Prof. Patrick O. Connelly: There is Life beyond the Controlling Function of Credit.Seek it out…the Competitive Market Supports, and may in fact Demand, the Transformation

Over the last thirty years, and particularly throughout the most recent decade, many processes have been identified that are critically important to business growth. Credit line management and cash flow management surface at the top of the list. During this same period, constant pressure on margins, turnover, and costs as well as the use of less-than-completely effective hedging alternatives have resulted in a demand for locally driven, cost-effective and very creative business solutions.

A major force in the race for competitive advantage has been noted to be the ability of the firm to identify and capitalize on the less obvious opportunities resident within its existing infrastructure. This has commonly been referred to as “thinking outside the box”, or “beyond the silo” etc.

Success here has been linked to leadership realization of the value and capitalization on the talent and expertise currently resident within the firm. Corporate memory and experience play key roles in corporate success. Generally, one finds under utilized or poorly utilized potential contributors trying to support the company objectives. Why?

A strong competitive position requires that firms manage ALL aspects of the business process and supply chain. Similarly the firm is required to establish prudent business relationships with viable partners, in growing numbers to support the potential for growing profitable sales.

To the extent that internal firm associates align their functions and strengths, the outcome will inevitably be a stronger competitor, aligned with the needs of their customer channels, poised to create a successful destiny for the firm.

Classic competition is supported by the country commercial system, and requires that competitors optimize price, product, promotion and placement (logistics) in its search to attract buyers in the market.

As revenue achievement becomes stressed or stabilizes at a lower level, and as cost pressures follow, businesses continue to seek out ways to balance the cost/sales equation in the quest for profitable growth.

In response, a significant number of associates have sought opportunities at alternative firms, voluntarily and involuntarily. With payroll generally constituting the single largest expense item for the firm, it is the natural point of focus under these conditions. This clearly works at counter-purpose to the model suggested above. What might be done? Can the credit group play a part in augmenting competitive advantage and promoting revenue growth?

Absolutely! And Credit professionals are in prime position to drive the solution.

Over time, the credit function has developed in different ways in the various world geographies. The function ranges from a basic individual cash collection function, to a global organization headed by a theoretical leader and mentor of the firm’s credit risk philosophy. The size, margin, channel, market, geography and history of the firm have much to do with that development.

Also, the proximity to the customer has much to do with this development. The closer to a customer the process occurs, the more training, development and mentoring is required for the associates. In other words TIME, that scarcest of all commodities must be invested in the teams. Note however, that this is one investment with extremely high yields. After all, the development produces a good customer first impression and the opportunity for a continuing relationship. This is a key determinant to the level of ultimate success in developing profitable and growing customer relationship.

How does your firm define success in its credit process? Does the function of credit controlling represent the challenge of collecting invoices and reconciling balances towards the goal of collecting all outstanding receivables within terms? Or perhaps, does your firm support a more service-oriented function to encourage interaction and development among the company groups in order to establish realistic strategy for sales, human and process capital development, market expectation, capital requirements and costs, credit line optimization, hedging, etc.?

How is the growth of your firm faring as against the competition? Better than last year? Worse? Why?

Could it be that the firm has created for itself an opportunity to generate substantial improvement in value by better utilizing the existing resources (human capital ) resident in the firm?

Is it possible that by providing additional training for the teams, improving their understanding of basic business concepts ( communication, capital sources and costs, cash flow process, assessment and management of credit lines, uses of hedges, etc), and then promoting the use of these new skills, the firm might increase its competitive advantage in the market?

Is it further possible that back office credit controllers and associates (among others) can become more refined business professionals and credit services oriented teams, and in that fashion promote better cash flows, decreased cost of capital and DSO, and more engaged customer relationship partners for the sales and marketing teams?

The answer to every question above is a resounding “YES!” And further, this process is the perfect response to the “credit crunch” crisis currently being experienced in many world markets.

Competition in an open market requires two major factors for success:

  1. Control over all of the factors of production/delivery and
  2. Some degree of market stability and efficiency.
  1. Control in this sense requires that all factors of destiny: price, promotion, production, logistics and in particular, risk management decisioning vest with the firm… that they are internal decisions.If influence from outside the firm seriously affects any of these factors, then the firm subjects itself to risk of immediate and at times, catastrophic change in their supply flow (and subsequent cash flow) with customers. Market factors which may not even affect the firm in the ordinary course may enter into the decision process of exterior forces, with the result impacting the purchase power offered to certain, many or all customers in the portfolio of your firm.
  2. Trade and other market information must be generally available to all market players at the same time and with the same degree of completeness.
    Despite the lack of trade information in the past, the new era ushered in by Basel II will surely have an impact on the availability of such information and the willingness of companies to provide this necessary information. That will leave companies to address the issue of customary practice… culture, as the most important issue (and potential impediment) in this area.

