Credit

Credit is the trust which allows one

party to provide resources to another
party where that second party does
not pay the first party immediately
(thereby generating a debt), but instead
arranges either to repay or return those
resources (or other materials of equal
value) at a later date.
Credit
The resources provided may be financial
(e.g. granting a loan), or they may consist
of goods or services (e.g. consumer
credit). Credit encompasses any form of
deferred payment.
 Credit is extended by a creditor also
known as a lender, to a debtor, also
known as a borrower.
Introduction to Credit and Collection
Credit is a  contractual agreement in which a borrower
receives something of value now
and agrees to repay the lender at some later date.
Introduction to Credit and Collection
When  consumer purchases
something using a credit card,
they are buying on credit
(receiving the item at that time,
and paying back the
credit card company month by
month).
Introduction to Credit and Collection
Any time when an
individual finances
something with
a loan (such as an
appliances, automobile or
a house), they are using
credit in that situation as
well.
Consumer Credit
Consumer debt can be defined as
‘money, goods or services provided to an
individual in lieu of payment.
Consumer Credit
Common forms of consumer credit
include credit cards, store cards, motor
(auto) finance, personal loans
(installment loans), consumer lines of
credit, retail loans (retail installment
loans) and mortgages.
Functions of isCredit
The credit function an important
component of any company's
business operations.  
Using creative methods when
necessary to structure transactions
so that sales can be approved, the
credit department can make a
significant contribution to sales
and profit maximization. 
Functions of Credit
The key is knowing when and
how to accomplish the sale
safely. 
The key is to find the best way to
minimize the risk of late payment
or non-payment by customers.  
Core Activities of Credit
1. Maximizing sales
2. Accelerating cash flow
3. Minimizing bad debt losses
4. Reviewing and approving new
accounts
5. Developing and updating credit and
collection policies
6. Establishing appropriate credit limits and
terms of sale for new and active customers
7. Creating new or more appropriate
payment terms [terms of sale]
Core Activities of Credit
8. Placing accounts on credit hold, and
releasing orders from credit hold
9. Managing the collection function
10.Maintaining current information in the
credit file on each active customer
11.Documenting credit decisions and actions
12.Performing financial analysis on customer
financial statements
Core Activities of Credit
13.Researching and resolving disputes and
deductions that would otherwise delay or
prevent payment of accounts receivable
14.Communicating with other departments
within the company including order entry,
sales and shipping
15.Management reporting, and
16.Safeguarding the company's investment in
accounts receivable
Collections and Credit Holds
Customers occasionally overreact to a decision by a
creditor company to place orders on credit hold.  
However, most debtors understand the collection
process that creditors use, and understand the risk
they face when they delay payment. 
Occasionally, the penalty for delaying payments to
creditors involves a credit hold.
Collections and Credit Risk Management
Most collection problems and bad debts result from a
flawed or inadequate initial credit investigation.
It may be helpful to think of credit extension as
making a loan to an applicant. 
We know that a bank would not make a loan without a
completed and signed application, and without a
detailed understanding of the creditworthiness and
financial worth of the applicant. 
Collections and Credit Risk Management
The care that banks take in approving loans should
not be lost on trade creditors. 
A creditor should not approve open account terms
until there is sufficient documentation to show the
applicant is creditworthy.
The Credit Department
Strategy
The credit department is involved in the quote to cash
process, meaning the process from order approval to
the cash collection.
The cycle involves the important task of information
collection, credit analysis, collections and cash
application, and deduction resolution.
All of these elements have both financial and strategic
implications in the business process.
The Role of Credit Department
Collection of Information

The collection of information enhances the quality of financial

analysis.
That same information also has strategic implications; it can
strengthen a company's understanding of its customer base and lead
to expanding that base.
The credit department is, in effect, an information warehouse within
any company.
The information collected by a credit department can be used by a
purchasing department to screen vendors or by the marketing
department to help find new customers.
The Role of Credit Department
Credit Analysis

Credit analysis provides financial protection by

determining whether the customer has the ability to
pay the debt. 
Depending on a company's strategic goals, becomes an
important factor in the sales decision.
The Role of Credit Department
Collection

While the credit department is responsible for the

enforcement of payment terms, credit terms are a part of a
company's strategic business plan.
Whether credit terms are restrictive or liberal will have a
direct impact on a company's strategic business plan as
well as on the credit process.
Cash forecasting is a natural transition for the credit
department.
The Role of Credit Department
Cash Application

The financial impact of cash application is related to

the timing of cash flow and the cost of carrying a
receivable.
The strategic implication of cost of carrying
receivables is related to a company's financial strength
and its need for cash flow.
The Role of Credit Department
Deduction Resolution

