Debts that are not paid on time, organizations and individuals that become insolvent, judgments that are not fulfilled and are not enforced, standing orders and checks that bounce – all of these are a nightmare that could materialize at any moment for hundreds of thousands of organizations and citizens across the world.
The importance of Credit and Collections risk management
Risk management in an organization is a process whose purpose is to identify the existing risks, evaluate them, examine the existing controls, and finally choose a strategy for dealing with or covering each risk – with the aim of limiting or reducing it.
Let’s take the risk of fire in the business as an example. A risk manager’s initial responsibility involves evaluating a fire’s potential impact on the business. This entails a thorough assessment of current safety measures, including verifying the presence and standards compliance of smoke detectors, reviewing and updating fire emergency procedures for employees (such as evacuation routes and safety signage), and inspecting fire suppression tools (like fire extinguishers, hoses, and sprinkler systems). Following these preliminary steps, the risk manager, often with input from a fire safety expert, must decide on necessary enhancements to these measures and establish a schedule for regular review.
Subsequently, considering the residual risk after implementing all precautionary and protective strategies, the risk manager must assess the need for fire insurance that aligns with the evaluated risks. This includes selecting a deductible that reflects the business’s financial capacity, thus balancing the insurance costs with the level of risk retention that the business can afford.
This approach applies across all types of risks within an organization, ranging from disruptions in delivering products or services to customers, reputational damage, strategic vulnerabilities, and environmental harm.
Credit risk management is crucial to an organization’s overall risk management framework. Despite the varying maturity levels in risk management practices across organizations, particularly within small and medium-sized enterprises globally, the function of managing credit risk is commonly present, albeit under various terminologies like credit control, customer credit management, and similar designations.
At this juncture, we can provide a straightforward explanation of credit risk management and its value to the organization as follows:
Credit risk management within an organization addresses the uncertainty regarding a customer’s ability or intention to fulfil their financial obligations promptly and in full.
This discipline is a foundational economic and financial element that ensures the organization’s stability by influencing cash flow. It is integral to the company’s sales, production, and service provision cycle. Enhancements in managing credit and collections risks not only bolster cash flow and customer satisfaction but also lower collection expenses, thereby augmenting the organization’s profitability.
Exploring the realm of credit and collections, equipped with the comprehensive “toolbox” available to a credit and collections risk manager, offers a wider professional perspective than the traditional roles of a credit control manager or collections manager. This approach enhances the credit granting process by going beyond merely evaluating the collateral a customer offers. It also considers the customer’s industry sector, such as the textile industry, and assesses the broader market risks associated with the organization’s operational markets, whether they be domestic or international.
The credit risk manager is entrusted with addressing the risk of the entire client portfolio of the organization, just as a bank manager is entrusted with handling the risk of his client portfolio – using operational terms from the banking world (such as credit limit and excessing limits). The credit and collection risk manager can adopt control processes to examine the quality of the collection processes from the world of risk management while dealing with examining, planning and managing the operational risks inherent in them.
Organizations must prioritize credit risk management, collections processes, and accurate customer billing in today’s intricate and competitive landscape. This emphasis extends from the initial customer interaction with the product through the entirety of the marketing and sales journey to the final collection of payments. This underscores the necessity for effective cross-functional management encompassing all credit control, billing, and collections departments to ensure seamless operations and financial stability.
The purpose of this website
The purpose of this website is twofold: firstly, to educate and empower managers and staff to execute credit risk and collections tasks independently, fostering a collaborative spirit within the organization. Secondly, it aims to equip readers with the knowledge and tools necessary for identifying and forecasting financial challenges, thereby effectively managing credit and collection risks associated with their clientele. A significant focus is placed on maintaining healthy and respectful customer interactions, emphasizing the importance of customer relations and retention. This unique perspective underscores the website’s emphasis on enhancing the “customer experience” throughout the credit and collection processes.
We aim to enable readers to gauge the comprehensive risk landscape of their organization’s credit and collections framework, both in financial terms and as a segment of the sales cycle, and in comparison to peers within the same sector. We plan to introduce structured and systematic approaches to managing credit risk and collections, empowering readers to concentrate on their objectives and achieve desired outcomes.
