| Look after your credit and your profit will look after itself |
|
|
| Monday, 04 December 2006 | |
|
With trade receivables often accounting for as much as 40 per cent of a business’s net assets, Jon Lindsay, Head of Atradius (formerly GERLING NCM) in the UK and Ireland, believes that only the foolhardy will continue to ignore this hidden cashflow goldmine
Unless it’s in the bank, you haven’t completed the sale. And in this turbulent and uncertain economic climate, with UK company profitability at its lowest ebb for several years, this is truer now than perhaps it ever has been. In the past year, there were 15,677 company insolvencies in England and Wales[1]. And estimates show that approximately 10,000 go under because of late payment and bad debt[2]. With figures like this ringing in our ears, and insolvencies no longer being just among small or lesser known companies, no sensible business person can continue to ignore the threat that bad debt poses to a company. British industry spends approximately £12 billion a year on credit management, yet for years it has been viewed as just another function of the accounts department, despite its massive impact on a company’s free cashflow. Although some companies are starting to treat it as a boardroom issue, with a serious impact on profitability, it still suffers from a lack of status in the corporate hierarchy. According to Atradius’s research among UK finance directors (FDs), carried out by independent researchers NelsonHall, organisations want to improve their credit management efficiency. One of the most telling findings is that although 79 per cent of the FDs think that credit management is highly important to their organisation, only half of these are satisfied with their in-house capability. A change of mindsetFor credit management to take its rightful place at the board table there has to be a change in mindset, starting at the very top of the organisation. Credit managers themselves need to re-emphasise their important role within their company, positioning themselves as advisers not only to the financial director, but also to the sales director, and ultimately to the managing director. Finance directors can legitimately point to their team as helping business growth and the sales acquisition by ensuring the credit function is joined up with the sales process. Another problem is that whilst there is recognition by many companies of a genuine need for good, professional credit management, most still do not promote this as a serious career move for their best people. This may explain why only 41 per cent of the Nelson Hall research respondents are fully satisfied with their in-house credit management function. Growth and risk protectionGood credit management is clearly linked to the sales process, rather than sitting purely within the finance function. Credit managers should be involved at an early stage with the commercial teams doing the business. Companies that are really successful at converting opportunities into profitable sales are ones where the sales team is active in ensuring that the company recognises the importance of getting paid, as well as getting orders. It starts with information. Where possible, it makes sense to use credit-checking agencies at a very early stage. An awful lot of information is available out there – from financial statements, balance sheets and from the customers themselves. A sales team working closely with their credit manager should not be uncomfortable trying to obtain financial information from a business it is trying hard to sell to. And remember, it’s just as essential to know precisely the corporate entity of the buyer. Get as much information as possible; financial managers should see this as a priority on any transaction. To get even greater piece of mind you might go to your credit insurer, who will normally have the benefit of more detailed knowledge, since they will be dealing with a number of the buyer’s suppliers. The main benefit of insurance, on top of the comfort that your lenders gain from it, is the transfer of risk to the insurer who has a mutual interest in protecting against bed debt. In international trade, in particular, you really are obtaining a second opinion on an unknown risk. Once the risk is assessed then you are in a much stronger position to use credit terms as part of your sales armoury. Don’t forget that good terms of sale, including (where appropriate) retention of title clauses, ensure a much better chance of getting the cash if things go wrong. While credit insurance in itself is a highly effective trade enabler, assessing customer sector, market risks and covering against non-payment, there are complementary methods of maximising cashflow. Factoring can complement this, often having credit insurance or trade finance or simple overdraft facilities behind it, which can increasingly be linked to credit management systems. The final and most critical part of any credit system is getting the cash. Collecting the money is sometimes seen as the unpleasant part of the trading relationship. Atradius recently sponsored a seminar by the US Credit Management Guru, Abe WalkingBear Sanchez, who emphasises that: “Collections… is simply the completion of the sale”. His point is that most companies want to pay, but something’s preventing them – through technical disputes or systems problems. And, in fact, if you do have a debtor that can’t pay or won’t pay, the signs are readily visible very early, before the debt becomes significantly overdue. This means that understanding the debtor’s problems, before sending in the heavy mob, is just common sense. Performing all these tasks needs a combination of different and increasingly rare skills, combined with excellent systems that allow the tasks do be done efficiently, while not interfering with the core business processes. That’s why more and more interest is being shown in outsourcing. The ‘O’ WordFor many people, outsourcing is a dirty word. But, business process outsourcing (BPO) is one of the fastest growing segments of the European services market, and is estimated to be worth around £35 billion by 2005. Outsourcing is all about a company focusing on its main purpose or ‘core business’, and leaving the other ‘non-core’ activity to organisations that specialise in those areas. The benefits of using a good credit management-outsourcing provider are obvious. Aside from straightforward cash collection, they can take on all or any number of the processes involved in cash collection – from the issue of invoices to management reporting enabling them to focus completely on increasing sales and improving the bottom line. But many companies are still wary about going down this route. It tends to be very large companies – for example in the electronics sector, such as O2, BT and Microsoft – who have made the leap and are enjoying the benefits. Although smaller companies are now thinking about it, they still need to be persuaded about its value and reassured about their fears before dipping a toe into the water. Business improvement is the focus
One of the main areas for concern among UK companies is that outsourcing could ‘dilute’ the company, making it harder for management to have complete control over their business and customer relationships. It is absolutely essential, therefore, that outsourcing providers offer a service that provides the right flexibility to allay these fears. Customer, customer, customer
In summary
While credit insurance remains the most well-known and respected credit management service, there is definitely a future for outsourcing credit-management in the UK, as long as providers listen to what companies want and respond accordingly. Done professionally, outsourcing credit-management can simplify the debtor management process, improve efficiency, increase sales, reduce DSO, bring more customers and increase customer retention. (This article was originally published in Director of Finance 2004 edition) |
Subscribe to our weekly newsletter for top jobs, news and more
Digg it!
Post to del.ico.us
Seed in Newsvine
Post to Reddit
Post to Furl
Post to technorati
