Crises have a problem, but they also give us a great benefit, the problem is that they make us nervous because they generate uncertainty and this tends to make the situation worse, the benefit is that they represent the ideal way to get the best out of each and identify great opportunities.
A few days ago, I participated in an international forum with credit professionals from different countries, where the role that the credit area in the organization should play in an adverse financial environment was discussed. In the forum, many different ideas were discussed and there were, of course, moments of debate on whether the role should be more risk, sales or collection oriented, one of the participants, my friend Joseph Busutill from the Malta Credit Management Association put us all to reflect with his participation when I pose a series of questions To reflect, same that I will repeat in this article along with my reflections on each of them:
1- Is it true that credit is the fuel that makes the wheel of the economy turn?
To answer this question, it is enough to understand what is the origin of this international crisis, effectively credit, which in this case was placed on the second-tier mortgage market in the United States, on the other hand, one of the first activities that banks Financial institutions restrict credit in an environment such as this, as soon as the financing key is closed, companies begin to lack liquidity, their sales decrease, their profitability disappears and, as a consequence, many businesses count or close their doors, the alternative for companies that stop receiving bank financing, it is the providers who usually keep their loans to the end and end up becoming the only sources of financing available,allowing industry and commerce to reactivate their operations, leveraged by the structure of their suppliers, who in turn turn to others with greater strength, and so on. That is why credit is the fuel of the economy.
2- Is credit a tool to increase sales?
The only purpose that justifies the existence of commercial credit today is to generate profitable sales that would otherwise be lost because it provides the client with an additional tool to acquire the products that your company sells, therefore, like all tools sales, as long as they are better and offer greater benefits to the customer, he can use them more regularly and efficiently.
3- Can we start using credit to differentiate ourselves from the competition?
If we agree that credit is a tool to increase sales, then it is clear that it can be very useful to differentiate ourselves from our competitors, the credit area has a great advantage and that is that being in the initial part (granting credit and approval of orders) and final (Portfolio Recovery) of the customer relationship, have a greater relationship with him, know him better and can easily detect large areas of opportunity for the benefit of his client and his own company.
On the other hand, being in the middle of the sales, finance, accounting, production, logistics and billing operations, credit personnel can usually detect the needs of other areas of the company and how these affect the relationship with customers.. The problem is that few credit areas are used for this purpose, that is, as tools for continuous improvement and customer service, on the contrary, they are used as administrative areas that provide cash flow and limit risk, which implies that these advantages are completely wasted.
4- Is it possible to adopt a creative strategy that allows us to innovate in the granting of credit using this service to build solid relationships with clients?
If the objective of credit is to sell, why within the company the first response of a credit analyst to a scenario of possible risk is no? Surely this is because the orientation of the area is strictly financial and risk containment, being creative implies innovating in the credit analysis process, understanding that the riskiest sale is the one that is lost, so in the granting of credit, the objective It must be looking for "YES" because the "NO" of making that sale or supplying that order we already have, for this it is necessary to use innovative strategies aimed at reviewing the profit margin of each business regardless of risk. We must understand that today more than ever we need the loyalty of our clients and this occurs to the extent that we are willing to partner with them in their projects.
5- Do we realize that if we do not sell we will not have clients and that the business will not survive?
In many cases it seems not, because when in a company there are policies such as not releasing new orders if there is an overdue balance by the client, if at the time you have any negative reference the credit is canceled, if you do not investigate the value of the business over the risk of delay, if the company is not protected primarily from the risk of no return, then it is clear that the company has an orientation that will complicate things a lot in the midst of a crisis where what is sought is to retain customers and guarantee higher sales.
I insist, the credit is there to help increase sales, not to prevent them from being made.
6- Could we start to think of credit as an investment instead of a cost?
Credit is an area where the company invests money in its clients to obtain as a return higher repetitive sales to the same clients and better profit margins that, by the way, do not depend solely on clients paying on time, it is clear that a business that has costs beyond its possibilities or that it does not generate enough sales to cover them, even with the best liquidity, it does not offer a good future outlook.
7- Are we ready to consider customer debtors and to develop business with them instead of just approving or rejecting orders?
We assume that doing business is just bringing a new order and registering a customer, but true business develops in the long term; In most cases, the cost of bringing in a new customer is not covered just by having him fill the first order, so repetitive sales are usually the most profitable and these will only occur when seeking to develop a lasting relationship with each customer. that it will not prosper when the relationship with him occurs only under the environment of pressure for payment, threat of consequences or restriction of sales by the credit area.
The time has changed.
It is time for the credit personnel to visit their clients, to better understand their needs, if not, how can they meet their expectations and create greater advantages over our competition? It is necessary to build long-term relationships based on the business potential to be developed with each client, their credit staff knows the business, knows the benefits of credit and above all, knows the client.
This of course implies doing the company a favor and establishing once and for all common objectives with the sales area to create synergy between both departments, management must understand once and for all that the customers they serve are exactly the same for both departments, so there should not be a big difference in the treatment or in the way the performance of these are measured, which are complementary functions, and that is that today, while sales are measured by turnover, credit is measured by risk, that is to say, completely in the opposite direction and if we base ourselves on the maxim of "You will sow what you reap" which is equivalent to "tell me what you measure and I will tell you that you obtain" then the results are obvious.
It is true that credit implies the possibility that a client may not pay, it is also true that late payments can affect our financial situation, but we must begin by understanding both risks separately.
First, the risk of delay has affectations in terms of liquidity and therefore implies financial costs, the credit areas must have projections to meet flow demand and use money return measurement tools that allow them to adequately calculate and supply flow to the company and the portfolio days indicator is not always the most suitable, especially if the company manages varied sale terms, for which indicators such as the CDI (Collection Days Index) can be used. Now, the impact of this risk and its impact on the business must be measured in comparison with the benefits of the sale and the margin it gives, this is determined based on elements such as product demand, profit margin and production capacity,All this analyzed at the time of sale because it may vary from one client to another, once analyzed, it is weighted against the prospect of delay.
On the other hand, it is important to understand that the risk of loss is the real enemy to overcome, because while the risk of delay with a simple comparison we can determine the feasibility of each operation, in the case of loss there is no comparison that is worth, loss is loss and the credit area must find schemes that protect your business from incurring them in two ways.
- Generating higher sales to cover the cost of losses Having risk coverage services such as Guarantees, Credit Insurance, check protection, factoring, guarantees, options, etc.
The credit function and the management of accounts receivable is much more important than you think, unfortunately in most companies this function does not have a strategic role and rarely does a credit representative appear on board meetings, assuming that it is a cost area that belongs to the financial or administrative sector of the company. However, it is time for management to turn to this area that for years has been poorly understood and less exploited with all its benefits.
A final thought.
There are 4 ways to profitability:
One may be to increase prices, which is not a very popular or effective measure unless it has no competitors in a specific sector and can control demand.
Another may be through increased sales as long as costs remain.
A third can be the reduction of costs while maintaining a constant volume of sales, consider that many of the costs associated with the operation are related to the inefficiencies that derive from the lack of communication between areas such as sales, billing, logistics and credit.
And the fourth option, perhaps the most effective, is an increase in sales accompanied by a reduction in costs.
In which of these areas does your credit and accounts receivable directly influence?
Think about it and think quickly, remember that Crisis is also written with C for Credit.
To know more.
www.ejecutivosdecredito.com
www.credi-training.com.
