Getting on top - Dominate your Credit Risk

Until recently, when debt became more expensive and harder to come by, companies generally had a blasé attitude toward managing their trade-credit risk. Most corporations, big and small, don't have credit risk procedures any more sophisticated than the sub prime lenders did. In which case you are flying in dangerous territory with your defenses down.

A simple tip but one that's been largely ignored until recently: Be more wary before extending credit to new customers. Make them prove their creditworthiness. Currently, companies take more a of shy unassuming approach to trade credit by quickly granting it to every new client that comes across their threshold. Once aboard they hope for the best and follow the client's payment performance over time.

Companies too often get into the habit of not asking for any financial information from their customers in favor of speeding up a much coveted deal. Suppliers have been doling out credit based on what little information may be available on their privately held clients, despite the fact that private firms have a higher rate of bad debt. Even after a credit account has been granted, the supplying company may shy away from asking for financial data because they don't want to offend a brand-new client. Clearly the banks have a part to play in all this because they too have been willing to extend credit lines far beyond reasonable doubt.

Companies should ask for customer and bank references up front. Although, that information may be biased and unreliable because of the struggling financial institutions. Will the bank and lenders be there in the long term for their customer? Are they going to provide financing or will they make a quick exit and leave the company with a liquidity shortfall, which may or may not cause the demise of the company? Are the financial institutes responsible for the ongoing viability of their clients, i.e. the corporate companies. What support and backup can they provide a struggling company when they themselves are in difficulty. These and many more, are all questions vendors need to ask themselves when looking over a customer's bank information.

Companies should request that all customers, new and old to fill out a one-page credit profile every year. The sheet should include the company's cash position and the most up-to-date contact information. A type of credit probe which may or may not provide the correct level of information in the right format, in a timely manner. This will lead to more overhead in the accountancy dept or with the business analysts, but if addressed properly, it may provide early warning of difficulties.

If there is any good news to be had during this economic downturn, it's that everyone is in the same boat. Your customers are asking their customers for more financial information. It's now become perfectly acceptable to ask about a client's financial status because everyone is being scrutinized by every supplier. Its a big global circle of accountants, checking each others assets.

If it's impractical to demand financial information up-front, then come up with a triggering number for when your company will demand it. A simple threshold or framework will suffice. If clients cross the established and agreed amount, then they must provide their trade creditors with financial statements to validate their credit. The type and level of the threshold can vary depending on client, industry, item value, uniqueness, development costs, credit exposure, etc. Its not a numerical value, its a way of thinking about and controlling your risk exposure.

Another way to improve your credit /risk management is to conduct a detailed assessment and calculate each customer's probability of default. With such precise knowledge you can price your services accordingly, and by showing your client the calculations, you can easily justify a premium rate. Cash has always been king and currently it is even more critical to companies health and financial welfare, but many companies have no idea who they're selling to, never mind who owns the company or their cash position. Its never been more critical to know your customer.

Moreover, suppliers can no longer rely on traditionally held views that big-name companies are safe from sudden and dire financial problems even if they don't have strong cash flow. Many of these companies have lived on extended credit lines for years and are not asset rich. Other companies can have negative cash flow and positive net worth. They're sitting on land or occupy buildings that no one's willing to buy. If their credit is pulled and they end up going bankrupt, the asset value won't cover the debts.

Experts also suggest sales and credit departments improve their communications between salespeople and the collections side. Your salespeople are trying to maintain the vendor /customer relationship at the same time as maximising their commission payments. This is a tightrope, and is a very dangerous situation for the company to ignore. It must be very, very tightly controlled. Don't allow salespeople to grant extended payment terms, without justification and authorisation, before checking in with their credit counterparts. Companies should use these negotiations to get more financial information out of their privately held clients and reprice future services if possible.

Moreover, salespeople may be able to offer the credit department more insight into a customer's financial situation. Therefore it is imperative that they have the influence, motivation and the time to actually get involved in credit and collections questions. Its a team effort and everyone better be on the team or the game is over.

