Improving the bottom line

If there is one good thing to come from the ongoing financial difficulties businesses face today, it is that they have finally woken up to the critical importance of cashflow. Whether they realise it or not, they have also recognised the vital role of good credit management, and the value it can bring to their business.

Of course for those of us that consider ourselves credit professionals, this eureka moment has been a long time coming. 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 the bottom line.

A good credit manager
We believe that successful businesses have certain characteristics, and one of those characteristics is good credit management.

Modern credit managers do much more than simply defining the policies and practices businesses follow in collecting payments from their customers – although 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 in different organisations and industries, 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.

Keeping cash flowing

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, and ensuring sales 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.

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 as they are obliged to share greater risk with their insurers. They may be involved in the creation, maintenance and management of a full credit policy – internal documents that identifies procedures and policies that govern the credit function.

They may also be negotiating and agreeing terms of business with new and existing customers or suppliers, 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, back-to-back deals, etc, when other methods may have been rejected.

Accessing professional support
So why is it, given the importance of good credit management, that some still fail to grasp the fundamentals of cashflow? Should, those involved in the credit industry do more to help those working in the public sector gain greater access to the professional help they require in managing their finances?

This very question was put to an ICM Think Tank – a group comprising some 25 experts from all aspects of the credit industry.  They 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 to local authorities and businesses in general that good credit management and the ability to get the cash in is the difference between success or failure.

More initiatives are not necessarily the answer. It isn’t that the training, advice or support isn’t there. It is just that good intentions often go out of the window when day-to-day business activities get in the way. Credit teams want, wherever possible, to be given the advice they need and then the time to go off and do it themselves. So what degree of practical help is available?

In 2008, the ICM and the Department for Business, Innovation and Skills (BIS) combined to publish a series of Managing Cashflow Guides. Each of the guides provides a checklist and tips to give businesses advice at a glance. There are guides on negotiating payment terms, invoicing, chasing payments, factoring, credit insurance and what to do if a customer goes bust – all with the principal objective of getting paid.

The guides are now backed up by the ICM’s new Business Directory – CreditWho? – which acts as an online portal through which a range of cashflow services can be promoted and representing the key credit management areas already highlighted in the ICM/BIS Managing cashflow guides.

Prompt payment

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. 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, 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 19 out of 20 invoices now paid within 10 days, and a similar number of Local Authority invoices paid within 19 days. 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. It is still fashionable to single out the few examples of poor practice – especially within larger organisations  – rather than highlight the good practice of the many. What has become patently evident, however, is that credit managers can help themselves enormously by getting the basics right, and not allowing their invoices to be in any way held up or disputed for lack of incorrect billing address or purchase order.