Having explained these important competitive practices, how does the firm improve now, and further, prepare itself to take advantage of any improvement in factor 1 or 2 above?

In many, if not most markets of the world, currently or in some past time, competing companies have encouraged the purchasing interest (loyalty) of customers in many creative ways. I have found one area of particular interest to customers has been that of finance-related benefits. Beginning with the offer of agreeable pricing we find extended payment terms, pre-payment discounts and other such inviting “carrots”, all with the objective to encourage (the semblance) of customer loyalty.

But is that not what business is all about…creating a compelling reason for customers to buy from your firm instead of your competitors?

In times of growth and expansion, periods of encouraging cost and availability of capital, accompanied by aggressive credit insurance cover and cost, the firm’s existing model is reinforced and change is discouraged. The status quo prevails.

When the perception of the firm leadership is that events are unfolding as expected, and that current structure and planning follows the company strategy, there is little interest in changing the status quo. In other words, we become complacent.

Over time, in a stable economy, the business process grows to reinforce the status quo. The firms become accepting, even enamored of the current process. Why, they posit, is there a need to add more cost to the business model by seeking out and further developing key functions and functionaries, in the midst of strong company performance against its plan.

More simply put, “If it isn’t broken, don’t fix it!”

But if we assume that the prime objective of the firm is to maximize profitable business; we must anticipate a time when the firm finds itself  falling short of its objectives and under pressure to achieve revenue and profit targets continue to be challenged by market conditions, competitive onslaught, or the need for revitalization of some of the business’ internal and external features add to the challenges.

Thus a key fallacy surfaces, in business the perception of adequacy, the status quo, does not always translate into an acceptable reality or even an appropriate strategy for business TODAY or TOMORROW.

As the economy is subjected to shocks or the competitive landscape changes, businesses encounter “tremors or shocks” that force response and  some element of change. Unless the human and process capital of the firm continuously evolve in anticipation, the firm may find itself incapable of mounting a speedy response to the event; in jeopardy of missing its targets because of the failure to plan beyond the status quo.

As an example, we scan the trade horizon and quickly spot Basel II, the Sarbanes-Oxley Act, terrorism and market uncertainty …in a word “shock”. Despite our love and comfort in the status quo, there is a growing need to change the conduct of trade in order to meet both the opportunities and the challenges on the horizon.

To constantly test the viability of the existing processes requires well-heeled and soundly developed professionals, loyal to the firm, and committed to the objective of maximizing profitable business.

In credit, the process will require the cash flow stimulating experience, reconciliation process knowledge and portfolio experience of the credit controller, supplemented by the enhanced skills of a credit services professional.

In all fairness, conflicting demands upon scarce resources lead firms to make decisions oriented towards the short term. Fiscal periods of ninety days, up to twelve months force consideration of the more immediate effects, results and cost.

Further, the time available to make a growing number of decisions shrinks as the number of situations requiring decision expands. The pressure continues unless human and process capital solutions are implemented to reduce the requirement for, and stress of short term decisioning. Improvements expand the number of possible, and better decisions, and may even relegate the decisions to an automated process, improve the non-automated processes, integrate processes to reduce decision points and stimulate throughput. To the point, there are improvements that can be initiated with little effort and with almost immediate cost-effective results that also establish the value of continuous improvement for the firm.

A key area of opportunity in this light resides in the realm of credit. In response to the general question “How does the firm continuously improve? Let’s take a look at the credit controlling function as an example.

Credit Controlling has been the mainstay of the company’s customer receivable cash flow since the company’s inception. Throughout firm history the Credit Controller has periodically interacted with customers by telephone and written communication, and also directly  (accompanied by sales personnel), in the quest to convert invoices to cash, while managing the firm’s customer reporting and performance notifications necessary to keep insurance cover in place (one must protect oneself from the odd shock) at a reasonable cost, while achieving such internal performance requirements as the firm has established for the fiscal period. In other words, the Credit Control function performs well in the status quo and at the existing level of expectation of the firm.

However, if the firm relegates the credit controlling organization to a back office function, wholly reactive with virtually no cross-functional, inter-company, growth-oriented development, then possible improvement of both the human capital (associates) and process capital (processes) will be very limited. The key to a Credit Services mentality is that it unlocks the potential hidden away in silos across the firm.

