It Isn’t Just The Four C’s of Credit Anymore
Author Robert Shultz
Conventional wisdom has it that every effective credit professional must understand and apply the “Four C’s of Credit”. The “Character, Capacity, Capital and Conditions of the times” define a debtor’s potential to meet its future obligations. To be successful today, a credit professional has to look beyond the “Four C’s of Credit”. Credit extension is only part of the job. To be of maximum value to the organization, today’s credit professional must also be an expert in the overall operation of his or her company.
This requires an understanding of, and direct involvement in, every aspect of the quote to cash process. Ultimately cash flow is affected by how well different parts of the organization work together. As any credit professional knows, the Aged Trial Balance is a window to all the upstream mistakes and successes in the order, delivery and collections cycle. It is essential to achieve an integrated process and organization structure supported by proactive systems and automation.
The credit professional is now much more than just a credit grantor. We must look beyond the Four C’s of Credit – Extension and consider how to be effective managers in a broader sense. For starters consider an additional “Five C’s of Credit – Management”.
The Five C’s of Credit Management:
· Customer interests are critical
Understand your customer’s needs. Spend time in the field with both customers and your sales people. Listen carefully. Use what you learn as a road map to specific areas needing improvement.
· Customer related processes and systems take priority
Take care of your customer first. Review and continuously improve all systems and processes connected directly to the customer. Efficient handling of these areas is a top priority. Benchmark competitors and ensure your company compares well.
· Coordinate and integrate for efficiency
Consider the downstream affect of each quote to cash step. The process chain starts when your sales people structure price and terms quotes and ends when undisputed cash payments are deposited and posted. If deals are too complex, they are hard to administer. This leads to more errors and exceptions. If processes and the organization are properly integrated, the result is shorter timelines, fewer exceptions and improved dispute management. That equates to improved Accounts Receivable and financial results.
· Compensation plans and incentives
Establish metrics defining successful performance for each of the quote to cash process steps. Everyone involved should have a clear view of individual and group goals. Goal achievement should directly impact compensation and incentives. Yes, this includes both sales and administrative operations.
· Cross-functional approach
Many parts of the organization impact payment delays, disputes and exception processing. Focusing on priority issues, the credit professional can initiate a cross-functional team approach to analyze and attack root causes.
Facilitate a cross-functional improvement process
As a credit manager you can take the lead in establishing an effective cross-functional improvement process. It is amazing how much can be accomplished. First, determine the key individuals who impact a problematic business process. Then organize and conduct a meeting of all involved. Focus on a well defined, priority, issue. Follow-up, communicate progress, implement changes and report results.
Process improvement teams can meet on an issue-by-issue basis or as standing cross-functional meetings. Ongoing meetings provide each department involved an opportunity to communicate new organization, process or systems initiatives that affect other areas. Regular meetings also provide a forum to focus on specific issues requiring cross-functional cooperation.
Following are thirteen ideas to help you take the first step towards a successful cross-functional improvement process:
· Inclusion – Include managers and stake holders from each area affected. For example, some complex issues require involvement by sales and marketing, customer service, operations, information technology and credit and collections.
· Ask for input – All invited should be asked to provide input on the agenda in advance. This is particularly relevant to standing meetings.
· Set priorities – If multiple issues are identified, get a consensus on the top three. Attack the number one first then number two etc.
· Clear communication – Once the agenda is complete; send it to all participants and senior management in advance. Be clear on the meeting’s objectives.
· Professional approach – Be sure the meeting room is well organized and prepared. How many times have you gone to a meeting where everyone showed up late, the door was locked, the room was freezing and there were no marker pens for the flip chart. Were you impressed?
Equipment such as PC’s, projectors, white boards and flip charts should be in the room in advance. Electrical equipment and PC connections should be tested before the meeting starts. Provide refreshments, particularly for meetings that exceed an hour. A well-prepared, professional meeting environment will yield professional results.
· One individual needs to be the facilitator – Take the initiative and do it. This is an excellent role for the Credit Manager with the unique perspective the position provides. The Credit Manager is one of few in the organization who has a sense of how it all ties together.
· Adhere to a schedule – Emphasize punctuality, allocate time slots for each topic, stick to the schedule and keep the discussion on the subject at hand. Remember, time is valuable. If you gain a reputation for running efficient meetings participants will be more willing to attend.
· Facilitate the discussion, seek input from all meeting attendees – The key here is to be fair and open. As the brainstorming progresses and ideas are presented, cut criticism short. A composite of ideas will result from the meeting that no one individual could have developed alone. This will only happen in a non-threatening atmosphere, where everyone feels comfortable with the interchange. Pride of authorship must be left outside the meeting room. If someone is quiet on a topic, ask for their opinion.
· The discussion must be action oriented - At the conclusion of the meeting, clearly define next steps. Assign responsibility. Set a time-line for completion of tasks.
· Review and summarize the meeting – Go over next step assignments one more time before adjournment. Loose ends will be identified and resolved at this stage.
· Set a next meeting date and time
· Make attendees accountable - Document actions and task assignments. Publish minutes. Be sure to copy management, at least one level up, in all relevant functional areas.
· Communicate success – Keep everyone posted on progress. Each success case will add credibility to your efforts and will increase continued support.
The “Five C’s of Credit Management” are critical to continuous improvement of each step in the quote to cash cycle. By being involved the Credit Manager enhances his or her value to the organization and becomes a leader in the company’s improvement process.
Errors and exceptions can be reduced, manual efforts can be automated and collections can be handled more efficiently. The resulting quote to cash time cycle reductions have a positive effect on cash flow, the balance sheet and operating expenses. Improvements in your company’s financial condition and improved customer satisfaction provide a competitive advantage in the marketplace.
The credit professional is in a unique position to orchestrate the cross-functional approach needed to bring these results.