“Beyond the Fundamentals: Anatomy of The Perfect Credit Department” ICTF April 7, 2014 Pamela...
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Transcript of “Beyond the Fundamentals: Anatomy of The Perfect Credit Department” ICTF April 7, 2014 Pamela...
![Page 1: “Beyond the Fundamentals: Anatomy of The Perfect Credit Department” ICTF April 7, 2014 Pamela Krank President The Credit Department Inc. (TCD) Pkrank@tcd.com.](https://reader035.fdocuments.net/reader035/viewer/2022062516/56649e105503460f94afc429/html5/thumbnails/1.jpg)
“Beyond the Fundamentals: Anatomy of
The Perfect Credit Department”ICTF
April 7, 2014
Pamela Krank President The Credit Department Inc. (TCD)[email protected]
![Page 2: “Beyond the Fundamentals: Anatomy of The Perfect Credit Department” ICTF April 7, 2014 Pamela Krank President The Credit Department Inc. (TCD) Pkrank@tcd.com.](https://reader035.fdocuments.net/reader035/viewer/2022062516/56649e105503460f94afc429/html5/thumbnails/2.jpg)
Agenda
• Characteristics of “Perfect” Credit Departments
• Efficiencies vs Effectiveness • Process/Technology/Resource
Maximization• Strategies for Moving toward
Perfection:• AR Valuation• Bad debt Analysis
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The Credit Department, Inc (TCD) Background
•Manage global trade credit for 52 mid-market companies all over the world•70,000+ bill-to customers•150,000+ open invoices daily•Consulted in nearly 500 global companies’ Credit Departments
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“A Perfect Credit Department”
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A Generalization:Smaller vs Larger Credit Departments
•Smaller Credit Departments (less than 10 members) tend to be more efficient and less effective•Larger Credit Departments (10+ members) are usually more effective but less efficient
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Top Consulting Observations onCredit Departments
1. Insufficient focus on managing top risks
2. High cost per credit analysis, collection account, deduction management
3. Work arbitrarily assigned4. No retrospection on missed
opportunities5. Write-offs common practice6. Poor/incomplete use of internal
data7. Lack of sophisticated
tools/technologies8. Inconsistent decision-making9. Policies/procedures not
followed/enforced
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How do we get our Credit Departments more effective while meeting our CFO’s lower cost goals?
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Profile of Perfect/IdealCredit Departments
1. One Standard Process flow2. Credit Scorecards Utilized3. Credit Committee Formed4. Maximize
Automation/Paperless 5. Department of Specialists6. Best-in-Class results7. Efficient cost structure8. No surprises
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Process Flow
• Credit Policy directs each process• Only those who add value are a
part of the process.• Credit resources are defined by
impact of risk on the receivables portfolio
• Collection activity is driven by default risk and cash flow priorities
• Value in diagramming processes
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Credit Scorecards
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Credit Committees
• Representatives from Credit, Finance, Sales, Marketing, Executive
• Build consensus on credit policy and updates
• Meet regularly to deal with sales forecasts vs existing credit limitations
• Deal with inter-company process issues
• Create a path for approving lines beyond credit recommendations aka, business decisions.
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Technology Expectations
•Automate routine processes (letters, scheduling, statements, small lines)•Allow the system to determine daily work queues, not individuals•Expect analysts to spend time working risks alerted by the system•Code every past due item with status, review dates•Focus is on reporting risks and customer information to top management
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Staff Resource Utilization
Current Resource Utilization Example
Most Effective Resource Utilization
Staff size determined by history of account management
Process & technology maximized first before replacing/hiring new staff
Employees are all “generalists” who do the same tasks regardless of asset allocation needs. Work generally divided by alpha, region, or division/product line.
Duties assigned to specialists (ie credit analysts, collectors, deduction specialists) based on numbers of credit files, past due accounts, #’s/complexity of deduction files, etc
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Obstacles to a “Perfect”
Credit Department– Lack of upper management support– Existing team members unable to
identify process change needs/implement scorecards
– Insufficient budget for technology– Change reluctance by employees– Limited resources
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“No Surprise” Reporting Example
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No Surprise Tool: Valuation
of the Receivable Asset•Assign risk probability to every credit customer•Compare probability of default to exposure•Assign statuses to every past due item with historical probability•Calculate the risk
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Existing Exposure Example
Based on Risk Probability
Total Aging: $16,610,000:
Customer A/R Totals in these categories from scorecards:•Very high VH (20%+): $500,000•High H (10%+): $760,000•Medium high MH (5-10%): $1,250,000
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A/R Asset ValuationRisk of Credit Default
•Very high VH (20%+): $500,000 * .20 = $100,000•High H (10%+): $760,000 * .10 = $76,000•Medium high MH (5-10%): $1,250,000 *.05 = $62,500
Total reserve (part 1) based on Customer Risk of default in Credit process: $238,500
Value so far: $16,610,000-$238,500 = $16,371,500
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Delinquent Account Status Reserve
ExampleStatus Past write-off
experienceExisting Status Balance
Predicted Defaults
Bankruptcy 95% $122,000 =$115,900
Bad debt 100% $115,000 =$115,000
3rd party 85% $80,000 =$68,000
Collection Attorney
60% $48,000 =$28,800
Final Demand 40% $180,000 =$72,000
Installment Note
20% $350,000 =$70,000
Total Probable Status Bad debt =$469,700
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A/R Total Valuation Report Example
•$16,610,000 gross value•($238,500) Default Risk Probability•($469,700) Account Status Default probability
Total Net Value of the Asset:
$15,901,800
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Bad debt Analysis Example
Customer name/acct #
____________________ ___________
Bad debt written off
$______________
History of risk changes
__/___/__ date ____score $________ line amt
__/___/__ date ____score $________ line amt
__/___/__ date ____score $________ line amt
Within policy limits?
___ yes ____ no
Missed Opportunity
__________________________
Comments __________________________________________________________________________
_____________________________________
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Conclusion
• Perfect Credit Departments are both effective and efficient
• We need to ensure our process, technology, and people resources match the needs of the asset
• There are changes and enhancements we can all make to strive toward perfection in Credit.
• Surprises ruin perfection….our job is to prevent them from happening
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Thank you!
Pam Krank
The Credit Department Inc (TCD) [email protected]
800-451-0164 X 203
www.tcd.com