Major Components

In most cases the credit-to-cash function can be broken down into four major components:

• Credit/sales approval
• Billing
• A/R management
• Monitoring and improvement

Each component must have a goal which compliments the purpose of the credit-to-cash function itself. Unfortunately most companies view the first three items as separate and distinct business functions while the fourth component is ignored altogether. If the credit-to-cash cycle is not viewed as a single process with individual components that contribute, in their own unique way, to the success of the whole, this critical cycle will consistently fail to achieve its full potential.

Credit/Sales Approval

Despite the investment and the goal of extending credit, the credit approval process has, at times, been described as finding ways to say "no" and the credit department has been referred to as the "sales avoidance department". Moreover, considering that credit people are being told (via performance measurements) that risk avoidance is the goal, it's surprising that any customer gets approved for credit.

Avoiding the Wrong Message

A substantial investment is made in getting customers to the point where they want to buy. It's such a waste to then look for reasons to reject the sale and to alienate the customer to the point where they may reject you in the future.

There are three key factors that must be considered during the credit approval process. They need to be considered not just at the original sale but on all credit sales

Customer Profile: Who are your customers and, just as important, how do they do business?

Past Performance: Has the customer ever paid anyone in the past?If they haven't what makes you think you're going to be the first? As the late former US president, Ronald Regan, said "Trust but verify."

Product Value at Time of Sale: If you are operating below capacity, the only expenses that matter are variable costs. This is true for both a service as well as product-oriented environment. The actual profit margin for these incremental sales is therefore higher, sometimes substantially higher. In order to fill this excess capacity, you can adopt very aggressive pricing models or relaxed credit terms. The write-off rate may be higher, but the incremental profit more than makes up for the added risk.

Sending the Right Message

The credit approval process should be to maximize sales opportunities wherever possible while minimizing risks. Working to find ways of saying "yes" to every possible sale while remaining confident of payment better complies with the sales support mission.

Most people treat credit approval as a fixed point in time with a fixed set of operating characteristics. Once a prospect has overcome all of the credit approval hurdles that inhibit the desire to place an order, the prospect is then assigned a credit line. However, this, in most instances, acts more as a deterrent to new business from the prospect than as a protection against increased risk.

For example, if a customer likes your products or services and wants to order more than either party had originally anticipated, credit line place a temporary cap on the ability to expand the relationship and do more business with you. What's wrong with this picture? Good customers with whom you want to do more business should not be impeded in any way and yet the desire to "protect" revenue has done just that. Good customers should be allowed to place their orders easily and permit the sales-to-cash cycle flow evenly into the billing process.