One might assume that the operations of credit and collections systems exclusively contribute to achieving the desired outcomes for an organization in this area. However, our experience reveals this is not the case. The management of the organization and its policies significantly impact the results of the activities of the credit and collections systems.
Credit Risk and Collections Management Methodology
It is essential to plan a structured, logical, and practical approach to managing this area, taking into account the overall picture of the organization’s activities. This plan should be primarily based on the organization’s overarching business goals.
It is also necessary to define the specific objectives and goals for the credit and collections area, while also establishing the strategies and means to achieve these objectives.
The success of this methodology will be quantitatively measured through a series of reliable and well-defined indicators, recognized globally, and in the market sector in which the organization operates.
Since we are dealing with processes that affect many parts of the organization, it is clear that the success of the methodology depends on effective collaboration with organizational units that influence credit and collections performance.
The diagram below presents the methodological model or framework for managing the credit and collections systems, aiming to consolidate the necessary considerations and processes within a systematic work framework. (The terms presented here will be discussed in depth in the upcoming chapters of the book).
Diagram 9: The Methodological Framework for Managing the Organization’s Credit and Collections Systems.
The declared objective of the organization’s management and the credit risk and collections manager is to act in accordance with the methodological framework for managing the credit and collections systems. Operating simultaneously across all activity areas and in as many directions of action as possible is crucial. This approach enables the achievement of a set of systemic organizational improvements that can be translated into measurable business outcomes in the credit and collections area, thereby enhancing the organization’s business results.
An example of using the methodological model: Constructing an annual work plan
As each fiscal year of the organization ends, it is advisable and beneficial to develop a work plan for the credit and collections system for the upcoming year. The methodological framework provides a “roadmap” for constructing an annual work plan in this area.
An annual work plan requires a thorough review of all activity areas of the credit and collections systems (refer to Diagram 9 above) – examining all possible directions of action within the methodological model presented and applying them across each area of activity.
For illustration, let’s take the topic of collections management, and propose recommendations for improvements to be made this year within the framework of the work plan according to the directions of action outlined in Diagram 9 above:
- Establishing operational strategy and policy: Review the alignment of collection procedures with the organization’s policy, ensuring work is carried out in accordance with predefined rules and operational strategy.
- Policy and objectives: Set collection targets for the coming year, goals in line with the organizational plan.
- Organizational structure: This year, review the suitability of the credit and collections system’s organizational structure for achieving desired goals, and explore options for improving the organizational structure.
- Process improvement and cycle times: Establish a cross-organizational improvement team to propose process improvements in the credit and collections system and address “root problems” within the organization.
- Training: Determine a training program to enhance the performance skills of all those involved in credit and collections, ensuring that sales and customer service training systems continuously and correctly teach the requirements of credit and collections procedures.
- Computing technologies: Define a list of improvements to be characterized and implemented this year.
- Market surveys: Conduct a comprehensive market survey this year to assess the efficiency of the credit and collections systems relative to the industry.
The list of action directions for improvements presented in the examples is meant for illustration only, but it demonstrates that by following the path outlined by the methodological framework, it is possible to systematically examine all important topics in the area of credit and collections and their risk management. This enables us to consider and plan the desired improvements and necessary actions – all with the goal of constructing a work plan that will lead to significant and measurable changes in the coming year.
The methodological framework can also be used for other purposes, such as guiding improvement teams or mapping training systems in the area of credit and collections. Furthermore, the framework can serve as a useful foundation for mapping the reporting systems of credit and collections data.
In fact, the methodological framework presented here is an important tool that will allow the credit risk and collections manager to plan their steps in a structured and efficient manner and implement them according to their decisions in each of their areas of activity and responsibility.