Employing the ‘keep calm and carry on’ motto

For those of us that consider ourselves credit professionals, it has always been our challenge to convince others that an investment in credit management, people and resources can actually be linked directly to an improvement in bottom line performance.

To that end, if there is one good thing that is coming out of the current financial difficulties, it is that the government has finally woken up to the critical importance of cashflow, both to businesses and those operating in the public sector. Because cashflow comes through good credit management.

A good credit manager
But how do we define good credit management, and indeed a good credit manager? How do we ensure we keep our heads when all around us are (seemingly) losing theirs?

Modern credit managers do much more than simply defining the policies and practices organisations follow in collecting payments from their ‘customers’ – albeit that this is still an essential task. Today they pro-actively and positively input to many departments, functions and procedures to improve business flow and customer service, as well as focusing on their main role of protecting their organisation’s investment in debtors and recovering debt.

Their remit of course varies from organisation to organisation, and industry to industry, but is increasingly becoming much more strategic, given that large organisations are known to have strategies for either non-payment to help their own bottom line profit, or at least significantly delaying payment causing the supplier to finance them at no cost.

At its most fundamental, a credit manager will oversee the sales ledger function, including raising invoices in a timely and accurate manner, speedy cash posting and accurate allocation of that cash, agreeing invoice formats with larger customers/suppliers, and ensuring account management teams are capturing data accurately to prevent subsequent invoice queries. In times of crisis, as now, it is these fundamentals that become more important than ever.

Assessing risk
Credit managers may be assessing risk on new accounts and existing customers by way of credit information providers, reading financial accounts and establishing trading histories, something that is becoming increasingly important. (It is also becoming increasingly difficult: the position of a business today in its new report and accounts could look very different from 12-months ago, and this in turn could seriously impact its access to credit).

They may also be involved in the creation, maintenance and management of a full credit policy – internal documents that identify all set and agreed procedures and policies that govern the credit function.

They may also be negotiating and agreeing terms of business with new and existing customers, including payment terms and setting up service level agreements and credit limits, and reporting to directors on age and profile of debt, potential risks of bad debt, overtrading accounts, areas of suggested training and general customer service observations.

They are also likely to be overseeing or monitoring the activities of tracing agents, debt collection agencies, solicitors, insolvency
practitioners and other third parties, and finding alternative ways of doing business such as escrow accounts, guarantees and back-to-back deals, for example, when other methods may have been rejected.

The fundamentals of cash flow
So why is it, given the importance of good credit management, that some organisations – including those in the public sector – still appear to fail to grasp the fundamentals of cashflow? Should, and indeed could, those involved in the credit industry do more to help small businesses gain greater access to the professional help they require in managing their finances?

An ICM think tank – a group comprising some 25 experts from all aspects of the credit industry – was tasked with responding to that very same question and concluded that help is indeed available, but that it was not immediately apparent where they can go to find it. They concluded also that we need to think harder about how we can get the message across that good credit management and the ability to ‘get the cash in’ is the difference between success or failure.

Support where needed
Whereas most agreed that approaching the banks (or indeed the government) are obvious starting points for financial advice, many were disinclined to do so, often fearful of revealing too much about matters they consider confidential. The biggest challenge, therefore, was in how to deliver support where it is needed most.

More initiatives are not necessarily the answer. It isn’t that the training, advice or support isn’t there (The ICM, for example, is a major provider of professional training initiatives and has worked closely with various government agencies to further enhance
those agencies’ credit management expertise); it is sometimes that the support is insufficiently promoted.

In 2008, the ICM and the Department for Business, Innovation and Skills (BIS) combined to publish a series of ‘Managing Cashflow’ guides. Each of these provides a checklist and tips to give ‘at a glance’ advice to those working in credit departments. Some, such as negotiating payment terms, invoicing and chasing payments, may be bread and butter to the professional
credit manager. But even professional credit managers sometimes benefit from an aide memoire on best practice, and a reminder of the more technical aspects of ‘credit’.

Indeed the series has only recently been updated with a new guide produced in association with the Finance & Leasing Association (FLA) and the National Association of Commercial Finance Brokers (NACFB) that provides tips on the financial assistance that is required for organisations looking to purchase new equipment. (So successful have the guides proven to date – there have been more than a quarter of a million downloads – that they will shortly be going into their third edition.)

Improving payment cycles
The guides are an integral part of a much wider campaign spearheaded by the ICM and BIS around the issue of ‘Prompt Payment’ that led to the launch of the Prompt Payment Code (PPC). At the beginning, there was, understandably, some cynicism towards the code, with suggestions that it was simply a government stunt that would have little impact on improving payment cycles.
The cynics, I am delighted to say, were wrong.

Signatories to the Code have grown steadily, notably among the FTSE, and especially within the public sector. Far from paying
‘lip service’ to the idea of prompt payment, the code has led directly to an improvement by the public sector in payment performance, with figures published earlier in the year suggesting that 19 out of 20 invoices are now paid within 10 days, and a similar number of local authority invoices paid within 19 days. No-one is suggesting that the occasional hiccough no longer occurs, but what is evident is that the code and the wider prompt payment drive is creating a new culture within certain sectors that promotes paying on time as being good for business.

Of course, there are still many challenges ahead. In the very latest survey conducted by the ICM and known as the Credit Managers Index (CMI), credit managers are growing increasing pessimistic as to their chances of collecting the cash, and confidence is at an all time low. The headline index to the end of September stood at 51.9, which although a tiny
improvement in Q2 (51.8) still lags considerably behind the 53.7 score recorded in September 2010. Although DSOs were improving, the number of disputes was rising, perhaps suggesting that the payment landscape is getting tougher.

Credit, in the future, is not going to be ours by right; we will all have to earn it. We are a long way from being out of the woods yet. What we do know, however, is that those who manage to keep a close eye on the cash – and who keep calm in a crisis – have every chance of emerging comparatively unscathed.

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