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 BtoB commercial relations.

In addition to generating sales, managing customer risk and debt collection is just as vital to a company's long-term survival and development.

And while larger companies are more inclined to recruit a credit manager, this is a strategic position for SMEs, which are much more sensitive to the effects of uncertain cash flow.

Eric Desquatrevaux reviews the challenges of credit management in this article.

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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's not by chance. This strategic position is mainly found in Anglo-Saxon companies.

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

• not being paid,
• cash flow problems,
• jeopardizing its financial health or even its very existence.

That's why credit management isn't concerned with turnover and sales, the sum of which is 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?

These are the main issues for the company:

• assess, control and monitor outstanding receivables,
• reduce collection times and late payments,
• limit time-consuming procedures such as invoice dunning and debt collection,
• optimize working capital requirements and cash flow,
• develop financing capacity without recourse to bank credit,
• respect your cash flow plan,
• improve your 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 operational credit management policy and oversees its application throughout the company.

For this reason, he/she reports to either :

• sales management,
• the Finance Department (ideally).

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

Credit manager: missions

The dual role of credit manager is a real challenge.

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

• on the one hand, making sales and satisfying customers by granting them credit and payment terms,
• for the others, to rigorously control 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 practices around invoicing and payment management.

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

Credit manager: skills

Mastery of :

• 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 consulting and customized services to the finance departments of SMEs, ETIs and major accounts, including :
  • risk analysis,
  • dunning management,
  • reporting,
  • dynamic collection agendas.

Credit Management: processes

Credit management intervenes 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 receivables management strategy to prevent potential risks of default, which may be caused by :

• customer insolvency,
• disputes,
• internal malfunctions.

Several levers are at your disposal:

• Deepening the segmentation carried out by 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,
  • down payment terms,
  • acceptable payment terms (credit limit),
  • penalties for late payment,
  • reminder methods, etc.
    
• Participation 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,
  • invoice issue processes,
  • collection processes (amicable collection methods, late payment penalties, formal notice, litigation), etc.
    
• The development of a credit management procedure summarizing all these points, to be communicated to all company departments for greater fluidity and transparency.
  
• Risk management and recourse to solutions such as :
  • factoring: a credit institution buys invoices and processes them, in return for a fee,
  • credit insurance, to minimize the risk of non-payment.

Implementation during the sales phase (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 income statement,
  • business sector,
  • legal form and ownership structure,
  • compliance with commitments,
  • history of customer relations, if any,
• customer scoring to personalize reminder procedures.

2) During the negotiation/contractualization phase, he defines the acceptable credit limit (payment term) according to :

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

3) During the invoicing phase, he checks that invoices have been drawn up correctly, and that contractual clauses and payment terms have been met.

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

Performance analysis with key indicators

Credit management includes the calculation and monitoring of key indicators, in order to consider areas for improvement.

Financial indicators to be studied include

• DSO (days sales outstanding or NJC, number of days of customer credit), which establishes the average collection or payment period, calculated as follows: (accounts receivable/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, reporting to the CFO, to optimize these issues and play a role in working capital.

Eric Desquatrevaux,

• the late payment rate, calculated as follows: overdue invoices/total customer work-in-progress;
  
• 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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La maison fait (attention à ses) crédits !

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!