HR - New Start Integration

DIS - Dynamic integration support in a rapidly changing, cost conscious and fast growing enterprise

The dynamic integration support process will supplement and enhance the services provided by the organisations stressed-out HR staff and management team. The consultant addresses the volatile requirements of stakeholders both in the rapid uptake of candidates and in their effective integration into the new environment. The consultant decreases the time taken to assimilate new staff and embed them into the team and organisation, maximising their effectiveness and motivation throughout.

Chief Executives

Dynamic integration in a rapidly changing 'cost conscious' enterprise is able to support and supplement the HR staff in addressing the 'cost versus talent' argument by supplying focused coaching skills to candidates that may be less qualified, less experienced or unused to the new environment that they find themselves in. Free from this responsibility, the HR team can then concentrate on sourcing candidates with the greatest potential and the right motivation to grow without worrying about precision skills matching and the integration of candidates that may have different or unmatched energy levels and personalities from the incumbent team.

Hierarchy awareness and Buy-in

The DIS process also requires that the managing environment and team understand the changing team dynamics and that they are also positively managed through this period. Working on behalf of the organisation and the team, the DIS process ensures the rapid uptake of new skills and knowledge by the candidate. Supplying the provision of a mentor to manage the changes and to mitigate or resolve any risks or issues, envisaged or arising. The consultant will establish a buffer or de-militarised zone to allow the free flow of dialogue and negotiation, minimising disruption to the team’s effectiveness and to managerial goals.

Performance enhancements realised

It is vital to be able to positively manage the organisational expectations coming from forthcoming changes in staffing levels and the introduction of new skills and personalities. The organisation must maintain team and goal cohesiveness and remain focused on moving forward, not at the same pace but with greater efficiency, greater capability and rapid growth. To do this you need to increase effective integration rates and decrease staff fall-out and turnover. The loss of experience from an organisation is taking the life blood out of it, in the form of loyalty, commitment and hard-won knowledge. Thus compelling them to make the same mistakes over and over again and sustain losses repeatedly.

Finance Officers placated

By supporting the management from within, the stakeholders’ expected benefits, established goals and ROI can be truly realised and even exceeded with the correct level of coaching and mentoring, targeted at the right people, time and place.

Operational success

Left to their own devices a new candidate and the installed team will take up to 3 months to fully integrate and become truly effective to the organisation. The first 6 weeks will find the candidate isolated and floundering to find knowledge and develop new skills on his own initiative whilst the installed team circle around them, sizing and testing this new guy. No organisation can afford to wait that long for a return, especially if it is ‘disappointing’. If you are left wondering why the increase in numbers does not relate to a direct increase in revenue, we have the answers for you. We will be happy to support you. Contact me on kenwbudd@lycos.co.uk

Team integration issues - example

As a new start, it is at this time the candidate will bond with, or be be-friended by, one or some of the team but not all. This may not be with the positive thinking, forward thinking group that you would want them to join. In fact it is more likely to be with other members of the team that have become isolated and withdrawn.

If this trend continues then the team dynamics will start to move in the wrong direction, because every new candidate will be drawn to, recruited by or be-friended by, the ‘outsiders’. The team will start to experience a new division instead of an integration. A divided team is very un-focused, difficult to re-unite and the devil to manage effectively.

Cause and effect

Circumstances like this lead to overloading or repeated distraction of the next level of management, keeping them away from their core activities. Instead they find themselves increasingly involved in ‘territorial’ disputes and trivial ‘personality’ clashes. The intended growth of the organisation is diverted or worse, stalled and, because of the push on recruiting and taking on of new staff, suddenly you now have greater overheads.Unless rectified the company is heading for a self-destructive downward spiral.

Your operational managers are faced with issues that began a long time back and have now become established and possibly cultural. In the words of the Irish philosophers ‘If you were trying to get to Dublin city quickly, I would not have started from here!’