Operations: Credit management

Customer defaults are an unfortunate fact of life. David Taylor, Chairman & CEO of OnGuard explores how intelligent software can help credit managers spot and interpret the ‘red flags’ that indicate a customer is in financial difficulty, and how monitoring these can help businesses protect their own cash flow.


In the post-crisis era, companies are taking a more cautious approach, particularly when it comes to the payment of their own invoices. Simply invoicing a client for a product or service does not guarantee payment and in the present economic climate, revenue only counts if it is cash in the bank. The key challenge facing companies is to keep cash moving by taking a proactive approach to managing debtors and bringing credit management into the heart of business processes.

A credit management department has many touch-points within an organisation, but the most important of these is with its customers. Credit managers are in contact with customers every working hour of every working day, and this close relationship effectively works as an ongoing customer satisfaction survey. The credit management department is therefore well positioned to spot any red flags indicating that customers are not in control of their own cash flow and are struggling or not willing to meet pre-agreed payment conditions. These red flags include widening or fluctuating gaps between payment, arranging a scheme but defaulting within the first few payments, re-requesting invoices already sent and recurrent querying of invoices.

Good credit management is no longer just about chasing debt; it’s about understanding the customer. It is common sense for firms to have the greatest understanding of their top tier customers, discussing invoices before they are issued to iron out any potential problems and highlight any challenges around cash flow. The importance of this becomes apparent when you consider the general rule that 80 per cent of your income comes from 20 per cent of your customers. Such conversations will ensure that suppliers are at the forefront of customer’s minds when it comes to payment.

In the credit management world, knowledge is power. Software solutions can build a sophisticated profile of customers including payment terms, historic payment behaviour, disputes raised and credit scores. It can help companies predict when customers are getting into difficulty by spotting – and anticipating – early warning signs or red flags. Business can build their own parameters into these monitoring solutions to ensure red flags raised are appropriate to specific business models.

For example, a classic tactic among customers aiming to withhold or delay payment is to raise spurious queries or complaints around invoices. A root-cause analysis of these complaints creates transparency by tracking the number of complaints raised by a particular customer over a set timeframe against the percentage that were proven to be unfounded.

If you factor in the complexities of hundreds, thousands or millions of customers the idea of knowing your customer and spotting changes in their behavioural patterns becomes virtually impossible without a software solution. The resource, cost and human error implications of manually monitoring customer behaviour would sit heavily on the shoulders of any CFO and taking this one step further, and prioritising those customers that are vital to the cash flow of your own business, accentuates the need for automation in this process.  

Once red flags have been identified an alternative defined collection process can be followed. Cases can be escalated in an appropriate manner ensuring conversations around late payment are had with the appropriate people at the appropriate level. Bringing an element of consistency to the collection process is vital to ensure objectivity and rationality in decision making. Whether it be a small business, where credit management is just one of multiple functions completed by an individual, or a large business with a team of credit controllers, defining and automating these processes can prove useful as software solutions set out specific actions to follow – they can even draft letters and write scripts. Taking the ‘thinking’ out of this process provides for consistency across teams and allows people to get on with the tasks that really make a difference in this process – getting to know customers.

Of course, there comes a tipping point where the cost of pursuing customers outweighs the benefits of keeping them and a good credit manager will be able to identify this and have the ability, resources and power to make difficult decisions. Software can provide a realistic overview of the costs of chasing up bad payers, creating transparency right down the chain, from the initial invoice to its resolution. Above all, good credit management takes the emotion out of the process, basing it instead on the facts resulting from data and behavioural analysis.

By intelligently combining traditional external information around credit ratings, court filings and solvency with specific proprietary information on customer behaviour, credit managers are now focusing on actively profiling clients and building relationships with them and their finance departments. These efforts will encourage customers to communicate with suppliers about their cash flow situation and keep them informed of any problems on the horizon. After all, the better you understand your customers, the red flags highlighting they might be in difficulty and the obstacles they are facing in terms of payment, the easier it will be to manage the cash flow within your company and the better you will understand your own business.

As a discipline, credit management focuses on giving CFOs the insight they need to safeguard their bottom line by identifying and anticipating tomorrow’s risk by minimising attrition through write-offs. And at a time when cash counts, companies with the strategic foresight to integrate credit management systems and procedures into the heart of their business processes will find themselves first in line when it comes to being paid, and being paid on time.