pay us on a timely basis. The reality is that some customers pay us late for legiti- mate (complaints, disputes) or illegitimate (payment behavior, lack of money) reasons. As such, the tasks of credit management can be di- vided into 3 main areas.
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5
News and Views
Most people have ac-tually no idea whatyou are talking
about when you mention theword credit management. Inmy opinion, there are two mainreasons why credit manage-ment is so often so poorly un-derstood: 1) credit manage-ment is inconsistently or incor-rectly explained and 2) inter-esting stories and case studiesare mostly distributed via spe-cialized media only. Credit peo-ple talk to other credit people,wondering why the outsideworld does not understand theimportance of their work.‘Preken voor eigen parochie’and ‘onbekend maakt onbe-mind’ typically applies to creditmanagement. As a new over-seas member of the DutchChamber of Commerce inHong Kong and as an intro-duction, I feel honored to writethis article about my profes-sion, B2B credit management. Ihope this article will give you abetter idea what credit man-agement is about and how itcan help organizations to opti-mize cash flow, operationalperformance and results.
Introduction
When B2B companies do busi-ness, they often do so on anopen account – invoice – basis.This basically means that welend money to our customersand trust that our customerswill pay us for the goods orservices we have delivered orwill deliver. However, withdoing business on open ac-count we run two mayor risksthat may affect our future per-formance and results:
1. the risk of not getting paid,because the customer has nomoney (for us) - and
2. the risk of not getting paidin time, because the cus-tomer does not want to payus (for legitimate and illegit-imate reasons).
Credit management tries todeal with these problems bymanaging and optimizing whatwe call ‘the order to cashcycle’. Not getting paid or late
payments, no matter what thereason is, has a negative impacton your cash (in)flow, yourability to pay others, your needto finance working capital,your costs and ultimately yourbottom line. Furthermore, latepayments often have a negativeimpact on our relationshipwith the customer (two ways!),which, on its own may have a
Cash, Profits & CreditManagement: BringingFinance & Sales Together
By Marcel Wiedenbrugge, Founder and principal
of WCMConsult
ALL CUSTOMERS
(1000)start here
PAY IN TIME: 75%
(750)
ALL CUSTOMERS
(1000)
PAY IN TIME: 75%
(750)DO NOT PAY IN TIME
25% (250)
DO NOT PAY IN TIME
25% (250)
DO NOT WANT TO
PAY 20% (200)
DO NOT WANT TO
PAY 20% (200)
REASON?REASON?
COMPLAINTS
5% (50)
COMPLAINTS
5% (50)
INVOICE / PRICE
2% (40)
INVOICE / PRICE
2% (40)DELIVERY /
PRODUCT
2% (40)
DELIVERY /
PRODUCT
2% (40)
COMMERCIAL
ISSUES
1% (10)
COMMERCIAL
ISSUES
1% (10)
DELIBERATE
(CASH
MANAGE-
MENT)
6% (60)
DELIBERATE
(CASH
MANAGE-
MENT)
6% (60)
LAZY /
SLOPPY
ADMINI-
STRATION
4.5% (45)
LAZY /
SLOPPY
ADMINI-
STRATION
4.5% (45)
UNRELIABLE
/ OBSTRUC-
TIVE
4% (40)
UNRELIABLE
/ OBSTRUC-
TIVE
4% (40)
FRAUD
0.5% (5)
FRAUD
0.5% (5)
REASON?REASON?
RISKRISK VALUEVALUE
HIG
HLO
WAV
ERA
GE
LOW
HIG
HAV
ERA
GE
illegitimatelegitimate
illegitimatelegitimate
CANNOT PAY
5% (50)
CANNOT PAY
5% (50)
TEMPORARILY
4% (40)
TEMPORARILY
4% (40)STRUCTURALLY
1% (10)
STRUCTURALLY
1% (10)
Ideally we like to do business with customers who can and will pay us ona timely basis. The reality is that some customers pay us late for legiti-mate (complaints, disputes) or illegitimate (payment behavior, lack ofmoney) reasons. As such, the tasks of credit management can be di-vided into 3 main areas.
