MANAGING CREDIT IS THE PROCESS OF GETTING PAID FOR WHAT YOU SELL
Financial Statements, Sales, Accounts Payables, Accounts Receivables, and Inventory are what credit management deals with on a daily basis, and all are used to evaluate and compare what to do if we collect the funds, and what our strategy will be if we run into problems, as the financial health of our company depends on its cash flow.
Not surprisingly, there are corporate "solution" products available to the Credit Managers to be used from the beginning of the process to the final stages of depositing the check. The products are Informational Reports, Credit Insurance or Trade Receivables Guaranty, Collections, and Factoring.
Should the Credit Manager act like a Cash Manager, more often than not the strategy will reflect the steps necessary to protect the sales investment and not just hope that you get paid. This fundamental difference creates an expectation by management as how to best use the collected funds as the subject of who should get credit and how much is not the issue, but rather the steps one can take to be reasonably confident of being paid for their service. The meltdown of the 2008-2009 economy and financial system illustrated that extending credit to the "perfect customer" with the absolute certainty of being paid is a myth.
Begin by getting to know your clients past history, and evaluate its current financial position by purchasing Domestic and International Credit Reports. This also helps making an informed decision regarding its growth, past and current payment history and whether you will grant credit that is within a percentage of their net worth. This process should be repeated periodically to insure that something hasn't happened in the market place that will change the dynamics of their financial condition. This is an absolute necessity if you are exporting to a foreign country where you are at the mercy of international laws very different from our own.
Protecting your cash flow can be accomplished by applying for a Credit Insurance policy from a specialized insurance carrier that has evaluated your potential buyer and agrees to reimburse you if your client becomes insolvent or is unable to pay. Under certain conditions, raw material, in process, and finish goods inventory can also be reimbursed as a credit loss. This product has been available for many years, and is purchased by many corporations to help with their bank borrowings, hedge against a large concentration of accounts receivables, support and supplement their internal credit decisions, and guaranty that their cash flow is protected in the event something unexpected happens to their customer.
It is usually understood that 80% of accounts receivables is tied up with 20% of the customer base, and to that end a Collection contract should be part of the revenue enhancement cycle. To keep your accounts from going over 60 days is paramount, especially if you have an asset based loan, and depending on your credit staff it may be advantageous to get outside collection help to focus on collecting the 80% of your outstanding receivables.
Factoring accounts receivables is a financing product designed around the credit worthiness of the actual receivable rather than the credit worthiness of the seller. In short, factors buy your receivable, guarantee credit, collect invoices, and create value by increasing cash flow. Address factoring costs as a profit center by comparing how much you might save by offering your suppliers cash discounts larger than your factoring rate, and you might be surprised that you actually make money on the deal, because it's what you do with the funds that will determine if you created value for your company. It's all here in one complete package with Coface of North America a corporation that deals internationally, is investment grade, and provides all the products described above. An email or phone call will get you an answer to your question.
Regards,
Tom