CREDIT DEPARTMENT

The Role of the Credit department

The nature of a business and its size will determine the structure and staffing of the credit

department. Unlike most other company operations, the credit department tends to remain fairly

constant in size and scope of activities during periods of changing business conditions. This is

due to increased support needed for full volume sales in good times and for increasing

delinquencies when economic times are difficult. A credit department may face a greater number

of collection problems in a depressed economy when inflation is rising and the money supply is

tighter. During prosperous times, new account volumes create more upfront work for the credit

department.

A company will need to start departmentalizing when it begins to grow or has grown. A credit

department is one of the first departments which will become needed as revenue grows and

credit is extended to clients new and old. The types of transactions specific to your company will

determine how rigorous your company needs to be in the development of its credit department.

Why Does a Company Need a Credit Department?

Many start-ups and small to medium businesses do not “need” a credit department. In these

cases, credit management tasks are usually assigned to one person within the business, generally

the CFO or Controller. Their job is to keep the accounts receivables low. As the business starts to

grown and revenue increases, the job of collections and credit management will (hopefully)

become too much for one person to handle efficiently. When this occurs, a company needs to

create a credit department. Credit departments work in conjunction with the sales department to

make sure that the sales extended on credit are going to credit worthy customers who will pay in
a timely manner. Often times friction is created between these two departments – sales want the

sale no matter what, and credit departments are tasked with only allowing sales that will end up

being paid. A good CFO or Controller will have these departments work together harmoniously.

Relationship of Credit Department and Credit Policy

There is a natural relationship between the credit department and the company’s credit policy.

While many times the credit policy is implemented before the credit department is established,

the credit department is tasked with making sure those procedures are complied with. When the

credit department is established, then the credit policy may need to be revised to fill the bigger

and expanding role of credit in the organization. For example, the credit department will likely

be where the sales contract, personal guarantee, and other initiating documents for new clients

are located. It’s also the department that will institute the collections process when the debt is

going bad.

We take a look at how the department fits in within an organization, possible conflicts, and how to

avoid them.
The activities of these units can be summarized as follows:

(a) New business unit

• Focus on getting good creditworthy business.

• Speed the rate at which clients are put into the books.

• Use of very fair and objective manner.

• To give good impression to new customers.

• Demonstration of teamwork to sales and marketing arms in the company.

(b) Accounts and administration unit

• Updating of the customers’ records.

• Chasing customers for pending information.

• Changing details of the customers’ records.

• Correct capturing of the data to satisfy the customers and other departments.

• Recruitment, control and maintenance of the customers.

• Making subjective decisions and judgments.

• A section that requires assessing the reasons for late payments.

• To assess the future problems in different accounts.

• To coax defaulters while maintaining the customer relationship.

• Adherence to the policy framework to guide them on the decisions both to the customers

and other departments in the organization.

(d)The recovery unit

• Qualities of discipline and objective approach.

• To assess with an open mind and understand that recovery work is expensive.

• Use a commercial approach to evaluate the options available to avoid wastage of money.

• Knowledge of law is required and also a commercial appreciation that some debts are

inevitably irrecoverable and must be written off to minimize losses in the organization.

The role of credit department within the organization.

The credit department must take a flexible approach to be accepted and recognized in the

organization. It should not be seen to be unyieldingly rigid, nor a soft touch for large orders.

The credit department’s function can build respect by communicating its success and

proving to be an objective decision-maker. The credit department has the powers to stop

orders, change terms and act as a gate-keeper for new business. This degree of control is the

root cause of most conflicts with other departments

Possible conflicts and ways to avoid them

The important issue in undertaking the functions of a credit department calls for thorough
communications in other offices.

a) All actions must be communicated to the sales departments and equally to the finance

department.

b) All bottom-line results or risks should be communicated to the managing director with

possible solutions and recommendations.

Note

1. Failure to do the above results in continued misunderstandings as to the precise

function undertaken by the credit department and this manifests itself in the form of

departmental isolation whose symptoms will include by-passing of the department and

rendering it useless.

2. While some credit departments are only seen in action when presenting negative news

such as stopping credit, reporting on problems to open new accounts, a communication

of: successfully opened accounts, increase on credit limits, flexing the credit policy

can help advise other departments on the role: of credit managers and strengthen the

commercial reputation of the team members.

Conflicts from sales

The following conflicts occur between the credit department and the sales department:

(a) Sales department views the credit department as a business prevention department.
(b) The credit department interferes in the special relationships that exist between customers and

sales team.

The above views and attitudes will only be corrected by:

Regular positive communications.

Consultations when things go wrong.

Invitation of suggestions from the sales department.

Joint visits to customers to discuss the problem of collection.

Conflicts from finance

(a) Finance department views the credit department as an account control function and hence

expect accuracy and worship of data.

