Credit management is one of the most intimate, sensitive and critical functions in any business. Because it is repetitive and most effective when following clearly defined methodologies, it is also probably one of the most suitable areas for computerisation.
Credit control disciplines have been transformed in recent years by the advent of credit management software, online factoring and full business process outsourcing, yet many finance managers are still reluctant to let credit management out of their direct control.
With commerce being driven at internet speeds, companies can process credit and financing applications in seconds rather than days he notes. Yet why are most credit decisions still manual?
Ron Wells, author of the book 'Global Credit Management' comments that internal credit departments are viewed as "a burden to the enterprise, constantly harangued from all sides" and are usually given minimal resources to tidy up transactions for what are seen as more important value adding parts of the business. Finding and applying the right credit management techniques and technologies can help you turn this perception on its head.
This AccountingWEB Expert Guide sets out to describe the hows and whys of computer-aided credit control. Once you know and understand the beast better, its attractions may become more apparent.
As Wells notes, global credit management is going through major changes as a result of the banking industry's new risk-based rating methodology imposed by the Basel II rules. Predictive statistics, based primarily on a company's financial statements going back three years, are fed into the banks' risk models to establish credit worthiness.
Right from the outset, the credit equation is being determined by computer software. Wells argues, however, that suppliers are much more important providers of capital to your business than banks and that managers themselves should be willing to use technologies and information of their own to protect their cashflows.
In the future, Wells predicts the credit management process will revolve around payment risk trading and look something like this:
- Salesperson with a new prospect asks credit manager for a credit limit on the new account
- Credit manager checks website for quoted price for credit default protection on the new buyer.
- Based on the information, credit manager grants credit line with an internal credit charge, for example 0.1% per shipment.
- This internal charge is added into the sales quotation.
- When goods are shipped, the credit manager buys credit default protection based to hedge the company's exposure, effectively transferring the customer's credit risk to the credit derivative marketplace.
It's a breathtakingly efficient, market-driven process. But the systems and information infrastructure may not be there yet for typical UK companies to apply it to their credit processes. Here are some other approaches, ranging in graduated steps from simple efficiency tips to those demanding more profound structural and cultural shifts:
eInvoicing
First and foremost, are you using electronic communications to expedite invoicing and payments? With more than 90% of UK businesses now connected to the internet, email and other delivery methods can take days out of your collection processes - and save money on paper, envelopes and postage.
Sending an invoice to someone's inbox makes it much harder for them to claim a bill has been lost in the post, and you can fire a reminder to them and get confirmation of recepit while you're on the phone. Many accounting and sales order processing programs will now automatically dispatch invoices for you.
Suppliers including Accountis, Open Business Exchange and Isabel eInvoice would argue that email is a passive and inefficent approach to the problem. These online sites provide more sophisticated invoice management services to deliver process transactions. Accountis, for example, can translate invoice data into appropriate nominal codes for each line item that can be imported to your accounts package. The customer receives an email taking them to a secure online area where they can view, authorise, pay and download the invoice.
Electronic payments
In just the same way that email and eInvoicing websites reduce postal time lags, electronic funds transfers via the BACS system make sure money is deposited into your account more quickly. Direct credit payments are easy to arrange - as long as your customer agrees to it as part of your terms of biusiness. If you have not already done so, the BACS website www.directcredit.co.uk tells you how.
It is worth noting that the BACS system is currently migrating from its existing communications network to an internet-protocol based system called BACSTEL-IP. If you are about to embrace electronic payments, ensure your payment software is compatible with the new standard. Those who are already using BACS are advised to check that they will be able to comply, or they may get an unpleasant surprise when the old network is switched off at the end of 2005.
Online information and credit scoring
The internet's biggest effect on credit management has been to expand the amount of relevant information and credit ratings available to you on the world wide web. Ratings agencies such as Experian, Dun & Bradstreet and Standard & Poor use the Net to speed up their services and reduce costs. AccountingWEB's company data partner ICC provides its own credit score based on the information filed at Companies House.
Also available via AccountingWEB is the Mastering Credit Control, a toolkit to help businesses and their advisers ensure credit control systems are as efficient as possible. The online service provides guidance on credit terms and conditions and techniques for collecting debt and managing the overall credit operation.