6
negative impact on sales. Im-proving payment behavior orpreventing your customersfrom paying late is thereforeimportant and starts by analyz-ing how your customers actu-ally pay you.
Measuring, monitoring, ana-lyzing and improving paymentbehavior of our customers isone of the main tasks of creditmanagement. However, beingable to pay and wanting to payare two totally different aspectsof the business cycle as thisoverview shows.
Financial
The financial aspects of creditmanagement focus on the fol-lowing areas:
a. Managing and improving ofoperational cash in flow.Simply put: we can optimizecash (in) flow by makingsure that our customers areable and willing to pay us ina timely manner. The firstcan be ensured by regularlychecking the creditworthi-ness of your new and exist-ing customers. The latterboils down to making surethat customers have novalid reasons to pay us lateand the application of cus-tomer oriented (differenti-ated) dunning strategies(based on financial risk andpayment behavior).
b. Reducing the need to fi-nance working capital. Byimproving cash flow andminimizing bad debt, wecan reduce the need to fi-nance working capital orsimply put, reduce amountsunnecessarily ‘stuck’ in out-standing invoices. As long
as our customers do not payus, we obviously cannot usethat money for other - moreproductive - purposes.
c. Typical accounts receivablerelated activities such as as-sessment of credit lines, fi-nancial analysis of your cus-tomers, payment arrange-ments, sending reminders,calling overdue customers,contacts with collectionagencies, etc. etc.
Operational
Due to the relationship betweencomplaints and invoices, (auto-mated) complaint managementis an integral part of credit man-agement. Wrong invoices,wrong deliveries, wrong prod-ucts, commercial disputesmostly lead to blocked (= un-paid) invoices, unhappy cus-tomers and of course dissatis-faction on your side. Com-plaints or disputes take time, re-sources, people, and negativelyaffect cash flow which all costsmoney. Obviously complaintsor disputes need to be solved, sowe should better do that in anefficient (simple, easy) and ef-fective (fast results) manner tominimize the impact on the cus-tomer relationship or your ownperformance. By registering andmonitoring complaints, creditmanagement can analyze theroot causes. Based on their find-ings, credit management cangive suggestions on how to im-prove business processes andprocedures, which ultimatelyhas a positive impact on cashflow, performance and results.
Commercial
When we talk about sales andcustomer relations, we often do
not think about finance orcredit management. But actu-ally we should. Take new cus-tomer acquisition for instance.Especially in B2B, this is oftena time consuming and costlyprocess. Once sales has finallymanaged to close the deal withthe new customer, nothing ismore frustrating than findingout that we cannot ship the(first) order due to a poor fi-nancial status of the customer.As such, one of the objectivesof credit management is to es-tablish a pro-active workingrelationship with sales in orderto avoid these problems asearly as possible. In the end,the purpose of a company is tocreate value and build prof-itable customer relationshipsand we do not do that bydoing business with customerswho (structurally) cannot ordo not want to pay us. Fur-thermore, it s important thatboth credit management andsales have a more or less con-sistent and transparent visionon how to deal with customerrelations, so we can avoid situ-ations in which sales is build-ing a relationship with cus-tomer X, while credit manage-ment is breaking the relation-ship down due to for instancepoor payment behavior.
The Integrated approach
Since financial, operationaland commercial activities ofany business are fully inter-twined, credit management hasthe best return on investmentwhen it is applied in an inte-grated way. Integrated meansthat credit management, fi-nance, sales/marketing andservice (pro-) actively need towork together and share rele-vant information in order tooptimize the business processin sustainable and profitableway. Though this approach ob-viously may take time to imple-ment, more and more casestudies indicate that this way ofapplying credit managementclearly pays off.
Though credit managementmay be applied differently fordifferent kinds of organiza-tions, there is no exception tothe rule that customers, cash
OPERATIONAL
FINANCIAL
Communication &Cooperation
betweenPeople & Systems
CreditManagement
COMMERCIALKPI’s
KPI’sKPI’s
commun
icatio
n & co
opera
tion
communication & cooperation
communication & cooperation
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