Credit Management Toolkit: How to manage Credit effectively

Credit Management Toolkit:
How to manage Credit
effectively
‘Cross-border business
in the EU made easy’
Dr. Michael Sauter CCM,
Bundesverband Credit Management e.V. / Germany
Tallinn, 19.09.2013
Agenda
• 
• 
• 
• 
Basic Credit Management Principles
European Perspective on Credit Management
Effective Credit Management Organization and Processes
Outlook and Future Trends
2
Is this the reality of Credit Management in your company?
3
Credit Management today starts early in the customer lifecycle and
has a strong impact on profitability
Marketing/
Sales
Profit
• Target client
identification
and selection
Contracting
• New customer
credit check
• Fraud
prevention
• Securities
• Credit insurance
• Pricing
• Factoring
Controlling
Monitoring
• Information
management
• Limit
Management
• Limit
management
• Payment control
• Fraud detection
Dunning
• Dunning
management
• Securities
• Write-downs
Collections
• Collection
management
• Collection
factoring
With Credit Management
Customer…
Without Credit Management
… identification
… evaluation
… controlling
… monitoring
4
… dunning
… collection
Multiple objectives in Credit Management (selection)
Activities / Tasks
Objectives
Liquidity
Prevention of Bad Debt
Process Efficiency
• Ensure ability to pay
• Make sure receivables
match open invoices
• Manage minimum
liquidity
• Rolling cash forecasting
(short term, mid term,
long term)
• Cash planning and
controlling
• …
• Agreements with clients
• Credit check before
contract
•  Credit limit approval
• Continuous credit
check (even with long
term clients)
• Effective collection
process
• Managing large risks
with credit insurance
• …
• Definition of
responsibilities and
processes
• Definition of decision
and escalation
processes
• Detailed and consistent
reporting
• Continuous monitoring
of client portfolio
• …
Enabling profitable business more often and as such increasing profitability!
5
Credit Management has positive effect on DSO and bad debt (1/2)
(1) Revenue growth required to compensate bad debt
Revenue: 200 Mio. EUR
Profit Margin: 3%
Profit: 6 Mio. EUR
Bad debt
0,60%
0,45%
Difference: 0,15%
Profit reduction
1.200.000,-­‐ EUR
900.000,-­‐ EUR
300.000,-­‐ EUR
Required revenue growth
40 Mio. EUR / +20%
30 Mio. EUR / +15%
10 Mio. EUR / +5%
Summary: a reduction of bad debt by 0,15% compensates 10 Mio. EUR revenue growth.
(2) Positive effect through DSO reduction Revenue
Current
200 Mio. EUR
DSO (Cost based on 5% interest rate)
Current
1.111.111,-­‐ EUR
(at 40 days)
Effect
138.889,-­‐ EUR
Savings (at 35 days)
Summary: a reduction of DSO by 5 days results in savings of 138.889,-­‐ EUR.
6
Credit Management has positive effect on DSO and bad debt (2/2)
Bad debt reduction and DSO reduction with strong positive effect
Revenue: 200 Mio. EUR
Profit Margin: 3%
Profit: 6 Mio. EUR
Bad debt
0,60%
0,45%
Difference: 0,15%
Profit reduction
1.200.000,-­‐ EUR
900.000,-­‐ EUR
300.000,-­‐ EUR
Required revenue growth
40 Mio. EUR / +20%
30 Mio. EUR / +15%
10 Mio. EUR / +5%
DSO (improvement by 5 days)
Savings (interest expense)
138.889,-­‐ EUR
Required revenue growth
4,63 Mio. EUR / +2,32%
TOTAL
Required revenue growth
14,63 Mio. EUR / +7,32%
Summary: a reduction of bad debt by 0,15% and reduction of DSO by 5 days compensates 14,63 Mio. EUR revenue growth.