(b) Credit managers are viewed as debt collectors and as a department that does not indeed

add any value to the organization.

(c) The credit department is viewed as a department that calculates the bad and doubtful

debts provisions that reduce the very profits that are worshipped by accountants.

(d) Disregard of professionalism in credit department and hence any other likes of the sales

team

Note:

1. The above view will only be corrected by communication and consultations on what the
credit department is doing.

2. Outshining the finance department in diplomatic ways of collecting difficult debts to

improve cash flow in the organization.

3. Explaining the contribution of a credit department on the increased investment income,

which is used by management to rate the finance department success.

4. Building up confidence in clients so that you work as their helper when they cannot pay

the money in good time,

5. Keeping secrets on confidential matters relating to your, client with the bottom-line

objective to convert the credit sales into money.

6. Delegation of some accounts to the finance managers to assist in collection so that they

can appreciate what professional credit managers can do to the organization.

Reporting lines

The traditional reporting line of a credit department is to the finance director. The very reasons

why this has been the case although time has proved otherwise is:

(a) The finance director is acutely aware of the importance of cash flow and profitability to the

organization and will take a commercial view on risk when faced with a disputed credit

decision which most of the times arises from sales staff.

(b) The finance director is also aware of the impact of poor credit decisions on bad debts
provisions and write-offs.

(c) The finance director would also require a disciplined approach to managed information and

will provide feedback based on analysis and constructive assessment of what is submitted

to him.

However, there is the downside of the credit function reporting to the finance director.

(a) He will be more risk averse than the sales director.

(b) The finance director who is subjected to credit sanctions will demand high levels of

background information which delays decisions on credit and hence the customers’

suffering.

(c) The finance director also tends to spend a lot of time focusing on accounting information

given rather than simply viewing these as one of the tools available to assess risks.

Where the credit function is under the sales director, the underlying business is usually focused

on building market share quickly and venturing into strong market competition.

• The sales director will tend to be biased on the market and hence quick decisions

relating to credit will be instant.

• The sales director will also have an inventive approach to structure deals to build sales

and hence quick to complete new customers’ applications.

However, shortcomings will always be there. Some of them include:

office chasing new business.

• The sales director will also be too rigid to take any adverse action against the customers and

especially where there is need to stop credit.

While the developing countries are undergoing a lot of changes in business circles, the area of

credit management seems to have been ignored for quite some time and the majority of

organizations are learning about credit management out of the problems they are experiencing. It

is however, very difficult to deal with history and the only future that credit management has is a

preventive measure. In this regard therefore, credit management is gaining momentum in many

countries and future managers can only be effective when they report to the managing directors.

However, the vacuum that has been left in credit management in third world countries will call

for super positions of credit directors.

Reporting performances

While most management do not have a focus on reporting performances in credit management,

a professional credit manager will be aware that the mere fact that there is a provision for bad

debts and day’s sales outstanding (DSO) is not enough and there is a need to move further than

this.

Key performance measures in credit management

• Percentage of new accounts approved to those declined.

• Percentage of accounts performing to expectation.

• Number of cheques returned on a monthly basis.

• Days sales outstanding ratio.

• Overdue accounts on an aged basis.

• Bad debts provisions,

• Budget collections against sales budgets.

Day’s sales outstanding (DSO)

Day’s sales outstanding (DSO) is a basic performance measure for a credit department and is

obtained by calculating the number of days the department takes to convert the credit sales into

money.

Setting Targets

Many organizations do not put a lot of emphasis on credit management and hence no targets are

pegged to debtors. However, as a professional credit manager, it is your duty to set targets on all

areas of relevance and the starting point is from the sales budgets. This gives a direction of the

future of the company and also checks and balances the bad accounts going by your collection

budgets.

The collection budgets are based on history and the profession of credit management dictates
facts where a credit manager stands by his budgets.

A lot of questioning would be expected and especially from the sales team but again the credit

manager is expected to have the skills to support his or her facts.

Staff Matters

What makes a good credit manager? And what does the job actually entail. These are questions

that are answered by drawing up personal specifications and a job description respectively.

Personal specification

(a) Effective communication at all levels.

(b) Streetwise and commercially aware person.

(c) Demonstrate reasonable general knowledge.

(d) Be organized.

(e) Be able to cope under pressure under multiple tasks when necessary.

A professional credit manager should never rely on the human resource department to recruit

staff for them. The staff who can work in a credit department need some special qualities, which

can only be seen and assessed by a credit professional. Remember, as a professional you can

really be frustrated by staff in credit | control, since the job involves sensitive areas that need

careful approaches.

Job description
A job description is not a list of tasks. It is not a schedule of skills and qualifications required

for the job, either.

