The Changing Face of Credit Management

Article excerpt

Integration has been a theme in business for decades. The bottom line gets enhanced when all of the parts of the business process are linked together in an informed fashion. There is growing evidence that this understanding is penetrating the legal architecture of businesses as well. Credit management, which has been traditionally viewed as a separate collection oriented element outside of a corporation's regular business, is now being brought into the full business model. That model is a cycle, which starts with contract origination, product and distribution and only finally involves credit management. Using this new approach ensures that sound credit management policies are incorporated throughout the sales life cycle.

Indeed, within credit management, collections itself plays a critical but limited role. For example, in the syllabus of the Institute of Credit Management Examination of the LUK, there are only two modules that cover collections-Introduction to Credit Management and Advanced Credit Management. Further, each module dedicates only a limited amount of time to collections; 15 percent for the first module and 10 percent of the second. In comparison, five of the eight modules cover topics on contracts, agreements and compliance. Further evidence of the need to view collections more broadly is found in the charter of the National Association of Credit Management (NACM). NACM describes itself as having been "founded in 1896 to promote good laws for sound credit, protect businesses against fraudulent debtors, improve the interchange of credit information, develop better credit practices and methods and establish a code of ethics." Thus, the need to integrate collections into the broader context of credit management, and credit management itself into the larger business seems clear. In an information technology sense, collections and dispute management are critical sets of information that need to be fed back into the rest of the business in a timely and integrated fashion. Credit management needs to be incorporated into the entire sales and delivery system so as to minimize the risk of failure and thus the need for collections systems in general.

While to information technology professionals using credit information in a real time feedback control loop seems obvious, it has not yet made its way into most credit management solutions on the market today. The vast majority of these systems are designed to help companies collect past due receivables and/or resolve disputes with customers: this is an essential element of any business and needs to be performed well. However, more can be done with credit management information when it is fed upstream on a real-time basis to the rest of the organization. Problems-legal or mechanic-which are resulting at the end of the business pipeline, provide information critical to the upstage processes.

Firms seem to broadly understand this notion but lacked a solution to achieve it. For example, the Credit Research Foundation's "2002 Credit and Accounts Receivable ERP System Study" found that nearly 70 percent of commercial credit executives responding to the survey rated their ERP products as average or below average in relations to the entire accounts receivable function. Clearly, the industry is aware that something is missing and is challenged to a superior architecture and a cost effective solution to utilize collections as part of a broader information and quality control system.

The Sales and Delivery Processand Possible Points of Failure

In an ideal world, a company's sales and delivery process runs smoothly and profitably. Basically, a company sells a product to a customer, the two parties agree on the terms and sign a contract, the goods are packed, shipped and delivered to the customer; the customer is invoiced and the customer pays for the goods within the agreed upon amount of time.

Unfortunately, this ideal scenario often does not reflect the day-to-day reality of modern companies. …