Credit and A/R management is a sales enhancement function whose true potential has yet to be realized by most businesses. Credit is a lubricant of commerce and allows the expanded movement of products and services. Yet, improperly applied, credit policies can hinder free flowing commerce.
There was a time not so very long ago when there were valid reasons for viewing extended credit as a privilege, as a favor to some and not for others. Following World War II, pent up demand, commercial shortages, and earnings from work in the war effort precipitated unprecedented growth. Outside of North America, much of the industrial world had been badly damaged or destroyed by the war and had to be rebuilt. The lack of readily available finances for reconstruction in Europe created even more demand for credit.
Later, the 1950s became a time of limited competition; there were no big box stores, cyber competition or aggressive foreign competitors. Credit was granted only as a last resort, and credit terms were tightly controlled and designed to limit a company's risk. If customers failed to pay on time, they were cut off from further credit and potentially "blackballed" by others.
The natural outgrowth of this economic climate was the view that credit management was aligned with risk management and the KPIs were DSO and percent of bad debt. This view was therefore appropriate for the times.
However, the current economic climate is radically different from the post-WW2 era. Rather than shortages, now there are more goods and services available then ever before in human history with more on the way. Quality in products and services is a given expectation and for businesses to be competitive they must also have quality business processes.
Yet, today many businesses still cling to the old credit philosophy of the past and track DSO and percent of bad debt. But in doing so, they are missing an opportunity to increase sales, improve cash flow, control losses, elevate customer service levels and customer retention, and decrease their cost of doing business—all of which contribute to profit enhancement.
The notion of risk management that ruled in the 1950s was applicable for that time, but this is 2005. We must rethink the role of credit.
There was a time not so very long ago when there were valid reasons for viewing extended credit as a privilege, as a favor to some and not for others. Following World War II, pent up demand, commercial shortages, and earnings from work in the war effort precipitated unprecedented growth. Outside of North America, much of the industrial world had been badly damaged or destroyed by the war and had to be rebuilt. The lack of readily available finances for reconstruction in Europe created even more demand for credit.
Later, the 1950s became a time of limited competition; there were no big box stores, cyber competition or aggressive foreign competitors. Credit was granted only as a last resort, and credit terms were tightly controlled and designed to limit a company's risk. If customers failed to pay on time, they were cut off from further credit and potentially "blackballed" by others.
The natural outgrowth of this economic climate was the view that credit management was aligned with risk management and the KPIs were DSO and percent of bad debt. This view was therefore appropriate for the times.
However, the current economic climate is radically different from the post-WW2 era. Rather than shortages, now there are more goods and services available then ever before in human history with more on the way. Quality in products and services is a given expectation and for businesses to be competitive they must also have quality business processes.
Yet, today many businesses still cling to the old credit philosophy of the past and track DSO and percent of bad debt. But in doing so, they are missing an opportunity to increase sales, improve cash flow, control losses, elevate customer service levels and customer retention, and decrease their cost of doing business—all of which contribute to profit enhancement.
The notion of risk management that ruled in the 1950s was applicable for that time, but this is 2005. We must rethink the role of credit.
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