A 21st Century Credit Executive takes a holistic view of the risks that threaten to cause Customers or Suppliers to fail to meet their contractual obligations. She understands that a company or other form of business does not exist as such; it is merely a legal entity around which a group of individuals gather to undertake an enterprise. In other words Customers and Suppliers are clusters of people. We do not give credit to businesses – we trust people. We trust them to manage their businesses successfully, such that they will be in business when the time comes for them to supply the goods we ordered, in the case of Suppliers, or to take delivery and pay our invoice in full on due date, in the case of Customers.
We do not give credit to businesses – we trust people.
Of course this trust is built on a thorough knowledge of each Supplier or Customer; its previous track record, the experience and character of its leadership, sources of external support available in time of difficulty (e.g. a parent company or wealthy partner), its business model, its risk management strategies and its competitive differentiation strategy.
Today our work is not about ‘minimising DSO’; rather it is about tailoring the ‘most appropriate payment terms for each customer’. There is no point in setting up a customer to fail-to-pay, by insisting payment is due before he has turned the goods supplied into cash. Hence we must understand every customer’s cash conversion cycle. Modern credit management is a key part of business strategy so must add value and provide a competitive advantage. The working capital tied up in Receivables must be made to work by being wisely invested in profitable customers, that operate viable undertakings.
In businesses that deliver high value goods or services – Credit is not Collections. Chasing an unpaid invoice amounts to a failure of Credit; Customers should be vetted before goods are delivered and provided payment terms that they can meet. Invoices should be checked for accuracy and timeliness. Receipt of invoices by customers must be verified, and the customer asked to confirm that payment has been scheduled to be made on time.
We must be proactive because post-delivery Trade Credit provides the buyer with ‘an Option to Default’; he has our goods so why should he pay? We are no longer the ‘Sales Prevention Officers’ of myth, so we provide solutions to this question, solutions that grow our business sustainably.
Post-delivery Trade Credit provides the buyer with ‘an Option to Default’.
Every Credit Executive makes brave decisions to grant credit because she can only anticipate that payment will be made or recovered in the future; a future that is unknowable because it does not exist. Hence making credit granting decisions requires courage, as well as knowledge and experience.
Ron Wells is a contributing editor of BIIA. He is CEO of BarrettWells Credit Resources, a T3P LIMITED business, which provides training and advising services in the B2B Credit Management and Trade Finance domains. Ron is the author of Global Credit Management, an Executive Summary published by John Wiley & Sons; the Chinese (simplified characters) version of which is available as an eBook. Also available is his eBook Credit Risk Management – The Novel (Part One) see: t3plimited.com for details. Ron can be reached at [email protected]