The Credit Management paradox

Credit Management is every passing day a function whose necessity is more recognized by business managers.

In a context of economic crisis where companies are struggling to fund the development of their activity, the speed-up of cash receipts from customers is now considered as a priority, especially when businesses bankruptcies increase bad debts and impact the net income.

Easier, cheaper, more available than the use of banks to fund its business, get paid faster by customers also has the advantage of improving the balance sheet of the company.

Credit Management for better funding

Indeed, the decrease in net working capital (NWC) resulting from lower average payment delay from customers (DSO) improve the solvency of the company and the shape of the balance sheet. These elements are essential for financial analysts.

If borrowing from third parties is often necessary, it will be easier to obtain if the DSO is good and if the receivables are well managed. The application of the principles of Credit Management has from the point of view of analysts three major benefits:

Immediate improvement in cash flow and ability to pay, so to develop its business.
"Lifting effect" of the balance sheet that will reassure and seduce easier financial analysts.
Reducing financial costs incurred by the payment terms given to customers and improving profitability.

The Credit Management to avoid bad debts

Another effect is related to the economical context: the rise of business failures that can concern any company. The number of insolvency remain high in many countries, depending on the sector, and may concern companies of all sizes, including medium and large companies.

The consequences of these business failures of large sizes are not confined to their perimeter but accelerate the overall number of bankruptcy proceedings with the domino effect: these companies have many suppliers who are not paid because of the insolvency of their client and found themselves in financial difficulty or insolvency.

25% of bankruptcies are due to cash issues due to late payment / unpaid invoices

Credit Management's primary mission is to assess the risk of default and to set up credit limits. It is therefore essential in any business that wishes to manage its future and not play to Russian roulette every time a payment delay is given to a customer.

Where are Credit Managers?

In this context, issues related to Credit Management and this increase of the risks are generally well considered by companies and their Credit Management departments.

But it is there that the rub! Only companies of a certain size (over 250 employees) are liable to have a Credit Manager among their employees. This job can not be justified for any size business. Among the 15,000 companies which goes bankrupt every year in France because of unpaid invoices, how many had a Credit Manager? No one!

This is the paradox of this function: it is present in all major groups which are strong enough to absorb bad debts but it is totally absent where their skills are the most needed: in small and medium enterprises.

In fact, small companies are most exposed to payment delays and outstanding customers when they do not have the financial capacity to absorb them and may be pushed to bankrupt because of unpaid invoices.

Several factors can penalize them:

Their weight in the commercial negotiation, most of the time against them, does not help to obtain guarantees of payment or payments in advance.

Their business culture that drive them to use their weak bargaining power on price negotiation rather than securing payment badly considered from a commercial point of view.

Their small financial surface which does not allow them to absorb a substantial unpaid invoices

Faced with this reality, small and medium companies use palliatives solutions that are only partially satisfactory:

Credit insurance enables them to secure a portion of the receivables, but it is often the "good" part, understand the part composed of non-risky buyers. Caution of credit insurers can also push them to overestimate the risk of a buyer whose financial situation is not so bad.
Insurers frequently claim one of their favorite statistic: "we announced in advance 95% of business failures." Well, but they should also answer to the following question: "What percentage of companies announced as imminent bankrupt by them have really filed for bankruptcy? The result would be for sure very low (below 10% indeed)
.
Same conclusion regarding the benefit of factoring which is more a financing tool rather than a risk mitigation tool.

Collection agencies. The problem is the only curative nature of this method that is becoming more and more expensive as result becomes uncertain. They also cannot help in case of the debtor's bankruptcy proceedings.

These tools can be effective, but for that they must be integrated into a global approach to receivables management which is itself the result of what happens before, from trade negotiations and at each stage of the sales process.<

It is for this reason that the Credit Manager is required. Its role is to define the rules of operation for each of these steps (risk assessment, business negotiation, contracting, execution, delivery, billing, debt collection, legal action) with a view to avoid delinquency and accelerate customer receipts. However, the first steps are the most important because the key word of this job is "anticipation".

How to make Credit Management without Credit Manager?

We have seen that the great majority of companies do not have a Credit Manager. This function is essential, How to do it?

Simply by assigning this responsibility to a person of financial management or accounting who devote a defined % of his / her working time to Credit Management. The larger is the company, the greater the share of the working time given to Credit Management will increase.

There are many training courses to this job available in every country provided by the credit management association, as example in France with the AFDCC, or by small consulting firms. The most important is that this function exists in any business, whatever its size, and that it plays its role.