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Credit and collection are inseparable processes.

Credit and accounts receivable reengineering/TQM initiatives have improved the overall effectiveness and efficiency of the processes which we as credit professionals perform each day. The list of accomplishments in areas of increased productivity is impressive.

To cite just a few examples, consider that many companies have adopted programmed work rules to reduce the amount of manual exception processing such as credit referrals. By fine-tuning criteria, many of us have reduced the number of orders referred to credit for approval without a corresponding increase in delinquency or bad debts. This has speeded order fulfillment and enhanced customer satisfaction.

By outsourcing much of the data entry associated with check application other companies have cut costs precipitously. In many cases lock box banks are able to keystroke remittance data more efficiently than is possible to achieve in house. As a result, savings are realized without impacting customer service.

There are many other examples of dramatic improvements achieved through reengineering in the credit and accounts-receivable area. However, this is not to say that everything which is suggested by TQM consultants is necessarily correct. Every recommendation should stand on its merits.

A recommendation made by a number of consultants that has received mixed reviews is the notion that credit should be split from collection. Collection then becomes part of a customer service team designed to provide one-stop-shopping for the buyer. What remains is a small group of skilled credit specialists within the finance organization. The "collectors" are assigned to integrated work teams within the customer service organization. On these teams collectors are often outnumbered by customer service people by five to one.

Some of my colleagues whose companies have gone this route have told me that the results so far have been disappointing. Although billing disputes may be resolved more quickly, total delinquency and Days Sales Outstanding tend to creep up over time as the individual collector's focus shifts from generating cash flow to the team orientated goal of order fulfillment.

The fact is that it takes a different type of person to handle collections than it does to make sure orders are sent correctly and on time. The skill sets required for each position are very different. On teams the distinction could become blurred over time and, therefore, collection become less effective.

No one knows for certain whether separating credit and collection will work better than keeping these activities together over time. It's likely that in the future consultants will encourage companies to again merge credit and collection because separating them has caused the function to become disjointed. It doesn't take a great deal of imagination to envision consultants coming back in a few years saying one can improve effectiveness if we organize functions along the lines of specialties. Before splitting credit and collection one should carefully consider the possible implications.

Is there a better alternative than questionable organizational realignments? Clearly greater integration and coordination of credit and customer service activities can be achieved by utilizing process improvement techniques. Shared performance objectives, use of a single data base, and appropriate work load shifts improve the effectiveness and efficiency of collaborative process involving credit and customer service.

There is no doubt that maintaining the integrity of the specialized functions while improving communication and work flow will get the "best of both worlds." By merging two very different functions you will tend over time to get a "plain vanilla" performance that cannot be as effective.

Here is a list of ten illustrations of the synergistic nature of the credit and collection processes. They strongly attest to the essentially inseparable nature of the credit and collection processes.

1. In preparing for any telephone dunning effort the credit manager must "size up" the situation to determine the most likely cause of the delinquency. This assessment dictates the credit manager's approach to resolving the problem. For instance, the credit person will ask himself whether the particular customer is highly credit worthy and, therefore, may have inadvertently skipped some invoices. On the other hand, the customer could be a slow payer with chronic cash flow problems. In short, the collector should consider the credit picture.

2. During telephone dunning efforts, the conversation often turns to the customer's own problems with collections and to business in general. The credit person seizes these opportunities to develop valuable credit information and to request financial statements.

3. The credit person strategically trades time for security in managing the exposure of large, undercapitalized firms. That is, the credit person may ease the customer's cash flow problem by judiciously extending additional time to pay in exchange for the customer's agreement to provide security in the form of guarantees, liens, etc. To be effective in this strategy the credit person must be keenly aware of the customer's condition through credit and financial analysis.

4. When it is necessary to reschedule a customer's past due debt over time by negotiating a promissory note or other fixed payment schedule, the debtor invariably wants to know what his credit line will be for future shipments. The credit professional must simultaneously resolve both the collection and credit issues.

5. Distressed debtors sometimes make settlement offers to creditors in an effort to avoid bankruptcy filings. To properly assess the offer and conclude the collection, the credit person needs to carefully analyze the debtor's financial statements.

6. Part of the credit person's job is to follow up and to ultimately collect possible recoveries from customers that have filed bankruptcy. Any plan of arrangement proffered by a Chapter 11 debtor needs to be carefully analyzed in light of the firm's financial condition. The object of the analysis is whether acceptance is in the best interest of the creditor.

7. In handling an account that could potentially file bankruptcy, the credit person needs to employ a strategy of accelerating collection yet avoiding preferential payment claims. Again, an awareness of the customer's financial condition (and the law) is essential.

8. When a risk account's purchases places its balance in an over-the-credit line situation the credit person must negotiate prepayments. The negotiations invariably include requests from the customer to increase the credit line.

9. In most cases the credit person combines the purpose of customer visits. The credit person will see the accounts payable manager to resolve collection problems and the CFO to discuss financial issues. This does more than save time and expense, it actually improves results because accounts payable managers tend to be much more cooperative when they know that the credit person's next appointment is with their CFO.

10. Likewise, in the case of many large accounts, the credit person leverages this relationship with the customer's CFO to overcome collection impasses which may occur with the customer's buyer or accounts payable department.

Credit and collection activities are naturally and almost inseparably intertwined. In combination they create a strong synergy which those not familiar with the function need to better understand. Credit professionals must communicate the value we add to the firm and help consultants truly appreciate the intricacies of the relationship between credit and collection activity. While there can often be pressure from within the organization and from consultants to change, we should strive to avoid change for change's sake particularly when we believe it will harm the effectiveness of those operations under our charge.

Mark C. Clark, CCE is director of credit and collection for Pfizer Inc., New York, NY.
COPYRIGHT 1995 National Association of Credit Management
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Author:Clark, Mark C.
Publication:Business Credit
Date:Jan 1, 1995
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