KOLEHIYO NG SUBIC

WFI Compound, Wawandue, Subic, Zambales

Midterm Examination Credit and Collection

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Case Analysis:

Optimizing Credit and Collection Management at Edward Don

It is standard management practice to evaluate

performance in key business areas against industry norms. At Edward Don and
Company, we became quite concerned when our internal performance indicators
revealed that we were flagging 66.2% of our active accounts as carrying a high
credit risk. Subjectively, this number stood out as a very high scoring – and
therefore very suspect – result. In practice, the high level of customer credit
concerns were throwing up numerous road blocks in our core business, the
distribution of food service equipment and supplies in the US.

Reacting
to what appeared to be a very poor customer base credit scenario
resulted directly in several impacts on our operations:

 What in
fact turned out to be an excessive number of orders were being placed on ‘credit
hold’. This reaction had a negative effect of requiring our collectors to spend
an excessive amount of time on reviewing and releasing orders, and therefore
resulted in less time for value-added activities. They were primarily spending
time on the phone contacting customers for payment. About 98% of held orders had
to be released manually, resulting in execution delays and increased processing
costs.

 The knock-on problems included growing frustration among our

sales force, and an increasing risk that our customers were not optimizing their
sales potential.

Clearly, it would have been imprudent simply to

loosen our credit standards arbitrarily, which would run the risk of increasing
payment delays and counterparty failures because of inadequate credit analysis.
We needed to quickly find out which of our customers truly presented high levels
of credit risk, so that we could then more confidently accelerate order
processing for all the others. If we could achieve this, the vicious circle
would swiftly transform into a virtuous circle, with accelerated payment
performance, better satisfied customers, lower credit risk exposure, more
efficient operations and enhanced business development opportunities for our
sales force.

The resolution of this issue was clearly a very urgent

corporate priority, as it was significantly impacting our core business
operations.

The Base Situation

Edward Don and
Company runs a decentralized 41 person set of credit and collections teams,
distributed around our regional offices in Florida, New Jersey and Texas, and at
the corporate headquarters in Illinois, US. The team includes 35 credits
collectors/analysts, each of whom is responsible for about 1,200 accounts.
There are about 35,000 active accounts, growing at the rate of 150-200 new
accounts per week. Our core business pattern consists of a high volume of
relatively low value transactions.
Our original approach to credit
analysis involved the construction of generic scores, primarily based on
information supplied by specialist credit bureau. These scores were used to
evaluate the creditworthiness of new accounts, so that credit lines and payment
terms could be assigned to each account. They were also used to monitor the
existing accounts, supplemented with the team’s analysis of published, financial
reports plus some internally originated account performance data. The team also
used the analysis to construct collection strategies where these were needed,
in reaction to seriously late invoice payment performances.

Generally,
this describes a pretty standard methodology that is widely used in the credit
and collection business, but it did not seem to be generating sufficiently
accurate results for us. Therefore, the operation was becoming afflicted with
bottlenecks, and was increasingly stressed, as I have described above.
The team felt that the poor predictive quality we were experiencing with
respect to accounts’ changing credit condition probably resulted primarily from
a lack of accurate and timely input data. The underlying strategy then in place
was, reasonably enough, quite conservative; but in practice, it was generally
tending to assign far too many customers to an inappropriately high-risk status,
with the consequences I have outlined. One of the causes of this unsatisfactory
situation was the basing of the analysis of some accounts on the ‘ship-to’
location, rather than focusing on the actual legal entity that truly reflected
the risk. This approach will almost always lead to an underestimation of an
account’s credit status.

Paradoxically, other flaws in the analytical

methodology were in some cases resulting in the underestimation of the true risk
that was being carried by some other accounts.

So, we were operating in

an unsatisfactory environment in terms of the timeliness and accuracy of our
credit management process, and were therefore experiencing growing problem
issues in collections, in risk exposure, and in related fields. We were also
becoming increasingly sure that we were by no means using our professional
credit and collections teams at anywhere near their full potential. Something
had to be done.

Prepared By: Submitted to:

Ms. Rose-Anne M. Estabaya Mr. Roderick S. Tan CPA, MSA, MBA
Instructor Chairperson/Dean
Note: STRICTLY NO ERASURES!!!!