The challenge for high-potential, high-performance associates is often to maintain a focus on their contribution to the firm, and as well, their individual growth plans, in the midst of constrained growth limitations in the firm. Support is generally limited, recognition equally unavailable and in short order, the attitude spreads throughout the organization and eventually permeates the firm… status quo is good enough.


But allow for a bit of speculation…What if performance, both by the Credit Controller and the credit team exceeded the company expectation? Not just on one isolated occasion, but on a regular basis. What impact to the firm? What cost? What return?

Measurement of the consequence of improvement is fairly simple. A quick glance at the EBIT/A calculation identifies several focus points of measurement for process confirmation:

  • Cash flow period to period
  • Cost of capital :
    – reduced borrowings due to increase
    – increased opportunity cost
  • DSO reduction period to period
  • Sales increase due to accelerated credit line refreshment
  • Credit line enhancement due to purchase demand
  • Credit line cover improvement resulting from aggregate improvement of fiscal statements
  • Reduced bad debt improvement improves the bottom line

And, beyond EBITDA to note:

  • Competitive advantage resulting from expanded selling as against the competition
  • Reduced human resource turnover due to : – enhanced attention to associates and added opportunities

To name only a select few.

Initially we must overcome the historical reliance on the status quo. It is also critical to obtain the support of the key executives on the management board. Surfacing from the back office shadows into the light of the Credit Services process results in significant “heat” for the credit controller. Similarly, partnering will be new to the other key control areas of sales and marketing, and they will be reluctant to readily accept an untested process, or person.

A plan must be created to gradually provide the experience and training necessary, with important insight from sales, marketing associates and customers, to expose and orient the newly empowered credit associate to the teaming possibilities of customer relationship building.

For the new Credit Services professional, it is advisable to locate and secure a mentor to facilitate the transition into your new growth model. One can be waiting for your query in a number of places:

  • In your firm
  • At a business acquaintance
  • In your local trade group
  • In your trade association
  • By reference from a colleague or manager

Career growth responds in a fashion similar to that of muscle growth in sports dynamics. Both require a challenge to key muscle groups in specific ways, and mentors (like coaches) are usually experienced in the skills necessary for successful development

The firm now passes beyond the status quo. A Credit Services function begins to grow.

Well, at this point, how does the Credit Controller motivate the Credit organization to rise to the challenge of continuous improvement?

As follows:

I. Be noticeable in support of the company team
* Provide professional business training for the team: communication skills, analysis skills, recognition
* Commit to company objectives and assist others in achieving theirs
* Exceed expectations at every opportunity, yours and the firm’s

II. Upgrade your potential for contribution
* Become a polished business professional
* Become certified in the profession ( ICM, etc)
* Take advantage of distance learning opportunities
* Pursue a degree and advanced degree in the discipline
* Network in the trade to the extent possible, promote it with subordinates
* Share your experience with peers in the firm, draw from theirs

III. Step outside the credit/finance silo
* Volunteer for cross-functional and cross-departmental opportunities
* Encourage same in subordinates
* Work to understand peer organizations and interactions
* Actively discuss common solutions with peers
* Target opportunities to assist peers in achieving success
* “Make it happen!”

IV. Marketing communication helps.
* Recognize both the exposure and the visibility
* Communicate effectively to involve all parties in the event and the success
* Learn to produce for the benefit of the firm
* Learn to grow from the experience in the interest of your career

V. Create and publicize drivers of competitive advantage for the firm
* Become a creator of competitive advantage, spread the effect
* Mentor and recognize for development and behavior modification
* Report and reward substantial contribution to the firm ( your, subordinates, peers, outside stakeholder contribution, etc)
* Create ease in expanding current knowledge
* Establish a method of recording performance improvements on a regular basis ( ROI, EBDIT/A,DSO)

VI. Foster a climate of Credit Service
* Confirm the importance of cash flow
* Create life beyond cash collection and the control and reporting function
* Be part of the professional customer relationship development team with sales and marketing
* Create competitive advantage by openly promoting team involvement in the interest of your customers
* Assess credit line extension as if it were your exclusive decision ( train up )
* Develop business turnaround skills to assist wayward customers ( avoid needless losses, maintain revenue streams)
* Understand and manage the customer receivables portfolio profitability
* Involve members of the sales and marketing teams in the process
* Develop strategies for consulting with internal and external peer teams to take advantage of the complementary experience streams

History has shown that the implementation of this philosophy has a very positive, immediate and enduring impact on the business of the firm. And what better time to implement.

