Pitfalls to Avoid as Credit Analysts
Gaining the trust and respect of your colleagues as the credit analyst/professional takes time, patience and determination. Quite often there can be misunderstandings or clashes with sales, for example, or other executives who may not fully appreciate your role and how it can assist with revenue generation.
There are pitfalls, for sure, for credit professionals but there are ways to ensure businesses operate smoothly and all colleagues (especially sales) understand how best to work together to achieve the same goals.
Let us review some of the pitfalls and ways to address them that will, hopefully, benefit everyone and, of course, the bottom line.
Overlooking warning signs of client insolvency
It’s no secret to say that collecting receivables is the key to success of any business. But as credit professionals you want to address any problems even before they happen, if possible.
It’s crucial to look for warning signs to see if or how companies can pay for service. For example, is there a change in personal situations of the owner (a death or divorce, for example), is succession causing issues or problems and/or are there departures of key personnel or a change in behaviour that causes red flags?
Much of this information is only available to those on the inside, which is why, as a credit professional, you must communicate with your client at all times. It is essential for credit and collection people to have good relations with stakeholders, which could mean owners, order desk personnel, sales etc.
The more information you receive and the better relations you have with your own sales team, the better the rapport, trust and credibility you will have with stakeholders within the business.
Also, it is important to keep on top of any file with CCAA or one that files for bankruptcy. It is your job to have a plan if/when that happens to a customer. The right policy or procedure will assist them so they know what to do.
If you want to mitigate risk it is important to have regular team meetings, which again, increases knowledge transfer and information. Training is also important as it will allow credit teams to know what they need, especially if there is a sign of an impending problem with a customer.
Waiting too long to act on overdue accounts.
There is such a thing as waiting too long to act on overdue accounts. Of course there is the “three times a charm rule or a rule.” However, follow established policy, explore alternatives and escalate after two or three failed attempts of payment.
At that point there is likely an indication of a problem and the longer you wait, the less you are going to get paid. The more likely that you have to take this as a right off.
Some of the best ways of addressing the issue of non-payment or prolonged overdue payment, is to have cross-department meetings, or credit committee meetings to compare notes with departments and discuss what problems may have arisen. It’s best to formalize an exchange of information. Therefore have regular discussion with other stakeholders – particularly sales.
Also, some may find it helpful to determine a customer profile, which allows you to know them so you can see if a change in behaviour is really a change and have access to information on future forecasted business.
Find out: Who they are? What kind of business are they in?
Profiles should also include contacts. Who do you talk to for purchasing or accounts receivable? How are the invoices communicated? Credit professionals should go visit the customers’ site. Often talking to customer can solve issues face-to-face rather than via phone or email.
As credit professionals you need the ability to relate to, and communicate with, other people in the business. They have information that will affect you and you need access to that information, which will assist you in knowing if there is change in the business/customer and how they handle it. Influencing, advising, persuading is essential. To be successful you have to be able to master these skills.
Gathering insufficient information about clients in the beginning
The best thing you can do for your company and the bottom line is to understand your customer prior to any orders and/or making big shipments. Credit analysis, bank references, and financial statements need to be provided at the onset of a relationship. Therefore, if there is reluctance to provide these items, you will need to layout reasons for needing the information and asking the right person.
Don’t make credit analysis shortcuts. Have a checklist, and go through the characteristics of good and bad customers. You need to know what information is necessary to onboard an account – and it depends on the account size and amount.
Make sure to have financial management discipline by acquiring proper documents to bring new customer on board. This can be done by creating procedures and educating the sales team to act on those procedures. It’s important to be transparent about why you are doing this and how. You can still do an accounting review but you don’t want non-official or back-of-the-envelope calculations. By doing these things you will have a better understanding of customer liquidity and cash flow.
Failing to provide an effective reference guide to credit personnel
Before you can do anything it is important to have a policy guides because you might do business unknowingly with high-risk customers.
Cash flow might be at risk and it would put the company at risk. If this is the case you would need to have implemented a policy that ensures the customer credit decisions are documented. Communicate credit procedures and use due diligence checklists to ensure proper procedure is followed.
Giving authority to sales over the credit department to make decisions
There can sometimes be a struggle between the credit and sales teams. Sales is driven by incentives that the company offers them, which is why you need a reporting line that goes up to a senior level that can make decisions on credit or sales matters. Credit needs to enforce the rules – not make them. As a result you should:
- Educate your organization about the consequences of accepting client’s with bad credit history
- Separate duties of sales and credit
- Foster respect and understanding
- Assess credit worthiness through the credit department
- Include sales in the credit department meetings
Overall, the best plans allow for policies, procedure, and checklists so new and junior people know what to do. You will need to give them training and you will need to make your policies transparent with clear expectations. Your job as a credit professional is about communications, deciding, persuading, evaluating. With that, people will trust you and include you in discussions. Always make sure to build a rapport with customers and colleagues to build a successful business.
Author: Nawshad Khadaroo, CCP
General Manager | Credit Institute of Canada