Working Capital

Want Better Cash Flow? Listen to Your Credit Team

The pressure to boost sales is causing many companies to take on risky accounts.
Eric DowdellFebruary 26, 2018
Want Better Cash Flow? Listen to Your Credit Team

No CFO worth his or her salt would pursue a “sales at all costs” strategy. So, why are so many corporate balance sheets littered with predictably late-paying accounts?

The problem is a trifecta of market pressures. First, despite strong corporate profits in 2017, recent instability in global markets, particular in the United States, has made many finance leaders revenue-conscious.

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Second, some CFOs assume that historic lows in bankruptcies and bad debt write-offs mean less late-payment risk across the board. But while the U.S. economy has indeed been expanding since 2011’s economic recovery, certain industries and geographies have yet to truly recover.

Third, the spate of startup disruption is causing established players to take on risky accounts. Consider the example of hotel financiers who worry that any market share left untouched will be ceded to online, short-term vacation rental companies.

The Collection Conundrum

The sales-hungry climate built by these pressures is a double-edged sword. The good news is that many companies are starting to book more sales. The not-so-good news? Comparatively few companies are collecting efficiently on those sales.

Eric Dowdell

Eric Dowdell

There are, of course, ways that companies can collect from problematic payers. But each comes with a price that, if combined, can take a serious cut out of collected cash.

Take credit cards. Yes, they get cash in the door, but they bring with them a host of processing fees and surcharges. Expanding collection teams, too, can bring in additional cash, but that comes with soft and hard costs of its own. Not only must new collections representatives be paid, but aggressive collection can also damage the corporate brand.

Then, there are the popular vendor-based “pay to collect” systems that require companies to pay a registration or participation fee to join the network. Another “man in the middle” approach is reverse factoring, which involves the supplier paying an intermediary a 1% to 10% surcharge to get its receivables paid faster.

All these approaches boil down to the same thing: taking a discount to accelerate payment. Companies that don’t do front-end diligence with respect to customers’ creditworthiness inevitably pay for it on the back end.

Generating Profitable Growth

So how do companies keep their focus on revenues without minimizing the importance of profitability? Part of the solution rests with the credit team.

Think of the credit team as the oracle of corporate finance. The sales team might be a company’s most valuable intangible asset, but it needs the market intelligence provided by the credit team to operate efficiently. Accounts receivable, similarly, is the largest asset on the balance sheet at many companies, but only the credit team can foresee the collectability of those accounts.

Maximizing cash flow doesn’t always mean making more sales; it means making profitable sales. CFOs can leverage their credit team to do so in three ways:

  1. Enable the sales team with real-time credit decisions.

Sales opportunities can crop up anywhere at any time. Experienced salespeople often develop intuition around whether or not a customer will pay its bills, but educated guesswork isn’t enough when profitability is on the line. To secure profitable sales in real time, salespeople need direct access to the company’s credit system through their customer relationship management system.

For example, Dun & Bradstreet integrates its credit management system with Salesforce to provide real-time credit decisions and credit limits to salespeople in the field. Sales cycles are shorter because more than 90% of credit decisions are handled by the automated process. Just a small percentage of the kick-outs require manual review, and the credit team is seen as an essential partner by salespeople.

  1. Drive a credit-approved pipeline at the start of the quote-to-cash cycle.

Certain slices of the market are more prone to timely payments than others. A leading manufacturer that Dun & Bradstreet works with, for instance, knows that most of its former customers will be future customers as well. By setting pre-approved credit limits for prior customers, it expedites sales and reliably meets its sales goals.

Together, credit and sales teams can develop a list of pre-approved leads or target areas that can be loaded into a customer relationship management system for sales action. Considering that increasing customer retention by just 5% can boost profits by more than 25%, existing customers are a great place to start. The sales team can then set its focus squarely on the highest-value leads—not to mention avoid haggling with the credit team on the back end of the quote-to-cash process.

  1. Use risk-based predictive scoring.

On-time payment is only one facet of an organization’s financial health. Only a holistic, risk-based approach to examining customers’ creditworthiness can identify those who pay quickly, underutilize their credit limit, and are unlikely to default or go out of business. Predictive scoring is key for not only mitigating credit risk in an established customer base but also for identifying untapped areas of opportunity.

One U.S.-based transportation company has found significant growth opportunities in its existing portfolio by using this approach. By identifying and handing over the top 2% of its customers each month to sales, its credit team opens the door to millions of dollars per month in upsells. Every 0.1% increase in profitable sales growth delivers $5 million to its top line.

Facing encroachment by Amazon, some online distributors take a similar tack. By proactively screening customers before they attempt to buy — a strategy known in the consumer market as the preapproved credit card or the store card — they drive larger, more profitable purchases. Putting the customer credit check before the purchase can drive sales while also improving the customer experience.

Of course, the credit team can’t drive profitable growth alone, but neither can sales. The good news is that a modern approach to credit management can mitigate the risks of a “sales at all costs” environment without hampering the sales team’s performance. Together, these teams can rally around a common cause that eludes so many in today’s environment: profitable growth.

Eric Dowdell is the global head of trade credit at Dun & Bradstreet.