December Article

Someone told me recently that achieving zero bad debts was not necessarily a good thing? Why would this be the case?

When working in credit it can be easy to fall into the trap of targeting zero bad debts. I’ve seen many credit managers take one look at the credit report of a potential customer and refuse to give them credit terms because they appear a little too risky.

Make no mistake, as a credit manager you are not there to gamble with your company’s finances, but you should be taking calculated risks that align with the company’s strategic goals.

A credit managers role is not to simply ensure that every invoice is paid in full and on time or that only the most credit worthy customers are accepted. Your purpose to align yourself with the strategic direction of your company and react accordingly.

I previously worked with a company who had a strong position in the market: providing something unique which could not be purchased elsewhere. They knew their market dominance and therefore were averse to taking any credit risk. They only wanted to offer short terms, were quick to have directors guarantees signed and would stop supplies as soon as an invoice became overdue. Whilst the company didn’t achieve zero bad debts, they certainly came close. The offset was that they undoubtedly missed out on sales with potential customers who didn’t meet the strict policy for granting credit. They understood and accepted this trade off.

Let me contrast this with a very different approach. I met with the MD of a company who were one of the biggest in its market. However, by his own admission he had no way to differentiate his physical product from any of his competitors. Instead he relied on the overall service offer around the product to help them stand out and win business. Despite their size in the market, he had clear and aggressive growth plans. He had a good understanding of credit risk, was prepared to push boundaries and was able to have sensible balanced discussions about the level of risk that was appropriate.

This is where a credit manager can come into their own. Its easy to say ‘No’ but if you are at odds with business goals then life will become a battle and the credit department will quickly live up to the ill-informed stereotype of sales prevention. Modern thinking credit managers have moved on: they align closely with the sales and commercial teams and offer solutions to help achieve business objectives by providing input into a balanced risk and reward analysis. 

The nature of taking this calculated risk is that sometimes it will go wrong, and the business will incur a bad debt. Communicating effectively during the decision-making process and throughout the lifecycle of a customer allows everyone to understand and make decisions on this level of risk sooner rather than later.

In summary, I’ll leave you with these questions: Are you fully aware of your company’s objectives? More importantly, are you adapting your credit decisions and communication to meet these? 
In short, are you prepared to make and stand by the decisions which might just give your company an opportunity to grow?

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