Credit management software tools
Good credit controllers are like the Mounties - they're organised, methodical and always get their man. Fortunately, there are numerous solutions available for those people who are not brilliant at compiling and following procedural call lists.
In a small company, it would be a simple matter to email customers invoices and set time alerts against them in Microsoft Outlook.
The PDM software developed by Hove-based Outstanding Solutions, for example, extracts invoice information from the user's accounting system to create a database showing the status of each invoice. Workflow tools are used to create a credit collection "in" box, which produces personalised lists to help each collector tackle the most important tasks in the right order prompts.
There are several applications tailored for Sage Line 50, Line 100 and MMS users, including Credit Hound from Draycir and Credit Collector from Microstyle. Both applications provide on-screen summaries of the relevant account and transaction details when you're chasing a debt and generate call lists and follow-up reports and emails. Credit Hound deserves a mention for basing its corporate logo (and online assistant) on a cartoon beagle, but also comes with an attractive portal interface with alerts, charts and other visual aids to guide the user.
For a full-on treatment, take a look at the Enterprise Edition from US developer eCredit. The software can plug into multiple systems in different departments and divisions and is governed by a rules-based software engine that automates most accounts receivable processes. Rather than just automating the tasks, the better credit management emphasise the importance of identifying high risk accounts early and communicating with them in a structured, well documented way.
OUTSOURCING
It is possible to retain control over every aspect of credit management - but is it really worth the effort? Ron Wells argues that the vast majority of tasks related to credit control can - and should - be outsourced, leaving company executives more time to focus on the strategic issues of credit policy, managing working capital and dealing with trade finance banks and those dealing with your receivables.
"The trend now is to look at receivables as an asset at the macro level," says Wells. "Managers should manage risk rather than limit sales and consider the strategic reasons for granting credit rather than have it arise as an accident."
Wells prefers to refer to credit lines rather than limits to reflect the risk you are prepared to hold, rather than imposing a sales limit. "If you are not selling to some customers, you are opening the door to your competition."
Wells encourages outsourcing as a way to encourage credit managers to concentrate on the macro-management opportunities; rather than micro-managing individual accounts. "It can break through the barriers that often exist between internal departments, such as marketing, operations/logistics, accounting, credit and treasury to enable better cash flow management."
Once again, there are a wide variety of options to choose from.
Debt collectors
The more polite way to describe these services is "single invoice finance", where a specific invoice or customer (single debtor finance), will be passed to a particular agent to collect. Euler Hermes Collections, for example, has an online submission form that allows you to ask for a quote for the debt to be collected on a contingency basis, If the agent cannot collect, you don't have to pay.
Factoring
Why stop at a single debt? Because of the value contained in companies aged debtors' accounts, there is a legion of factors keen to take on the drudgery of collection in return for a commission, typically between 0.5% and 4.5% of the cash released, according to the risks. The options are extensive - for example you can choose to take the finance and retain control of the sales ledger, but this would approach undermine the strategic gains of outsourcing.
Full service factoring
Internet technology paved the way for a broadening of full service factoring operations, where you effectively outsource your sales ledger, credit control and collection to the finance provider. They specialise in the field so you get the advantage of their economies of scale and many firms can let you enter and transactions web browsers.
Entering such a relationship will mean that your customers will be aware their payments are being collected by a third party and using your receivables as an asset to raise finance in this way is not the cheapest way to raise capital. But it may be a very viable option if you do not have the financial track record to satisfy a BASLE II-obsessed bank manager. As with any outsourcing arrangement, you will need to set your requirements out very carefully in a service level agreement and manage the relationship closely.
The Factors & Discounters' Association website has more information on the various factoring options - and a handy interactive locator to put you in touch with potential suppliers.
Computers and the internet have speeded up credit control and vastly expanded the types of and services available to mangers. Whatever the tools and techniques you use, getting to know your customers, and knowing what is going on in their businesses remains the bedrock of good credit control. Ron Wells points out even with all the financial information that is available one of the most significant elements in the equation is the quality and honesty of your customers' management managers. As he puts it, "The only technology I can think of to do that is a lie detector."
John Stokdyk