To facilitate informed decision-making, we intend to provide a selection of key indicators alongside both global and local reports. This extensive array will offer a holistic and accurate view of the efficacy of their credit control and collections strategies, evaluated individually and against industry competitors.
It’s also vital to provide readers with tools to evaluate the alternative costs of managing credit and collection risks. Often, organizations expend considerable resources on collections due to a lack of awareness and effective strategies. We aim to present the various considerations informing the decision on whether collections should be conducted internally or outsourced to external entities, either partially or in full.
Furthermore, an overarching goal of this website is to establish a foundational framework for the study and professional development in the fields of credit management and collections. This initiative seeks to elevate the level of professionalism within these disciplines, aspiring towards the creation of academic pathways and degree programs dedicated to credit management and collections professions. We intend to contribute to professionalising roles within these systems, fostering a culture of academic pursuit and professional excellence in the field.
In the United States, recognized certifications for credit and collections professionals include programs offered by the National Association of Credit Management (NACM), such as the Certified Credit Executive (CCE), designed for credit professionals seeking to excel in their field. The CCE program involves completing core courses, an elective course, and a comprehensive exam.
Another notable certification is the Certified Professional Collector (CPC) and Certified Credit Professional (CCP) certifications offered by the Credit Management Association (CMA), in collaboration with the American Society of Credit & Collection Professionals. These certifications are aimed at individuals in credit and collection roles, providing comprehensive training to prepare them for these ever-changing fields.
The Chartered Institute of Credit Management (CICM) in the UK offers globally recognized qualifications for credit management and debt collection professionals. These Ofqual regulated qualifications are designed to develop members into standout credit professionals.
Additionally, the UK offers a range of finance certifications recognized internationally, such as the CISI Diploma in Investment Compliance from the Chartered Institute for Securities and Investment (CISI), which provides qualifications for a career in compliance, and the Associate Chartered Banker Diploma from the Chartered Banker Institute, enhancing the skills of those already working in banking.
These certifications are invaluable for professionals in the credit and collections field, offering a pathway to demonstrate expertise, advance career prospects, and maintain high standards within the industry.
The website’s uniqueness
Several key features highlight the website’s uniqueness:
- It provides tools for a comprehensive understanding of credit risk management and collections, focusing on intelligent process management rather than the processes themselves. This means it goes beyond the “how to collect” to “how to manage collections” strategically.
- The data and reports presented adhere to reliable and advanced international and local standards, ensuring readers can access cutting-edge information.
- The website is a foundational resource for learning about the professions within credit and collections. It addresses credit control from a theoretical and practical perspective. It offers effective and practical credit risk assessment and mitigation tools while maintaining sales levels according to organizational goals and work plans.
- Unlike other texts primarily focusing on managing late-paying customers, this website covers the entire credit and collection world, including managing timely-paying customers. It argues that collection efficiency cannot be measured without considering all customers and all collection costs, including those incurred from timely payments.
- “Customer experience” considerations are extensively discussed, emphasizing their importance in the overall organizational context and various processes. The goal is to implement a smart policy for retaining the organization’s customers.
- The website provides tools for examining the real costs associated with credit risk management and collections, offering suggestions for cost savings.
- A section is dedicated to managing collection centres at advanced standards, which is crucial for companies with a large number of customers (thousands and above).
- Comprehensive knowledge on working with lawyers is imparted, including considerations for legal action against customers, cost examination, lawyer selection and contract processes, and the overall efficiency of legal proceedings.
- It also tackles complex accounting issues, including legal and commercial aspects, such as provisions for doubtful debts and writing off bad debts. Additional relevant topics include basic knowledge and tools in selling credit risk, ethics in collections, customer relations, and the quality of credit and collection processes.
This summary encapsulates the website’s holistic approach to credit and collections management, emphasizing not just the technical aspects but also the strategic, ethical, and customer experience dimensions that are vital for professionals in the field.
Who is this website for?
The website is intended for a wide range of professionals involved in credit and collections within large, medium, and small organizations. The term “organization” in this context encompasses any entity that includes a credit and collection system. This includes institutional units such as companies, partnerships, and other legal entities like non-profits or government bodies engaged in credit and collections.
