Who is best placed to make the risk call?

 

I’ve long held a view that all too often, those in credit management report to finance functions that rarely have a grasp of risk management, loss mitigation, business continuity or business development. I guess we all have examples to recall but here’s just one of mine.

A German client I had visited in early days of trade had built a solid relationship with us allowing us to operate frequently at gross margins of more than 8% on components and in particular hard drives. The first three years went exceptionally well with increasing credit lines and credit insured availability, the latter peaking at around 700K. In the fourth year, I noted a lack of crispness in response from the client, visited them again and obtained interim management accounts that did suggest a dip in performance. I explained we would continue support but in a much ‘tighter’ fashion and insisted on provision of regular monthly management accounts and prompt settlement of amounts due.

I dropped the credit line to 500K and managed to reduce the debt in line with this lower level within two months. The first two interim management accounts provided suggested the ‘wobble’ was still evident but payment had nonetheless been prompt in those two months following my last visit. There was of course internal pressure to allow trade to the insured line of 700K again but I refused.

Four months later, the client called to say they had real difficulty meeting payment due and asked for a little more time and an element of continued supply. At this point, the debt was just short of 500K.

In creating an element of early bad debt provision given payment issues, my Finance Director’s view was that given insurance cover, stopping supply and insistence on immediate payment was the best course of action. I naturally countered that this was not the best way of mitigating risk for a number of reasons, not least of which was that we were well short of our aggregate first loss on our insurance policy so would have to take the almost full 500K hit. He could not quite see this but I won the argument by adding I could bring down the debt by visiting once more and working a phased ‘withdrawal’.

Over the next six months, and while continually reviewing payment, credit line and financial information provided, we successfully whittled the debt down to just 80K and all this while keeping debt within the credit insurance reportable period. It was at this point that the client moved to insolvency resulting in a claim of 80K instead of 500K. Not only had we reduced the bad debt level, we had actually managed to transact over those six months a further 1.2m of business at 8% gross margin.

Simple logic in terms of risk mitigation but in essence, demonstrates the real tangible difference a specialist credit management function offers in viewing the overall picture and potential end result as opposed to a finance driven cut and thrust call. 

There is only one function that can deliver sound risk business decisions – it’s not Sales, it’s not Finance, it’s Credit.