Portfolio Management

Credit and Collections as a Revenue Generator

Article

Next time you are spending quality time with a client, at a board meeting, or getting an update from the CFO you may want to inquire about practices of their company’s credit and collections department. The credit and collections department is constantly interacting with the company's customer base. This provides them with opportunities to augment sales, identify customer needs and problems, and / or be proactive in collecting those slow paying accounts. A properly operated credit and collections department can enhance profits and earnings per share.

 

Things to think about when seeking opportunities to improve the credit and collections department:

 

  • Training is Key
  • How is the staff motivated?
  • Are the credit files up to date?
  • What operating systems are in place?
  • What is the company's policy on updating customer credit files?
  • Does the company have systems for identifying troubled customers?
  • Has the company reviewed its remittance processes with an eye toward decreasing collection time and increasing cash flow?
  • Is the credit department trained to meet customer's needs?

 

Training is Key

 

If the company views the collection department's task as chasing slow paying customers then it is losing out on opportunities to generate additional revenue. Collection calls can be distasteful, or they can be part of the customer service process. While companies always face the challenge of attracting and maintaining a highly effective and professional collection staff, it is essential that these employees are empowered and trained to enhance the company's image.

 

The collections department is on the front line with your customer base. Failure to handle the customer properly can leave a stigma, causing slowness in future payments and lost revenue.

 

How is the staff motivated?

 

Are the people in the credit and collection department empowered and motivated to service the customer or are they expected to make collection calls all day? Is your credit and collection department empowered to solve problems and recommend changes to enhance customer satisfaction? A properly trained department can enhance the company's performance via increased cash flow and improved perceptions among your customer base.

 

Are the credit files up to date?

 

Do not let your credit department fall asleep just because economic life has been good. Life will return to normal and the company should be in the forefront of identifying trouble. Maintaining an updated credit file on your customers is critical. It will help you in identifying problems before they turn into bad debts. Customers refusing to provide timely financial information via comprehensive financial statements are an early warning sign that things may not be well.

 

What operating systems are in place?

 

Does the company have systems in place to track changes in the customer's acid ratio, current ratio, working capital ratio, inventory turns, days outstanding, etc.? Does the company maintain a data base of these ratios by customer to better understand how a specific customer ranks? These ratios will help the credit department understand changes taking place at the customer, as profits alone do not provide a clear picture of a customer’s ability to meet its obligations.

 

Tracking your customer base by risk category and payment history will allow the credit department to prioritize the collection effort and customer trends more efficiently. Understanding why your customer's payment history is changing can lead to opportunities to increase revenue and collections while conversely curtailing your bad debts.

 

Does the company have systems for identifying troubled customers?

 

Someone in the company needs to maintain a constant vigilance over the accounts receivable. Having systems in place to identify slow paying customers early in the process is important. A good system should minimize the company's exposure. Early detection of problems will allow you to reduce your financial exposure with the customer before other creditors start their collection process. Hopefully, if the company is the "First One In" they will not be part of the unsecured creditor list if the customer files for bankruptcy.

 

Are the company's systems such that a monthly list of delinquent accounts is made available to the senior management team in concise chronological order?

What steps has the company taken to streamline the remittance process and reduce risk?

 

Technology is rapidly changing how we do business. Is the company still waiting for the check to arrive in the mail? Does the credit and collection department understand how the customers process their invoices? Has the remittance process grown to the point where it is consuming too many resources? What does it cost to process a remittance? How many days does it take to process a remittance? Does the department have trouble reconciling remittances with customer balances? Are the company's customers local, national or global? If the customers are global what is the currency risk exposure and do they engage in hedging? Instead of waiting for the check to arrive the company my want to consider:

 

  • lock boxes
  • credit insurance on the customer to reduce risk
  • out of province remittance sights to decrease mail delays
  • "E" payments and "E" commerce
  • letters of credit
  • trade acceptances
  • automated payments

 

The company's bank can be a good source of ideas on how to reduce remittance time, and secure letters of credit or trade acceptances to reduce risk. Credit insurance is a good alternative to monitor customers’ credit worthiness and for establishing credit limits. Credit insurance can be a useful tool for growing companies exposed to high credit limits by a few customers. Credit insurance can be a lot cheaper than trying to save your company after a major customer gets into financial trouble.

 

Look for ways to shrink the time it takes your customer to approve your invoice, process it for payment and make the funds available for you to use.

Is the credit department trained to meet the customer's needs?

 

A key component of any successful company is customer satisfaction, for without customers there is no economic activity. Does the company look at its credit department as bill collectors or a team empowered to solve customer problems? Does the company have disputes with customers over:

 

  • billing inaccuracies;
  • shipping errors;
  • delays; out of stock problems;
  • quality problems

Disputes in these areas may indicate quality problems. Continued problems with the product, operations or the finance department will spell trouble and lost customers. Has the company looked into applying Total Quality Management (TQM) principles to eliminate these problems?

 

Is the credit department trained to meet customer's needs?

 

Is the credit and collections department trained and empowered in handling customer problems? If so, does the department understand its problems? Industry leaders work with their customers and seek feedback on all aspects of their business including the billing and collection processes.

 

How can it be hard for a customer to remit payment? You say, just send the check. The internal control processes undertaken by some companies make the remittance process difficult. Understand your customers' processes and requirements. A customer-oriented approach increases customer satisfaction, cash flow, and revenue. Understanding your customers’ needs and requirements can result in additional business as the customer turns to suppliers willing to help them be successful.

 

Smaller middle market companies may not have a credit and collections department. The function can be part of the controller’s, administrators, or president’s monthly task. That does not minimize the training and effort that should go into converting the person into a customer service representative.

 

Not large enough for a full time senior credit person? Then consider out-sourcing the function to a part time credit manager. If you select this approach, be sure the person is trained in providing customer service not just in making collection calls. Out-sourcing does not mean giving up control. Be sure the systems and structure are in place to monitor this segment of the business. An appropriate feedback system needs to be established to provide essential information to management on how better to service the customer while ensuring the collectability of the company's assets.

 

To succeed and evolve into the twenty-first century, companies need to maintain a competitive edge. Part of that competitive edge will come not from new technologies but from applying solid business practices to every aspect of your business. Credit and collections departments are not looked upon as a source of customer satisfaction and revenue, but a cost center necessary to collect your revenue. That can be a mistake. Credit and collections departments are in daily contact with your customer base. Empowering them through training, motivation, and professionalism will add to the bottom line not detract from it.

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Published under: Portfolio Management
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