7
Customer opportunity and risk need to be managed simultaneously
Cred
i
Polic t
y
Risk
•  Representation of risk principles
for a consistent understanding of
the risk policy
360 degree
view on customer
•  Definition of significance of Sales
and Credit Management by the
Management
•  Written specification of objectives
of individual credit policy areas
Opportunity
Combining sales and credit management expertise –
opportunities and risks need to be managed together and simultaneously!
8
Agenda
• 
• 
• 
• 
Basic Credit Management Principles
European Perspective on Credit Management
Effective Credit Management Organization and Processes
Outlook and Future Trends
9
The overall situation of EU cross-border business
Problem
Solution
Approach
• 
• 
• 
• 
A Business A situated in the EU has a customer in another member country
Payment under the contract is made on credit after product or service has been delivered
Business A would like to secure payment or at least minimise the risk of non-payment
How far can this (1) be regulated by contract and how far (2) can arrangements be made beforehand to safeguard
rights of recovery
•  Analysis in two phases required
•  Prospective: involves contract management and credit control
•  Retrospective: involves claims policy and dispute resolution
•  Strategic decisions and a sound understanding of the underlying business required so that terms of trade reflect
the nature of the business (e.g one-off vs. continuing business, individual vs. multiple customers)
•  Specific cross-border questions need to be addressed, e.g.
•  Applicable law: scope and choice of the law applicable
•  Dispute resolution: what to go for and how to set it up
•  Procedural / logistical questions: enforcement and required support / cost
•  Arbitration, litigation or mediation: suitability for the type of business / customer
•  …
10
The legal situation of EU cross-border business
EU instruments /
policy aims –
status so far
•  To enable court judgments to circulate freely within the EC/EU with the aim that they should be treated as domestic
judgments in all EU member countries
•  To harmonise rules for achieving enforceability of judgments across EU borders and to make procedures for
recognition and enforcement progressively easier and less burdensome
•  Harmonisation of rules for determining applicable law
•  Limited harmonisation of service of documents and taking of evidence
•  Approximation of procedural norms with limited unified procedures for certain types of claim
Business
impact of EU
instruments
•  If people and businesses want to take full advantage of the EU's single market, they need easy access to justice,
on equal terms in all countries
•  EU-wide rules are needed:
•  in cases of cross-border litigation
•  to ensure good cooperation between courts in different countries
•  so that court judgments can circulate freely throughout the EU
•  The business environment can be significantly improved by:
•  better enforcement of commercial claims •  simplifying the enforcement of judgments in cross-border disputes (cutting red tape and costs)
•  introducing rules to help creditors recover cross-border debt (63% of which is currently unclaimed)
•  modernising EU insolvency proceedings to help some firms stay in business which otherwise would not
survive
•  EU countries are also encouraged to make their legal systems even more efficient and implement necessary legal
reforms as part of their economic recovery programs, thus contributing to the policy of the "Justice for Growth"
11
Agenda
• 
• 
• 
• 
Basic Credit Management Principles
European Perspective on Credit Management
Effective Credit Management Organization and Processes
Outlook and Future Trends
12
Credit Management needs to consider various aspects simultaneously
13
International Credit Management organization (example 1)
Country/Business Unit 1
Acct. # 1 & Credit Limit 1
Country/Business Unit 2
iWantobuy Ltd
Acct. # 2 & Credit Limit 2
Country/Business Unit 3