It is a detailed role of the officer and the functions and responsibilities of a job vacancy. A job

description also includes to whom the position reports, qualifications needed by the person in the

job, salary range for the position, etc. A job description is usually developed by conducting a job

analysis, which includes examining the tasks and sequences of tasks necessary to perform the

job.

As a credit manager when recruiting staff the following should be taken into account

• Job title should be stated together with a diagram showing who the jobholder reports to

and who reports to him or her.

• The main purpose of the role should be stated clearly e.g., processing new business

applications.

• The smaller the number of tasks quoted, the more important the role tends to be e.g.,

managing the credit department.

• All internal and external contacts should be stated to give the member of staff an

indication of the positioning of his role.

Staff Development

The goal of staff development is change in individuals’ knowledge, understanding, behaviors,

knowledge you and your team possess, the better your chances of success. It is worthwhile to

note that;

• Skills are the results of experience and good training.

• Training is an early casualty of budget cuts and as a credit manager you have to get better

ways of utilizing your budgets early in the year to avoid deviations of the same to other

areas.

Why Train?

Training refers to the acquisition of knowledge, skills, and competencies as a result of the

teaching of vocational or practical skills and knowledge that relate to specific useful

competencies. Professional examinations provide an excellent foundation

of knowledge to equip any credit manager to do the job competently and with confidence. But

this is just the start of a long learning process. Knowledge fades over time and it needs to be

reinforced, refreshed and updated. Lack of skills in credit management increases the bad debts

arid hence reduces the profits. The backbone of any organization is proper assessment for better

management of credit which can only be gained through training. This is because training has

specific goals of improving one’s capability, capacity, and performance.

Sales/Credit relationships and impact on collections

with the sales department? If this happens, time that could be used more productively is being

frittered away on useless disputes. Who usually wins? The sales department, which has to get

more orders, or the credit department desperate to reduce day sales outstanding? There is no

correct answer to the question as to who should win. Credit department can be over-cautious and

sales departments can be over-zealous in their pursuit of new sales. The paramount factor is that

both sides should understand and appreciate the other’s point of view and thus, when problems

arise, these can be resolved more easily because of that understanding.

In examining the various aspects of the relationships, we shall look at the essential requirements

of co-operation, understanding and communication.

The sales staff’s primary tasks are the winning of new business, and they may spend quite a long

time trying to persuade a customer to buy from the company. It is upsetting to them if you, as the

credit manager, tell them that in your view, the potential customer is not creditworthy and that if

he/she wants the goods, he/she will have to pay cash. It will be equally upsetting to you to find

that the sales staff has negotiated special credit terms without referring the matter back to you.

These problems do occur, of course, and it is pointless to assume that they will never occur in

your company. Sales people cannot be expected to find creditworthy customers everywhere they

look and, equally, credit managers cannot assume that a sales person will be able to bring in
every single order without having to agree to occasional unauthorized extended credit.

Mutual understanding

The essence of co-operation between sales and credit staff starts with this understanding of the

position of the other party, even though it may be annoying at times. It’s an essential practical

problem and at the end of the day, the matter should be resolved by reference to the profit

potential for the company (Not everyone will agree with the decision!).

Think for a moment about the characteristics of a good sales person and the characteristic of a

good credit manager. Do you think that there are several similarities, even though, in some ways

the jobs are completely different?

Remember the key points made earlier on the credit manager’s need for tact and diplomacy. A

sales person also requires both these skills. What about persistence and tenacity? Few

salespeople would survive without these: sales are generally not easy to obtain and, although a

successful salesperson may make it look easy, the chances are that it is simply because he or she

is very professional. Salespeople have another similarity with credit managers; they need to be

professional too. What about the ability to communicate? That, too, is important to both sales

and credit managers.

What does the credit department require from sales?

What the credit department expects from the sales department and vice versa. The credit

department requires:
• Information about new and existing products and services, about the markets that are

being targeted, and about competitive activity.

• Information on prospective customers.

• Speedy responses to all queries, particularly when the customer claims that the goods

were unacceptable.

• Early warning of any problems that the sales force may see or hear of relating to

customers, particularly any sign that they may not be able to meet their commitments.

• Full consultation about new sales drives and expectations of increased business from

existing customers, resulting in a need to review credit limits.

• Agreement that the sales force will not exceed its authority by negotiating special

terms with customers.

How can these objectives be achieved? This is dependent on the persuasive powers of the credit

manager, so you should add the ability to be persuasive to your list of desirable attributes.

Education as a key to understanding

The key to establishing the right relationship with the sales team, so that the requirements listed

above are accepted rather than become a source of friction, is education. This means that both the

sales team and the credit team must learn about each other’s ways of working and need for

information.
In its broadest sense, education can be used to explain such basic concepts that a sale is not a sale

until it is paid for. This can be taken further by the credit manager ensuring that he or she is

invited to take part in, or contribute to, sales training courses. Spending a few hours with the

credit manager should be part of every new sales person’s training program. Another

worthwhile idea is to be invited to attend and possibly speak at a sales conference. Two other

major ways to establish good co-operation are meetings and joint visits.

