I’ve long
held a view that all too often, those in credit management report to finance
functions that rarely have a grasp of risk management, loss mitigation, business
continuity or business development. I guess we all have examples to recall but
here’s just one of mine.
A German
client I had visited in early days of trade had built a solid relationship with
us allowing us to operate frequently at gross margins of more than 8% on
components and in particular hard drives. The first three years went exceptionally
well with increasing credit lines and credit insured availability, the latter
peaking at around 700K.
In the fourth year, I noted a lack of crispness in response
from the client, visited them again and obtained interim management accounts
that did suggest a dip in performance. I explained we would continue support
but in a much ‘tighter’ fashion and insisted on provision of regular monthly
management accounts and prompt settlement of amounts due.
I dropped
the credit line to 500K and managed to reduce the debt in line with this lower
level within two months. The first two interim management accounts provided suggested
the ‘wobble’ was still evident but payment had nonetheless been prompt in those
two months following my last visit. There was of course internal pressure to
allow trade to the insured line of 700K again but I refused.
Four months
later, the client called to say they had real difficulty meeting payment due
and asked for a little more time and an element of continued supply. At this
point, the debt was just short of 500K.
In creating an
element of early bad debt provision given payment issues, my Finance Director’s
view was that given insurance cover, stopping supply and insistence on immediate
payment was the best course of action. I naturally countered that this was not
the best way of mitigating risk for a number of reasons, not least of which was
that we were well short of our aggregate first loss on our insurance policy so
would have to take the almost full 500K hit. He could not quite see this but I
won the argument by adding I could bring down the debt by visiting once more
and working a phased ‘withdrawal’.
Over the
next six months, and while continually reviewing payment, credit line and
financial information provided, we successfully whittled the debt down to just 80K
and all this while keeping debt within the credit insurance reportable period. It was at this point that the client moved to insolvency resulting in a claim
of 80K instead of 500K.
Not only had we reduced the bad debt level, we had
actually managed to transact over those six months a further 1.2m of business
at 8% gross margin.
Simple logic
in terms of risk mitigation but in essence, demonstrates the real tangible
difference a specialist credit management function offers in viewing the
overall picture and potential end result as opposed to a finance driven cut and
thrust call.
There is
only one function that can deliver sound risk business decisions – it’s not
Sales, it’s not Finance, it’s Credit.
Edward Pacey
FCICM FACP
07502246558
No comments:
Post a Comment