By David Taylor

Companies have cut costs and streamlined operations and are now emerging from the downturn stronger and leaner. As the global economy dusts itself down, their focus is shifting from protecting their customer base to actively expanding it. But poor credit management practices continue to throw a spanner in the works of even the strongest of companies. David Taylor, Chairman & CEO of OnGuard, looks at the challenges facing CFOs in understanding how credit risk affects the stability of their company, both now and in the future.

Although few will admit it, it’s relatively common practice for companies to sustain their cash flow by withholding payment to their suppliers until they have invoiced their own customers and safely banked the money. Of course, everyone prioritises the payment of their own invoices before those of other companies. But the lengthy tailbacks between the issuing and payment of an invoice can severely restrict the supply of money - the lifeblood of every business. These delays have a knock-on impact all the way down the supply chain from supplier to customer and back again. Eventually, this stagnation filters down to the wider economy, just when it needs it least.

CFOs today know that they have to adopt a more cautious approach to risk, and be tougher on payment terms and conditions. But simply invoicing a client for a product or service is no longer a guarantee of the success of a business, nor indeed of payment. In the present economic climate, revenue only counts if it is cash in the bank. The key challenge facing these CFOs is to keep cash moving by bringing credit management into the heart of their business processes.

Credit management isn’t what it used to be. Sometimes perceived as a one-way street where the recalcitrant customer was chased for payment until it was either received or written off, a growing number of companies are now taking a highly positive, proactive approach to credit management. In fact, the credit management department is one with more touch-points — and more daily customer contact, every working hour of every working day - within an organisation than any other. This makes credit management particularly well placed to deliver a strong alignment between business process and the market, at the same time as reducing customer payment times and improving cash flow.

Good credit management is no longer just about chasing debt; it’s about proactively understanding the customer. All supplier-customer relationships carry the risk of non-payment of invoices, but the new proactive approach to credit management hinges on using behavioural insights to pinpoint those customers who are likely to represent a credit risk in the future. By intelligently combining traditional external information about general customer payment times with specific proprietary information on customer behaviour, credit managers are now focusing on actively building relationship with customers and their finance departments, encouraging them to communicate with them about their cash flow situation and keep them informed of any problems on the horizon. Not only does this level of relationship-building help to avoid more remedial action at a later stage, it also keeps the supplier at the forefront of the customer’s mind, ensuring that if a customer should run into difficulties, the company’s invoice will be settled as a priority over those of other suppliers.

As customers, we all reserve the ultimate right not to pay an invoice if we are dissatisfied with the quality of the service or product we have received. Disputed invoices are an unfortunate fact of life, but robust credit management software solutions feature good dispute registration and management procedures that can trace and can track disputes down the supply chain, heading them off before they escalate. And, crucially, the vital behavioural insights produced by the data captured during this process enables a root-cause analysis to be translated into powerful management reporting that gives companies the ability to analyse and improve their working practices avoid similar issues in the future. A proactive credit management policy focuses not only on having outstanding invoices paid on time but also tries to understand why invoices are not being paid and offers the business insights and solutions to alleviate the problem in future deliveries.

Another area where credit management software is demonstrating its worth is in improving transparency on accounts receivables — a highly significant item on the balance sheet of most companies, and one that is under growing scrutiny from regulators and shareholders alike. Since cases like Shell and Enron, where asset values had been vastly overstated and were consequently written off with huge effects on profits and dividends, shareholders have understandably taken a very close interest in the value of the accounts receivable entry, demanding to know how and why they have been valued as recorded. Almost every company automatically writes off a proportion of this line on the balance sheet as potential bad debt, but the key to success lies in not underestimating and overlooking the impact on the bottom line.

The role of the credit manager is to establish clear visibility on the degree of risk and the impact of that risk on the quality of the debt. By producing accurate and insightful reporting on the chain of actions taken to manage accounts receivables, an automated system can provide a near-real-time measurement of a company’s outstanding balance and outstanding risk, exposing hidden risks and helping to minimise attrition through write-offs, thereby increasing pre-tax profits and boosting dividends - all key contributors to shareholder value.

Proactive, positive credit management is an intuitively commonsense way to handle customer invoicing in the current economic climate. Regardless of present market conditions, it represents a best-practice approach to working with clients. It is playing a key role in managing financial exposures and stimulating cash flow, while providing closer control over debtors’ portfolios and minimising time spent chasing unpaid invoices.

For most companies, the path to payment is unfortunately littered with obstacles. Effective credit management is about clearing these obstacles to enable CFOs to make accurate assessments on value and risk and allow them to react swiftly to the rapidly changing customer and market environments. As a discipline, credit management focuses on giving CFOs the insight they need to safeguard their bottom line by identifying and anticipating tomorrow’s risk to minimise attrition through write-offs. And at a time when cash counts, companies with the strategic foresight to integrate credit management systems and procedures into the heart of their business processes will find themselves first in line when it comes to being paid, and being paid on time.