For B2B businesses, credit management is essential for accounts receivable (AR) management success. Proper, healthy credit management allows for steady cash flow, better collections management and a manageable days sales outstanding (DSO).
The Credit Research Foundation estimates that only 20% of credit departments have formalized policies. Be it lack of critical financial information, undue to time constraints, or higher priority projects, many companies, today, struggle to create formal credit policies.
A credit plan should have a dramatic impact on the overall financial health of your business. As such, the primary goal of a credit plan is to clearly define these elements so that employees adopt documented steps and procedures designed to improve all related business processes.
Your credit plan provides a documented roadmap aligning corporate goals with business processes. The credit plan will help your organization reduce bad debt and write-offs. Additionally, it will enhance sales-to-cash payment cycles, leading to improved profitability.
The first step toward improving credit and collections is to develop a formal policy (your credit plan). Your credit plan should cover rules, regulations, and procedures to manage daily operations, approval workflow, and resources. Your credit plan should include a mission statement or well-defined company goal.
Next, you must identify all employee roles and systems that are directly or indirectly related to the credit and collections process. Each role should be defined in relation to credit and collections authority and responsibility. Workflow diagrams are useful for mapping out communications and inter-departmental relationships.
Once you have your internal workflow mapped out, you can look at external data to help determine your credit risk limits.
External and Supporting Data
B2B credit management is a complicated, but important process, containing many moving parts. Taking the time to plan out your processes while considering what’s best for you as well as your customers will aide in creating a successful credit plan.
Your credit plan should include supporting data including (but not limited to) your number of customers, credit term and credit limit policies (if any), annual revenues, average outstanding receivables, average days-to-pay organization wide, DSO), and bad debt write-offs.
Once this data has been collected, many companies set goals to improve these metrics using key performance indicators (KPIs). You may want to reduce average outstanding receivables by 5% or decrease bad debt by 10% year-over-year. These first goals are important because they help the credit and collections department understand the purpose and intent. From here, you can evaluate the system to make procedural changes that support these strategic goals. For example, if most customers typically pay late, reducing credit terms may be one resolution to support the organization’s goals.
Tools for Success
Surveys are useful tools to help define problems in the credit and collections process. Employees and customers responses should be studied to identify process improvements. This can provide valuable insights. For example, you may discover that customers pay late because they receive invoices late or often must dispute invoices due to internal mistakes on sales or service orders. Invoice automation or changes to business processes in other departments could have a significant impact on improving your credit and collections process.
AR automation can make a world of difference in your credit plan activation. Leveraging an AR automation system, like Lockstep Receivables, that has a customizable, online customer portal, allows your customers to securely view invoices, statements, and take actions like make a payment as well as contact you for available credit.