The financial implication of the cost of carrying

unresolved deductions or customer disputes impacts a
company's operating costs.
Deduction resolution has very critical strategic
implications because it is directly related to customer
satisfaction, which in turn, impacts sales.
The Credit Department Role in Customer
Retention
Establishing a customer relationship is one thing,
maintaining it is quite another.
Customers require a high level of support and after
sale service, in addition to quality products at
competitive prices, in return for their loyalty.
Companies have come to realize that it is far more
expensive to locate, solicit, qualify and establish a
relationship with the new customer than it is to find
ways to keep existing customers.
The Credit Department Role in Customer
Retention
As a result, customer service has become an important
task for every department in the company - including
the credit department.
The goal of the credit and collection department is to
accomplish the goals assigned to it with as little
damage to the relationship between the company and
its customer base as possible.
Techniques to minimize impact of customer
relations
Tell customers that you appreciate their business.
Make your appreciation more tangible by being more
flexible when addressing collection problems involving
customers that have been purchasing from your
company for a long time.
Techniques to minimize impact of customer
relations
Recognize that your company does not offer its
products and services in a vacuum but in a competitive
environment.
A customer is more likely to move its business to a
competitor if offered a more tempting balance of price,
performance an terms of sale.
Therefore, as competitors change the way they [a]
establish credit limits [b] collection past due
balances or [c] determine the terms of sale you
must consider making similar changes.
Techniques to minimize impact of customer
relations
Before addressing a problem with a customer, the
credit department must be sure it has all of the
relevant facts and there is no doubt that its position is
the correct one.
Techniques to minimize impact of customer
relations
To borrow an idea from baseball: All ties go to the
customer.
What this means is that if there is some doubt about
the validity of the seller's position, in the interest of
customer retention there should be a bias toward
accepting or allowing the customer's point of view to
prevail.
Techniques to minimize impact of customer
relations
Try to limit interactions with customers to their
accounting department.
Any time a creditor is working outside of its normal
collection channel [such as dealing directly with the
buyer] the seller's relationship is at greater risk.
Why? Because the accounts payable department is
accustomed to the types of questions and challenges a
collector may ask - but the buyer may be shocked or
offended by the directness of the collector's approach.
Techniques to minimize impact of customer
relations
Don't think of debt collection as a zero sum game,
meaning the only way that the creditor wins is if the
customer loses.
Think of it instead as a mutually beneficial process in
which the customer has the opportunity to continue to
buy your company's goods and services in exchange for
payment of the past due balance.
Techniques to minimize impact of customer
relations
Make certain that credit holds are used sparingly, and
are truly used as a last resort.
Try to notify the customer and the sales department
about the possibility of a credit hold... and try to give
as much advanced notice as is practical under the
circumstances.
Techniques to minimize impact of customer
relations
Negotiate, don't litigate.
Litigation should only be considered after every effort
has been made to resolve problems amicably.
Litigation should never be initiated until the credit
manager and his or her manager have discussed
options and alternatives, and until frank and earnest
discussions have taken place with the customer
[assuming it is still in business] about the seller's
desire to avoid litigation if other options present
themselves.
Techniques to minimize impact of customer
relations
One final thought: Even though the credit department
has an obligation to support and if possible strengthen
the relationship between the company and its
customers, it also has a duty to address and resolve
past due balances as quickly and as effectively as
possible.
This is the tightrope that credit professionals have
chosen to walk
The Credit Manager
A credit manager is a person employed by an
organization
 to manage the credit department and
make decisions concerning credit limits, acceptable
levels of risk and terms of payment to their customers.
Duties of Credit Manager
Controlling bad debt exposure and expenses,
through the direct management of credit terms on
the company's ledgers.
Maintaining strong cash flows through efficient
collections.
The efficiency of which is measured using Days
Sales Outstanding (DSO).
Duties of Credit Manager
 Days Sales Outstanding (also called Days
Receivables) is a calculation used by a
company to estimate their average collection
period.
A low number of days indicates that the
company collects its
outstanding receivables quickly.
Typically, Days sales outstanding is calculated
monthly.
Duties of Credit Manager
The days sales outstanding (DSO) figure
is an index of the relationship between
outstanding receivables and credit account
sales achieved over a given period.
The Days sales outstanding analysis
provides general information about the
number of days on average that customers
take to pay invoices.
Duties of Credit Manager
Controlling bad debt exposure and expenses, through the
direct management of credit terms on the company's
ledgers.
Maintaining strong cash flows through efficient collections.
The efficiency of which is measured using Days Sales
Outstanding (DSO).
Ensuring an adequate Allowance for Doubtful Accounts is
kept by the company.
Monitoring the Accounts Receivable portfolio for trends
and warning signs.
Duties of Credit Manager
Ensuring an adequate Allowance for Doubtful Accounts is
kept by the company.
Monitoring the Accounts Receivable portfolio for trends and
warning signs.
Enforcing the Stop List.
Setting and ensuring compliance with a corporate credit
policy.
Obtaining security interests where necessary, such as
a Debenture or a Cross Company guarantee, against credit
extended.
Initiating legal or other recovery actions against non-payers.
Types of Credit Manager
Credit managers tend to fall into one of two groups
due to the differing specialty legal and jurisdictional
knowledge required.
Commercial Credit Managers
Consumer Credit Managers
large companies which sell to both markets will
require a Credit manager familiar with both aspects of
Credit management.