Credit Management, a strategy at the crossroads of sales and finance

Today we're talking about Credit Management and the importance of the Credit Manager 's role in B2B commercial relations.

As well as generating sales, managing customer risk and debt recovery is just as vital to a company's long-term survival and development.

And while large organisations are the most likely to recruit a credit manager, this is a strategic position for SMEs, which are much more sensitive to the effects of uncertain cash flow.

We take a look at the challenges of credit management in this article, reviewed by Eric Desquatrevaux.

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What is Credit Management? Translation

Credit management: definition

In French, credit management means credit management.

If the term is English, it is not by chance. This strategic position is mainly found in Anglo-Saxon companies.

Why do we talk about credit? Because by authorising a customer to pay on time or in instalments, rather than on delivery of the service or product, the company is giving the customer credit, without interest, and taking the risk :

• not being paid
• having cash flow problems
• jeopardising its financial health or even its very existence.

This is why credit management is not concerned with turnover and sales, which are sometimes virtual, but with the terms of payment of invoices, to prevent the risk of non-payment or late payment.

Why is credit management so important?

Here are the main issues for companies:

• assessing, controlling and monitoring outstanding customer debts
• Reduce collection times and late payments,
• limiting time-consuming procedures such as invoice reminders and debt collection,
• optimise working capital requirements and cash flow,
• develop your financing capacity without having to resort to bank credit,
• respect the cash flow plan,
• improve its financial situation,
• develop commercial relations on a sound basis.

Who is a Credit Manager?

Credit manager: definition

As a specialist in customer receivables management, the Credit Manager manages receivables and disputes, defines the operational credit management policy and ensures that it is applied across the company.

For this reason, they report to either :

• the Sales Department
• the Finance Department (ideally).

In smaller companies, these duties may be carried out by the Chief Financial Officer (CFO).

Credit manager: duties

The dual role of credit manager is a real challenge.

He or she has to secure the company's receivables, taking into account the divergent operating methods and short-term objectives of the two departments:

• For some departments, it's all about making money and satisfying customers by granting them credit and payment terms,
• for the others, rigorously controlling the company's finances.

It is therefore a position of responsibility that bridges the gap between these two entities; a facilitator enabling the implementation and communication of best practice in invoicing and payment management.

It also has a double challenge to meet, legislative and technological, as these two credit managers explain:

Credit manager: skills

Among other things, he or she masters :

• cost accounting
• financial management
• business law
• ERP-type integrated management software, such as the SAP suite,
• software dedicated to credit management, such as DSOsuite, which offers tailored consulting and services to the finance departments of SMEs, ETIs and major accounts, including :
  • risk analysis
  • dunning management
  • reporting,
  • dynamic collection diaries.

Credit Management: processes

Credit management is involved upstream and throughout the commercial relationship between the company and its customers.

Defining a strategy

Even before any prospecting or sales action, the credit manager defines a customer receivables management strategy to prevent the potential risks of payment default, which may be caused by :

• customer insolvency
• disputes
• internal malfunctions.

There are several levers at your disposal:

• Deepening the segmentation carried out by the sales and marketing managers, to determine the types of risk associated with each of the customer segments under consideration.
  
• Defining payment terms:
  • Accepted payment methods,
  • terms and conditions for advance payments
  • acceptable payment terms (credit limit),
  • penalties for late payment,
  • reminder methods, etc.
    
• Participating in the drafting of commercial documents and their contractual clauses , including :
  • commercial contracts
  • General terms and conditions of sale,
  • Invoices,
  • reminder models.
    
• Definition of processes, such as :
  • processes for negotiating payment terms,
  • processes for issuing invoices
  • collection processes (amicable collection methods, late payment penalties, formal notice, litigation), etc.
    
• Drawing up a credit management procedure summarising all these points, to be communicated to all the company's departments for greater fluidity and transparency.
  
• Risk management and the use of solutions such as :
  • factoring: a credit institution buys invoices and processes them in return for a fee,
  • credit insurance, to minimise the risk of non-payment.

Implementation during the sales phases (examples)

1) During the prospecting phase, the credit manager carries out :

• a credit analysis, i.e. an assessment of the customer's solvency based on :
  • balance sheet and profit and loss account,
  • business sector
  • legal form and shareholder structure,
  • compliance with commitments,
  • the history of the customer relationship, if any,
• customer rating (or scoring) in order to personalise dunning procedures.

2) During the negotiation/contractualisation phase, it defines the acceptable credit limit (payment term) based on :

• the company's cash flow requirements
• the company's objectives
• the customer's profile.

3) During the invoicing phase, he checks that the invoices are properly drawn up, that the contractual clauses and payment terms are in place.

4) In the event of problems, it manages billing disputes and collection operations.

Performance analysis with key indicators

Credit management includes calculating and monitoring key indicators, in order to identify areas for improvement.

The financial indicators to be studied include

• DSO (days sales outstanding ), which establishes the average collection or payment period, calculated as follows: (trade receivables/sales including VAT) x number of working days;

What exactly is DSO?

DSO is a crucial metric for any company wishing to work seriously on its cash flow and the risk of non-payment. Large companies often rely on a Credit Manager, a specialist in collection issues who reports to the CFO, to optimise these issues and influence working capital.

Eric Desquatrevaux,

• the late payment rate, calculated as follows: overdue invoices/total customer outstandings;
  
• the unpaid rate, calculated as: unpaid invoices at the end of the month or period/total invoices for the month or period;
  
• WCR (working capital requirement).

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The house is (careful with) its credits!

Trusting your customers is all very well, but establishing a relationship of trust is even better.

That's what Credit Management is all about: anticipating customer risks rather than reacting... too late!