Regular meetings, preferably weekly, should be held with the sales staff, giving both sides a

chance to exchange information on relevant topics. These can include marketing and pricing.

policies, new products, new outlets, future production programs, proposed stop lists,

outstanding queries, the visits schedule and many other items. Each meeting should be properly

minuted and the minutes circulated promptly to all affected parties.

Joint visits either to prospective or existing customers are invariably beneficial. You have the

opportunity to meet key people, to gain an overall impression, and to gather up-to-date

information, The sales person will see that your objective is to try to help win f profitable

business, not to put up obstacles.

Information on products, services and markets should be j readily available. It may be more

difficult to persuade the sales | people to give information about potential customers in advance.

On the other hand, it can be a positive help for them to be able to go to the customer knowing
that the credit manager has already made a positive assessment. They will not waste time

following up people to whom you are going to refuse credit and, therefore, i they have more

chance of increasing their own commission f payments by concentrating on those customers who

have the best credit standing.

Resolving queries

Probably the most difficult objective is to get a speedy response to queries. It is sometimes not

easy to think of arguments that will | persuade the sales department to get to grips with queries,

partly | because this activity rarely results directly in extra sales and very | often involves

timeconsuming liaison with unhappy customers, creating quite the wrong atmosphere for a sales

team. Basically, | you will have to rely on the goodwill you have created between the credit

department and the sales department; the really good | sales people will see the reduction of

queries as a major part of the | job in order to maintain the goodwill of the customer. Delayed

payment costs the company money and this fact needs to be emphasized.

Customers are not interested in why something has gone wrong; they just want it put right

quickly. If you do that, then it is unlikely \ that any permanent damage will be done. If you try to

cover up, you can do untold damage.

The sales team as an information source

The sales team should be persuaded to give the credit manager the most up-to date information

about changes in the circumstances of the customer, particularly any hint that
the situation may be worsening. Opening a new branch may be a good sign. Closing one can

either mean that they are getting to grips with their problems or that they are in the midst of a

problem period. Either way, the information is useful to you because you can give special

attention to that customer’s new orders. If, for example, it looks as though they are increasing

their credit purchases from you, it would alert you to the possibility that they are not paying one

of your competitors and are, perhaps unable to obtain any further supplies from them.

Finally, there needs to be a clear understanding about the authorization of credit. It is not

unknown for sales people to report, “I have won an important new customer, but to get them I

had to offer three months credit, and 1 did not have time to phone you to confirm it was OK, but

1 am sure the managing director will approve. This is usually followed by “No, I did not get

them to complete a credit application form. Sorry, but, isn’t it marvelous that we got them to

come to us after so many years with our competitors!”

What does sales staff require from the credit department?

Having looked at the credit department’s requirements of the sales department, let us now

consider the needs of the sales staff. The sales department wants:

Prompt decisions and explanations on credit terms and limits— inevitably some decisions

will be unpopular and these must be carefully explained rather than just imposed.

Prompt notification of problems and queries so that they can liaise with customers and
obtain the answers before goodwill is lost.

Payments to be collected without the loss of customer’s goodwill.

Advice and guidance on payment terms.

Systems and procedures that are both user-friendly and flexible, taking account of the

different situations of different customers, and the changes that occur from time to time

in sales objectives.

Early warning of problems, such as the need to put one of their customers on the stop list.

Promoting good relations

Regular meetings between the sales and credit managers will enhance good relations between the

two departments, as will co-operation in staff training, the participation of the credit manager in

sales conferences and opportunities for the credit manager to accompany the sales manager on

visits to key account customers or potential ‘problem’ customers.

Authority

One factor that is vital in the relationships between departments in a company is clear guidance

on what responsibility each department, and each person within a department, actually has. For

example, the sales clerks within the sales department may well have authority to handle minor

queries and to give credit notes where appropriate. This is clearly vital information, because it

can save time when trying to resolve difficulties, and also it can save senior people becoming
involved in relatively minor problems.

The sales staff themselves must also be aware of where responsibility lies within the credit

department for such things as credit, limits, who can authorize extended credit, who can

authorize a softer than usual approach to debtors, etc. This is important in a number of respects

but, apart from anything else, it is a good discipline for the credit manager to establish these

aspects within the credit department.

Summary

Any credit department consists of functions that are best when separated to give the

best results.

The credit department has a special position in any organization and its function will be

misunderstood unless, extensive efforts are made to communicate to the other departments

on a regular basis.

The credit function is an independent and objective function making commercial

decisions on the terms of supply to individual customers in conjunction with sales and

finance.

Reporting lines of the credit manager can only be effective if it is direct to the managing

director.