It is specifically written for the business players who value credit risk management and collection systems, as well as those seeking to improve and streamline these systems to reduce overall costs, foster proper public relations with customers, increase cash flow, and, consequently, profitability.
The target audience is broad, including senior management (CEOs, owners, executive management, and board members), finance personnel (CFOs, finance managers, accountants, and treasurers), employees of credit and collection departments, legal department staff handling customer cases, customer service, marketing, and sales managers. It also extends to any organization staff involved in collection processes (like drivers collecting payments upon delivery, warehouse representatives securing equipment receipt signatures, technicians collecting repair fees, etc.), accountants advising small and medium-sized organizations, lawyers engaged in collections, and organizational consultants.
The structure of the website
The website is designed to facilitate systematic learning about the management of credit risks and collections. It advocates for incorporating the “customer experience” as an integral part of credit and collection processes throughout its chapters. This concept, which will be defined in detail within the website, intuitively refers to the entire journey of a customer’s interaction with the organization’s credit and collection stages. This includes everything from the initial sale and payment for a product or service to ongoing interactions with the customer. The website’s structure, illustrated in Diagram 1, outlines the progression of these stages, emphasizing the importance of maintaining a positive relationship with customers throughout their experience.
Diagram 1: The structure of the website emphasizes the “customer experience” in the sales and collection processes
Introduction
The first part of the website serves as an introduction, aiming to provide as comprehensive an overview as possible of the world of credit risk management and collections. Further, it lays out a systematic framework for assessing credit and collection risks based on their various components and international benchmarks. Then, the focus will shift to managing these risks, distinguishing between process management from the customer’s perspective and the organization’s perspective. This section introduces the concept of the “credit and collection cycle” graphically (illustrated in Diagram 7) and offers a methodological framework for the efficient and structured management of all credit and collection activities within an organization, including interactions with various stakeholders both inside and outside the organization.
Customer acquisition
The second part of the website focuses on customer acquisition management. This section explores all processes leading up to the point where a customer is billed, starting from the initial preparation required by the organization when a customer first encounters the brand and sales proposition. It covers the sales processes themselves, the integration of customer data into the organization’s systems, through to the delivery of the product/service to the customer, and beyond—transitioning to a phase where the working relationship with the customer becomes formalized for ongoing success.
To provide the necessary tools for managing customer acquisition effectively, three additional chapters discuss defining the legal entity of the customer, basic concepts from contract law, and understanding various payment methods. Emphasis is placed on the importance of these elements in managing credit risks and collections.
Receivables and collections management
The third part of the website delves into managing customer debts and collections, covering both the accounting aspect and the preparation for future collections. Initially, it discusses complex ethical issues related to an organization’s relationships with its customers. Recommendations are offered for developing debtor management policies, examining organizational workflows, and covering topics related to organizational control (recognizing sales, managing charges, and credits).
Regarding collection management, the website tracks all collection processes from the simpler to the more complex: from the creation of debt to its collection or the transfer of delinquent accounts to legal action through external attorneys. It lists methods and tools for collections used in interactions with customers and internal organizational operations, as well as models for collection management, including control reports that assist managers in their work. The final chapter in this section discusses managing the collection process through a collection center, which is crucial for organizations dealing with a large number of indebted customers.
Legal collections
The fourth section of the website explores the management of legal collection processes through external attorneys who conduct collections faithfully on behalf of the organization. Rather than focusing on how to collect through the court system, this section seeks solutions to efficiently manage external lawyers to maximize collections for the organization. It also aims to enhance the “collection experience” of the client under the circumstances.
Selected issues
The fifth and final section of the website, titled “Selected Issues,” aims to enrich the specialist’s perspective by concluding with two chapters that illuminate specific points of interest. These chapters are designed to deepen understanding and enhance expertise in areas deemed significant: one chapter analyses the topic of collection costs, offering strategies for reduction, and another discusses reporting and monitoring systems in the field of credit and collections, including the definition of “Dashboards” for management and essential metrics for credit risk and collection managers.
This website is intended to provide the reader with an enjoyable, engaging, and challenging reading experience, hoping to contribute knowledge, tools, and enthusiasm for the challenging field of credit risk and collection management. The ultimate goal is to contribute to the advancement and academization of this important profession.