Acct. # 3 & Credit Limit 3
•  Fragmentation in decisions
Difficult to manage under a centralized
process (not impossible)
•  Overall exposure management is
complex
•  Different approach (order control, past
due follow-up)
14
International Credit Management organization (example 2)
Country/Business Unit 1
Acct. # 1 & Credit Limit 1
Country/Business Unit 2
iWantobuy Ltd
Acct. # 1 & Credit Limit 2
Country/Business Unit 3
Acct. # 1 & Credit Limit 3
•  Fragmentation in decisions
Can be better managed with a centralized
organization if in presence of a common
systems platform
•  Overall exposure management is slightly
improved
•  Different approach (order control, past
due follow-up)
15
International Credit Management organization (example 3)
Country/Business Unit 1
iWantobuy Ltd
Acct. # 1 & Credit Limit 1
Country/Business Unit 2
Country/Business Unit 3
•  Credit decisions are taken on behalf of
the group
Can be supported both in a centralized and
decentralized organization
•  Exposure management can be
consolidated/centralized
•  Common management approach across
the organization
16
Clear Credit Management processes required
Information mgmt
Application mgmt
Assess
customer
Determine
credit
•  Credit agency,
bank pools,
internal sources
•  Optimise quality
of information
•  Credit application
•  Analyse /
evaluate existing
information
(scoring / rating)
•  Provide
most current
information
•  Determine
suitable limit
Existing customer mgmt
Control
credit
Monitor
customer
•  Credit insurances, •  Early warning
own captives,
system
collaterals
•  Reduction in
•  Identify and close
failure ratio
gaps in coverage •  Working capital
•  Alternative
management
contract versions •  DSO optimisation
•  Independent from •  Reduction in
individual
interest paid
providers
Track
claim
•  Overview terms
and settlement
dates
•  Guidelines
•  Dunning
strategies
Clear organization and processes required!
17
Claims mgmt
Realise
claim
•  Lawyer, own legal
department,
collection, at
home and abroad
•  Prompt realisation
•  Customer
retention
•  New dealings
•  Reduction in cost
•  Increased
success rate
Effective credit decisioning process is key
Credit Decisioning Process
Credit
Application
Application Check
Information Gathering
Information Evaluation
Various internal data
(payment history, sales
information, etc.)
and external data
(agency data, balance
sheets, etc.)
Consolidated Scoring / Rating
Securities
Limit Calculation
18
Credit
Decision
Increasing complexity of data in the decisioning process (examples)
EXTERNAL
EXTERNAL
Strong local data provider
•  Agency report (short version)
•  Agency report (long version)
Big?
Data
Specialized local data provider
•  Agency report (Hungary)
Private balance sheet provider
•  Balance sheet analysis (Europe)
•  Financial KPIs
«Public» balance sheet provider
•  Balance sheets (Germany, free of charge)
•  P&L statements (Germany, free of charge)
INTERNAL
International data provider
•  Agency report (international data)
•  Family trees
•  DUNS number
Credit insurance
•  Credit insurance report
From IT systems
•  Payment history (internal)
•  …
From team
•  Credit Manager information
•  Sales Manager information
•  …
19
Payment pools
•  Payment history pool (Germany)
Generic «web» data
•  Key words, company news, investor news,
facebook, Twitter, etc.
Austria
Switzerland
Creditreform AT
Deltavista AT
Deltavista ZMR
KSV / IDB
KSV / BoMo
KSV / KKE & WKE
Creditreform CH
Deltavista CH
Teledata
ZEK
Belgium
Graydon BE
Bulgaria
Creditreform BG
France
Banque de France
Altares
Hungary
Opten
Italy
Cerved IT
CRIF IT
Experian IT
Luxembourg
Creditreform LU
Netherlands
Crimimail
Experian NL
Poland
Creditinfo
Spain
ASNEF
Informa ES
Axesor
Turkey
Cedar Rose
UK
Equifax UK
GB Group
Graydon UK
20
Rest of World
Rest
world
Accumio
Bürgel
Bürgel Conqueck
CEG
Commerzbank
Creditreform
Creditsafe
Deutsche Bank
D&B
GenoRisk
Hoppenstedt
IHD
Infoscore
Post Direkt
Schufa
Schufa Kompakt
Pool - IHD AÜ
Pool - DDMonitor
