Caution, Full Speed Ahead

In the January issue of CFO.com Magazine, reporter Kate Plourd in her article “Rethinking Risk” gives kudos to the CFO of a cellular phone supplier for having the insight to tighten the credit granted to Circuit City just prior to their filing bankruptcy. The CFO saw signs of impending doom and he quickly moved to reduce his company’s exposure. Specifically he “tightened billing terms, demanded cash payments, and adjusted shipments.” When Circuit City did file, the cellular phone company was not as badly hurt as it could have been.

My hats off to the cautious CFO. The article does not mention if there was a credit manager advising the CFO, but I’d like to think that there was. Someone was generating the credit reports, talking to other Circuit City suppliers, watching the payment trends and keeping tabs on the orders. I’d like to think it was the credit manager who came into the CFO’s office and said, “Hey boss, we better be careful with Circuit City, I think they’re going to tank.”

In this scenario, there are two important dynamics occurring. One, a credit manager with the analytical acumen to discover the potential liability and secondly, a CFO who gives credence to such a report. With the historic downgrading of the credit manager position to little more than a collection arm of the company, competent credit analysis has become a forgotten science. During the boom times, credit was extended to anything that had a pulse. Credit managers who waved a cautionary flag were labeled Chicken Little bureaucrats. Businesses figured they could make up any losses with increased sales.

Now the sales are not there, customers are defaulting left and right and risk management is everyone’s new buzz word. The natural reaction is to slam on the brakes. This is what banks are now doing, lending to only those with A+ credit. Hence, they are not doing much lending.

If a business wants to be extremely cautious with its credit extension, it need only to look to the most inexperienced novice credit clerk. Those new and inexperienced in the credit profession have the highest fear factor. They will turn down anyone and everyone with a hint of slow pay, an old tax lien, or a lawsuit for any reason whatsoever. An over burdened collection clerk is not likely to open a new account for a new customer unless the likelihood of prompt pay is guaranteed. In short, it is easy for a company to tighten up on credit. Just raise the standards and shut off everyone who does not comply.

Or, the company can think and act strategically. Credit management and sales become a team. Both know the risks and both act to minimize those risks with carefully applied controls. It is one thing to deny credit to a shaky business, it is quite another to extend credit cautiously and manage it aggressively. In order to gain a competitive edge, companies will be forced to extend credit to less than stellar customers. The successful companies will utilize the management resources that will allow them to take on a little more risk, apply the necessary controls, work closely with the customers, and reel in payments in much the same way a fisherman reels in a marlin. It’s hard work, but it’s much more satisfying.

This is where Strategic Credit Management Solutions can help. We have the experience of enough down times to know how to get your credit department up to speed. We can not only train them in credit analysis techniques, show them the tools and resources, we can also train them to use this information strategically. We can get your credit and sale groups working together and we can show you the right tools to use to maximize credit and increase your return.
Contact us at http://powerscredit.com/. Your comments are welcome.