Few industries can claim to be recession proof, but credit and collection organizations in any industry can claim to be recession ready. These organizations have established corporate credit policy and are executing the necessary procedures to ensure those policies are not simply words in a binder gathering dust sitting on a shelf. Successful credit organization have a clear advantage in recessive times because they have the ability to identify the impact to their operations quicker and make the necessary operational adjustments that minimize risk and maximize the profitability of their receivables. In addition their policies have incorporated the tools available to minimize risk and under what circumstances they should be implemented.

In most businesses there are seven steps within the process of creating revenue. These include obtaining the sale, credit approval, order processing, customer billing, collections, dispute management and cash application.

Experience has proven that few organizations can say with confidence that all of these seven steps consistently operate at optimum levels of efficiency and effectiveness. The credit and collection department including dispute resolution can operate for long periods of time without much notice from senior management. This lack of attention generally occurs during strong economic periods, where management is focused on increasing market share, new product development, geographic expansion and other strategic opportunities.

It is usually not until times like these, economic downturn / recession, that management focuses their attention on the three important and most over-looked areas; credit, collections and dispute resolution. Unfortunately, too late they discover the bad habits the organization has perpetuated in the areas of credit evaluation, risk management and collection strategy will take time to correct resulting in delayed customer payments, increased reserves for doubtful accounts and large bad debt write-offs.

Organizations whose operations are not affected by economic downturns, and they are small in number, have credit and collection operations that consistently operate at a high level of performance and normally achieve their goals on a regular basis. This is usually attributed to their establishing best practices to ensure consistent optimum performance regardless of the economic climate.

Credit and collection operations that have a clear and concise credit policy that has been established at the executive level perform better than those organizations whose policies have been created at the division or department level. The reason being that although business units may modify policy where and when necessary the overall authority for policy and any permanent changes lie within the executive ranks. A true corporate credit policy and procedure will usually address the following:

Standard terms of payment

Payment discount perimeters

Methods of payment

Procedures for determining credit limits

Collection Process

Hold orders process

Exception process

Escalation process

Dispute process

Account Review process

The potential impact of not having a well – documented and strictly followed credit policy can quickly compound during a declining economy creating higher levels of bad debt write – offs and increased levels of balance sheet reserves for doubtful accounts. However, simply having a documented credit policy, supported and maintained by executive management, will not ensure improved measures of effectiveness. Compliance with the policy and procedures is paramount. For example, customer credit reviews must be completed timely in accordance with company account review requirements and necessary adjustments must be made when the review reveals they are warranted.

Successful credit professionals don’t stop with having established a company credit policy. This best practice is augmented by a focus on tools, such as risk-scoring models, that enable timely risk analysis and assessment. The objective in utilizing models is twofold. First, it is a key tool to determine how to conduct business with a new applicant. For example, analysis may determine the applicant be extended terms, or suggest conditional payment options such as credit card or payment in advance. Second, the scoring model functions as an early warning system for existing customers. When a risk model identifies the need for a credit review or a hold on future orders, there are several questions to be addressed before making any decision to override the warning. 

The first question concerns the risk model; users should ensure the risk model is current and refined for the present market conditions. Then there is the question of alternative payment options; what affect will this have on future relations with the customer? Can a solution be reached that is mutually beneficial while minimizing risk? It is imperative the credit department have a strong working relationship with sales where cooperative discussion concerning sales strategies and revenue implications can be discussed along with risk. This degree of communication that includes, sales, credit and the customer minimizes unpleasant surprises. 

Consistent with credit review compliance is the swift enforcement of credit limit policies when those limits have been exceeded. A healthy working relationship is created and maintained when all parties understand the criteria used in making the credit decision.

Another tool successful credit organizations utilize is the laws governing secured transactions. It has been proven time and again that secured creditors are most often paid before unsecured creditors. Successful credit organizations not only utilize these tools but also look beyond their customer for payment. Their analysis not only includes pertinent information concerning their customer but also looks at what the customer does with the merchandise; is it for use or resale. If it is for resale they look at who the end user is to determine their customers ability to pay under the approved terms they have been given.

For most companies, the sign of a slowing economy reveals itself in two areas: sales and receivables. The first indicator is often a revision of sales projections and/or an actual reduction in customer orders. While this has a direct impact on the overall size of the receivable portfolio, the real indication of recessive times is a slowing of existing customer payments. Successful organizations are quick to adjusting their collection procedures when they recognize the initial signs of a slowdown in sales which often takes one or two billing cycles to catch up to collections. Successful collection personnel recognize, even when their management doesn’t, that a decline in DSO (day’s sales outstanding) is an early indicator of decreasing sales rather than collections.

A credit department supported by management, with a strong sales relationship, utilizing the tools available and willing to make immediate changes when called for is recession ready. How does your organization measure up?

I wish you well

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.