Put credit management high on the agenda

A lot of companies are facing liquidity problems. Loans are hard to get or very expensive. Because invoices are being paid later and later and there is a greater risk of bankruptcy of major customers, credit management must be given top priority by the CFO.

Large companies such as KPN, Akzo Nobel and Albert Heijn recently announced that they will be paying their bills later. There is also a lot of discussion about the payment periods adopted by public bodies. Minister Ter Horst recently promised to take steps in this regard. Meanwhile suppliers to these companies must wait for payment. And that costs a lot of money. In order to still get the invoices paid on time, companies are quick reach for heavy-handed methods such as use of a collection agency. There is then a risk of damaging the relationship with the customer.

Non-payment
Another risk arising from a poorly managed credit management policy (or debtor policy) is non-payment, which can cause liquidity problems for your company. Even more threatening to the survival of your business are bankruptcies. Without a clear insight, good (well-founded) predictions, an insight into trends and a well thought-out policy companies run the risk of becoming the victim themselves of the bankruptcy of an important customer, resulting in a domino effect. What can CFOs do to protect against these sorts of risks? Is it a good idea to go along with major customers’ payment demands or to stick to one’s own policy?

Good credit management prevents a large number of problems and costs and helps provide your organisation with the requisite cashflow. But credit management is about more than just aiming for (looking at) cashflow (or liquidity). This is precisely the time when one should be thinking about structural improvements to the credit management policy and processes. It is up to the CFO to lead this policy (to act in this area). The economic crisis is an excellent prompt to place credit management at the top of your list of priorities. A few tips:

1. Think long term
In recent months many CFOs have placed greater emphasis on liquidity. That is a good development, but it is not enough. Credit management is about more than just looking at the payment of bills. This is precisely the time when one should be thinking about a structural improvement in policy and processes and then acting on this. The awareness is there, but only a limited number of CFOs have the nerve to actually invest in it. Credit insurance or handing over invoices to collection agencies sooner are short term stopgaps. Of course they work, but structural solutions like the use of credit management software are missing. CFOs should put credit management high on the agenda in a structured way. Since the relationship with the customer is at the heart of good credit management, this will not only result in cash in the short term, but also considers the long term.

2. Communicate with your customer
A good example of where things can go wrong in terms of communication is the handling of complaints. If you are dissatisfied about supplied products or services, you want to have it resolved before you pay the invoice for them. It is particularly frustrating if complaints are not being dealt with properly, but reminders are still arriving. Rapid and personal handling of a complaint, which is an important element within credit management, ensures that customers move to payment more rapidly and are left feeling positive. Personal, direct and effective communications about invoices ensure improved relationships with customers.

Another aspect of good credit management policy is that it helps create greater efficiency and improves the internal processes. Not only does this lead to cost savings, but it also prevents annoyances like duplicated reminders, overlooked invoices and unnecessary turmoil.

3. Go to customers
Credit managers and CFOs need to go out to customers with the salespeople. Only then will you get the right picture and the correct insight into the customer, which will mean that you can help the customer with paying your outstanding invoices. Talk to the customer about payment periods and invoicing. You can hear a lot from a customer: what is happening within the company, within the chain, within the sector. Maybe a couple of amended agreements can limit the risks for all the parties.

4. Work from your own knowledge

Ratings and risk scores do not provide sufficient information, particularly not in the current unstable market. The position today might have changed completely in a month’s time; your experiences may be different from those of the market. Avoiding payment problems is more and more dependent on your own knowledge and expertise. That is far more valuable than outside information. You can gain a better insight into the payment behaviour of (groups of) customers with the right data, which will allow you to anticipate future trends. CFOs must base themselves firmly on their own information, if this is available to a high enough quality level. And there is a shortage of this at some companies. CFOs like to rely on figures, but will also have to learn to assess risks better themselves. As a CFO it is worth looking ahead instead of steering on the basis of past figures; and not just figures, but also trends in payment behaviour.

5. Give your credit manager space
Your credit manager’s ‘gut feeling’ and expertise are very useful in this regard. It is vital that attention is paid to their position and status within the organisation. Not only do CFOs need to realise this, but credit managers also need to start taking on that role. In most organisations credit managers fulfil an advisory role in relation to CFOs. The fact that more and more CFOs are consulting their credit manager is a good development. Credit managers should become more assertive in order for the advice to be adopted. And they must demand more by providing better underpinning and by taking actual steps to get the cashflow under control in a structured way. The CFO must give them this space and be prepared to be open to this. 

6. Allow credit managers to participate in thinking about contracts and sales

Your credit manager’s expertise can be utilised in many areas. When it comes to preventing problems, it is worth including your credit management department in thinking about new contracts and sales. Let the credit manager come along on contract negotiations for new customers in order to agree payment periods and conditions, for example. Use the knowledge that your credit manager has of the sector, the type of customer and their payment behaviour. Let credit managers separate the good customers from the bad. After all, good credit management policy results in effective segmentation of the customer portfolio and is heavily focused on retaining customers and limiting risks. It avoids the risk of the credit management department responding too late and having to chase events. Involving them at an early stage avoids a lot of potential payment problems.

The credit management department can contribute to better sales, particularly in the area of customer acceptance. With customer acceptance and early segmentation you can correctly assess the financial risks and link your individual actions to them. Collaboration between the sales department and the credit management department is more important than ever for a business. CFOs must therefore work hard to achieve this.

7. Do not automatically accept a postponement of payment

One trend is that large companies in particular are unila