Pool - DunTrade
Pool - GSG
Pool - DRD Crefo
Global
Global
DACH
DACH
Germany
Europe
Europe
Popular data providers worldwide (selected examples)
Brazil
Serasa
China
Sinotrust
CIS / Russia
IGK
India
Cedar Rose
Malaysia
CTOS
Middle East
Cedar Rose
Oceania
VedaAdvantage
USA
Creditsafe
D&B
Europe
Bureau van Dijk
Coface C. Europe
Creditsafe
D&B
World-Check
World
Bureau van Dijk
Coface @Score
Coface @Rating
D&B
Graydon International
World-Check
Collection process needs to reflect motivation of debtors
Willing/
Unable
Willing/
Able
Voluntary payment
Securing a claim
Payment agreements
Solutions
• Solution-oriented approach
• Minimal time and cost expenditure
Motivation
Enforced payment
• Escalation
Professional
defaulters
Claims
Unable/
Unwilling
Able/
Unwilling
21
Returns
• Legitimate claim
(mal-, deficient-, non-performance)
Collection process based on customer group and default risk
Customer group
A
Individual
contact
in advance
Additional measures
to reduce risk
B
Collection with
all consequences
C
D
Out-of-court collection
Low
Medium
High
Default risk
22
Very
high
Best practice collection process (example)
Payment reminder
Dunning letter
Telephone call
Hand over to external provider
*
3-4 days 10-14 days
Payment date
*
)
4
10
days days
0 days
*
)* ))* )* ) ) )
Provider
Order to pay
27-32 days
Titles
*
Irrecoverable
55-68 days 125-158 days 275-408 days
Inhouse dunning activities
Outsourced dunning activities
23
)
Barred
30 years
Time
Agenda
• 
• 
• 
• 
Basic Credit Management Principles
European Perspective on Credit Management
Effective Credit Management Organization and Processes
Outlook and Future Trends
24
Change needs to be actively driven
25
Selected trends in credit management
Marketing
Organisation
Sales
Staff
Credit
Management
Controlling
Operations
Processes
Systems
...
Auditing
CM Policy
Organisation
•  Reorganization of
sales and credit
mgmt leadership
•  Set-up of shared
service centers
•  More efficient
processes,
reduction of staff
in credit
management
•  …
Staff
•  Continuous staff
training
•  Providing data
analysis expertise
to other
departments
(career steps for
credit managers!)
•  …
Controlling
•  Simplification of
KPI systems
•  Redesign of sales
incentives (aim:
based on
profitable sales
•  …
Processes
•  Improvement of
master data
management
•  Increasing variety
of data for credit
decision
•  …
26
Systems
•  Implementation of
IT systems to
generally support
the credit mgmt
process
•  Automation of
(administrative)
credit
management
processes
•  …
Auditing
•  Investments in
certification of
credit
management
processes
•  Use of
certifications with
external parties
(e.g. banks)
•  …
The role of the Credit Manager has changed –
from being an “Accountant” to being an “Adviser”
Classic Credit Management:
"Accountant for the Company"
“New” Credit Management:
"Adviser to the Company"
•  Little communication, many interfaces
•  Central function in the company
•  Economic situation hardly considered
("sales deterrent")
•  Advisory function for other departments
in the company (especially sales and top
management)
•  Limited use of customer data
•  Credit policy for determining policy
towards risk
•  Marginal use of external data
•  Exceptions rather than clear rules
•  Use of mathematical / statistical method
•  Late / forgotten request for payment
•  Use of additional external data sources;
link-up of all relevant information
•  …
•  Assessment of all customer information
•  Permanent monitoring and early warning
system
•  …
Credit management should serve as an adviser to the whole company!
27
But please keep in mind: all optimizations must be balanced between
value and cost
Euro
Value
Investment
Optimum
Cost
Best practice
Time
Individual approach required to effectively balance value and cost!
28
Key Take Aways
1
2
3
Effectively integrate with sales to boost performance!
Holisticly improve your credit management function!
Innovate and adapt continuously!
29
THANK YOU!
Dr. Michael Sauter CCM
sauter.drm@gmail.com
30