The Changing Face of Credit Management
Stanley, Jim, Business Credit
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. In fact, in this process, there are numerous points of failure that need to be taken into account. The counter-example of the process might look something like this:
A company sells a product to a customer. Within this process, a contract is created, but has mistakes: the customer is invoiced (incorrectly), the "goods" are delivered (late) and the delivery is short and to the wrong specification. The customer does not pay, or pays only a portion of the invoice as a result.
This latter situation has two major consequences; the supplier has invested resources in making the sale and delivering the product, but is not receiving payment. And, perhaps more importantly for the long term, the supplier's customer is not happy and will look for alternative suppliers. These problems should be avoided if at all possible-not dealt with after the fact.
Collections software only comes into play after the mistakes have been made and the customer relationship has been damaged.
At best, collections software operating alone will assist companies in securing some of their outstanding receivables and alert management to the problems that have already occurred. But the process, which generated the errors that a collection is resolving, may still be going on in the upstream processes of the firm.
What Should Be Done?
Because there are multiple points of failure in the system, and collections software only deals with the end result of these failures, the logical step is to deploy systems that are designed to minimize the risk of failure throughout the sales and delivery lifecycle.
If formation of the contract itself is a key point of failure at the beginning of the lifecycle, then a solution should be deployed that helps companies ensure that only "corporate standard" contracts are created and that the terms of these contracts are mutually acceptable. This will ensure that all parties have the same understanding of the deal. This contract management software will also help ensure consistency in the way the company does business, including the contract planning, negotiation and document creation.
The next area where a solution should be inserted into the process is compliance with the terms of the contract. Now that the contract has been formed and the companies understand their respective obligations, it is important to follow the process of fulfilling each individual term of the agreement.
Problems with exact terms of the agreement often lead to:
* Incorrect packaging
* Incorrect product specifications
* Incorrect quantity shipped
* Late shipment
* Invoicing errors
* Billing errors
Attacking the problems upstream in contract formation and contract compliance can significantly reduce a number of problems that cause overdue receivables and dissatisfied customers.
But, it is an unavoidable fact that things will still go wrong. While this fact needs to be recognized, the best companies will seek to learn from their mistakes and try to avoid making the same ones twice. The best way to accomplish this is through the deployment of an analytical software package that will allow management to get a detailed view of the entire sales process, from order negotiation through to payment. This system should be able to flag where the process broke down and determine if the failure was a random occurrence or part of a pattern. With this information, management can go about fixing what doesn't work.
Beyond the unavoidable fact that things go wrong, there will also be occasions where customers will not be able to pay on time and other times when customers simply will not pay on time for no apparent reason. According to the 2001 CRF Benchmarking Survey, the overall median for average days delinquent for all industries was 8.7, while the CRF's Domestic Trade Receivables survey for the first quarter of 2002 showed that average days delinquent was 8.9.
This being the case, there will continue to be a need for a collection and dispute resolution system. The system should be able to provide detailed information to the company's sales and finance teams in a way that allows them to work together with customers to resolve issues in a fair, open and collaborative manner.
The Ultimate Goal
At the end of the day, integrating all the information at a firm's disposal maximizes the bottom line. Maximizing the bottom line involves maximizing the use of credit management information throughout the sales and delivery lifecycle.
Jim Stanley is the general manager at I-many International. Jim can be reached at firstname.lastname@example.org.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The Changing Face of Credit Management. Contributors: Stanley, Jim - Author. Magazine title: Business Credit. Volume: 105. Issue: 1 Publication date: January 2003. Page number: 18+. © 1999 National Association of Credit Management. Provided by ProQuest LLC. All Rights Reserved.
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