In a series of recent trade articles I have taken note of continued questions surrounding the current availability of appropriate levels of credit, and with more concern about the availability as the market returns more robust and competitive. The query, in and of itself is an indictment of the status quo, and support for implementation of the Credit Services paradigm.

Regardless, we are still faced with the immediate question: “Strategically and tactically, what is preventing our firm from implementing a process that enables our firm to mark credit to the market?” What is necessary to meet the demand of any given market condition? What would it take to enable the firm itself to manage its growth in the market?

The existing Credit Controller and the resident credit organization can provide the firm with a pool of resources and opportunity. Investment here benefits both the associates themselves as well as the firm. As the review of the existing processes, costs and benefits associated with establishing and managing credit lines for customers evolves, there will also surface both human and process capital improvement opportunities.

In addition, it will become clear that there are forces both internal and external involved in the credit line management process. Each avenue should be thoroughly evaluated to determine how best, in the interest of the firm, each opportunity should be utilized and where control needs to be focused.

What are the internal elements involved in the credit management process:

  • Credit Controller and the credit team are responsible for collecting outstanding invoices
  • Credit team manages timely reconciliation of open, unpaid items
  • Collection group maintains focus on past due receivables
  • Reporting issues with customers for both the collectors and the insurance company cohorts

What are the external processes involved in the credit management process:

  • Historically, companies have used third party intermediation, factoring or more commonly, credit insurance to hedge against losses.
    • Basis has been both non-recourse and recourse depending on the need, and the cost
    • Risk of loss is fixed by contract
    • Cost of the hedge is fixed by contract
    • Extent of cover is determined by the external contracting party, in discussion with the firm
    • Ultimate cover decision vests with the third party beyond discretion
    • Term of cover is fixed by contract subject to special events
    • Over line needs are subject to discussion between the firm and the third party, but the final decision of cover vests with the third party
  • Reliance on the insurance company involvement and decision becomes very important and not easily replaceable
  • In time assessment expertise is lost entirely, and the insurance underwriter becomes the decision factor for credit lines of the  firm

In companies subject to the influence of a strong External involvement, it is apparent that the function of credit controlling has become mostly collection oriented, and almost exclusively back office-oriented. The functions attend themselves mostly to cash concerns, invoice reconciliation and collection, address bankruptcy preference and loss issues, manage bad debt write-off performance against targets, etc. The function has become predominantly reactive .

This relegation impacts the firm in several important ways, both short and long term.

  • Loss of assessment process control
  • Loss of skilled assessors
  • Failure to develop strong corporate memory in this key area
  • Reduced business and professional skills
  • Reduced human capital development in specific areas critical to credit line and customer development
  • Reduced career path opportunities
  • Reduced industry self-determination
  • Reduced market competitiveness

Does any of the above sound familiar?

Ask yourself if it is logical for a company to complain about the adequacy and availability of credit lines while it makes no serious effort to relieve itself of the constraint?

Will this problem become an accountability issue? How much influence can a third party have on the internal direction of a company, and with similar companies within the industry and market without being called to task for too strongly influencing competitiveness in the market? What responsibility vests with the firm for allowing and supporting such a condition? Where does this position your company, and its potential to compete in your market?

This Credit Services model or paradigm may offer a speedy and cost-effective solution to the firm. You might simply implement some of the solutions discussed in this article, or the Credit Services Paradigm in its entirety. You may resolve to upgrade the existing human (and consequently process) capital of your firm, and integrate the hedges of insurance and financial intermediation as supplemental tools for risk sharing and occasionally, risk transfer. The paradigm exists to resolve the conflict over credit availability and to place the destiny of your firm in your hands in a more complete way.

Remember, the key to program success is the more complete utilization of the capital resources of the firm. Your self development and the development of your portfolio of customers will further support the sales, revenue and profit requirements of the firm.

If it really follows that “You reap what you sow”, then the time has come for credit controllers to take control of their growth and destiny. The features of this paradigm will create value for you, for your firm, the profession and  inevitably the economy.

One can only imagine the resulting performance uplift if a significant number of credit professionals adopt this model. The impact will be felt in the firm, in their markets and yes, in the economy.

There is life beyond credit controlling and competitive markets encourage the pursuit.

Prof. Patrick O. Connelly is the Founder and CEO of the Tao Institute for Credit and Risk Management and a perpetual supporter of credit risk management development globally. Recently returned from a decade of development in China, he continues to provide support to the profession. Articles remain the intellectual property of the author. Direct questions to
Share this: