Main interfaces with entities outside the organisation

Customers

The interface with customers depends on the organizational structure of the credit and collection activities within the organization. In organizations where the credit and collection department operates directly with customers, this interface becomes primary. Having a direct interface with customers requires credit and collection personnel to be equipped with customer service skills. The rules for customer interaction—whether by phone or in person—must be clear upfront to avoid damaging customer relationships, as excessive aggression from collection personnel can sometimes lead to customer loss. When the approach is right and the guidelines are clear, there shouldn’t be a contradiction between the assertiveness required from collection personnel and the level of customer service expected.

In other organizations where collection is performed by collection centres, credit and collection department employees manage the process and provide professional guidance. They rarely have direct customer interfaces, leading to a real concern of “disconnect from the field” and managing collections through report analysis alone. The Credit and Collection Manager must maintain a direct interface with the organization’s customers, even if they are not personally handling them regularly. This is to “feel the field” and to manage the centres professionally.

Banks

The interface with banks requires the Credit and Collection Risk Manager to initiate, execute, and encourage competitive actions and optimizations with external entities to minimise collection costs (management fees for various banking operations), including fees on returned receipts from customers and other entities.

The credit and collection management team is also responsible for obtaining explanations for any discrepancies in the number of receipts not honoured due to process errors. This involves maintaining a proactive relationship with banks to ensure efficient and cost-effective banking operations, which is crucial for optimizing the organization’s cash flow and reducing unnecessary financial expenses.

Credit card companies

The interface with credit card companies involves unique aspects in addition to managing costs and deviations in the interface with banks. The Credit Risk Manager must ensure compliance with operational procedures and regulations when dealing with credit card companies. Non-compliance with the rules set by these companies can lead to transaction cancellation and non-payment. The Credit Risk Manager should focus on the following aspects:

• Transaction approval processes, which involve customer identification details, credit or payment amount, and the number of payments, are bidirectional and include a stage of credit approval by the credit card company and sometimes even providing certain insurance (according to agreements) on some transactions (not present in standard banking instructions).
• Some reasons for non-payment, such as transaction denial, require manual interface management with credit card companies, providing written responses, and follow-up. Failure to respond timely to the credit card company will lead to transaction cancellation by the credit card company, regardless of the customer’s claim validity.

These interactions ensure that transactions are securely processed and protected, minimizing financial risks, and enhancing the organization’s ability to manage its receivables efficiently.

Payment processors

The interface with clearing companies involves managing payment processing, such as bank direct debits through a Bank Clearing Center (BCC) or credit card processing through an Automatic Banking Services company (ABS). This requires control over the entire relationship with the clearing companies:

• Review of agreements with clearing companies.
• Market surveys compared with peers to check clearing costs.
• Control over the completeness of the clearing processes, both in terms of information systems and in terms of recording in the books.
• Examine the completeness of handling incorrect data that falls from the clearing processes.
• Control over the completeness of handling charges not honoured by credit companies or banks (including recharging customers).

This oversight ensures that all financial transactions are processed efficiently and accurately, minimizing costs and ensuring the financial integrity of operations related to payment processing.

Law firms (collections)

The Credit and Collection Risk Manager is responsible for:

• Selecting appropriate law firms to collect the organization’s “difficult debts.”
• Drafting advantageous contracts for the organization for working with lawyers and developing efficient work and reporting procedures under supervision.
• Monitoring the activities of these lawyers in terms of both efficiency and the protection of the organization’s funds.
• Keeping a close watch on the “settlement” with external lawyers.
• Acting as an effective liaison between the organization and external lawyers to provide them with essential information for the optimal handling of cases under their responsibility.

Credit rating agencies

The Credit and Collection Risk Manager’s role involves engaging with business information providers to ensure effective credit risk management and collection processes. Their responsibilities include:

• Selecting the provider(s) that meet the organization’s needs.
• Choosing the range of services to purchase from these information companies.
• Overseeing negotiations to finalize contracts with these providers.
• Maintaining ongoing communication with the provider for receiving information, updates, and alerts about their customers.
• Keeping up with new developments in the field.

This interface is crucial for acquiring accurate and up-to-date business information, which supports informed decision-making in credit risk management and collections.

Credit risk insurers.

Interface with companies involved in hedging/minimizing credit risks

Before contacting companies specializing in credit risk hedging, the credit risk and collections manager should evaluate the organization’s needs regarding credit insurance acquisition, debt discounting, or debt selling (through factoring or any other method). After formulating an opinion on the organization’s requirements in this area, they should:

• Assess the various solutions available in the market and the existing suppliers;
• Support the negotiation with suppliers concerning the organization’s needs specification;
• After signing an agreement – monitor the implementation of the agreement and ensure the establishment of proper processes;
• Be responsible for overseeing the hedging companies’ work and financial processes.
• Over time, assess the actual effectiveness of the risk hedging. Sometimes, in large corporations, the cost of hedging could be higher than that of bad debt. In these cases, the credit and collections manager should consider a policy change and update the upper management.

Collections agencies

Before contacting collection agencies, the credit risk manager should evaluate the pros and cons of using a collection agency for debt recovery. Subsequently, they need to define the organization’s needs across all required processes:

• Examine the various solutions in the market and assess the existing providers;
• Support the negotiation process with the providers regarding the specification of the organization’s needs;
• Accompany the implementation of the agreement and supervise the establishment of proper processes after signing an agreement;
• Regulate the oversight, work processes, and financial processes with the collection agencies.

Skip tracing companies

Before initiating contact with skip-tracing companies, the credit risk manager must assess the advantages and disadvantages of employing skip-tracing services for locating debtors. Following this assessment, they should clearly define the organization’s needs for the entire process:

• Review the different solutions available in the market and evaluate the current providers;
• Facilitate the negotiation process with these providers, focusing on tailoring services to the organization’s specific requirements;
• Oversee the agreement’s implementation and ensure the development of proper operational procedures post-agreement;
• Manage oversight, operational, and financial processes in dealings with the skip tracing companies.

Tax authorities

For the credit risk and collections manager, indirect interfaces with tax authorities are necessary to oversee compliance in various areas, including:

• The accuracy of sales processes related to revenue recognition (operationally, while the finance manager sets the policy).
• The correctness of cash receipts and cash register processes.
• The correctness of writing off bad debts (in accordance with the guidelines of the Income Tax Ordinance and VAT law).
• In cases where refunds include interest payable to the customers, withholding taxes on those interest payments is mandatory. The credit and collection manager is responsible for ensuring that the withheld taxes are properly and timely transferred to the tax authorities.

External audit

The credit risk and collections manager must address all aspects related to interfacing with tax authorities when responding to the external auditor. Additionally, they are responsible for reviewing the organization’s collections processes, both from an operational perspective and in terms of auditing information systems.

The responsibility of the Credit and Collections Manager in preparing and evaluating the bad debt provision for inclusion in the company’s financial statements involves several critical tasks aimed at accurately reflecting the financial health of the company regarding receivables that are likely not to be collected. This process is vital for ensuring that the financial statements present a true and fair view of the company’s financial position. The responsibilities include:

• Assessment of Receivables: The manager must thoroughly assess all outstanding receivables to identify those at risk of non-payment. This involves analyzing payment histories, customer creditworthiness, and any other relevant factors that might affect the ability of customers to settle their debts.
• Estimation of Bad Debt Provision: Based on the assessment, the manager must estimate an appropriate amount for the bad debt provision. This involves using historical data on credit sales and past experiences of bad debts to predict future write-offs. The manager may apply various accounting methods, such as the aging method, percentage of sales method, or any other method deemed appropriate for predicting bad debts.
• Adjustment of Provision: The manager needs to adjust the provision for bad debts to reflect current economic conditions, changes in customer base, or any specific customer circumstances that could affect the collectability of receivables. This ensures that the provision remains accurate and relevant.
• Documentation and Justification: The manager must document the methodologies used and the assumptions made in estimating the bad debt provision. They should also be prepared to justify the estimation to auditors, providing evidence and rationale behind the figures presented.
• Compliance with Accounting Standards: It is crucial that the manager ensures the method of calculating the bad debt provision complies with relevant accounting standards, such as IFRS or GAAP, depending on the jurisdiction. This includes adhering to principles of conservatism where necessary, ensuring that receivables are not overstated, and liabilities are not understated.
• Financial Reporting: The manager is responsible for accurately reporting the bad debt provision in the financial statements, including the income statement and balance sheet. This involves working closely with the finance department to ensure that these entries are correctly recorded and reflected in the company’s overall financial reporting.
• Review and Update Policies: The manager should regularly review and update the credit and collections policies based on the outcomes of the bad debt provision process. This might involve tightening credit terms for certain customers or sectors, or revising collection strategies to reduce future bad debts.

By fulfilling these responsibilities, the Credit and Collections Manager plays a crucial role in financial risk management, ensuring that the company accurately accounts for and minimizes the impact of bad debts on its financial statements.

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