One of the most under-appreciated aspects of Credit Management is the balance between managing risk and supporting revenue.  I specifically say “managing” the risk instead of “minimising” the risk.  Minimising is easy;  put all of your debtors on 100% hard security or ask for cash in advance;  your risk potential will be nil.  However, you will not receive any thanks from the commercial side of the organisation if you adopt this policy as it is virtually impossible to grow revenue on this basis.

Credit Management, whilst having a definite scientific aspect;  formulas, ratios, statistics, et al, is also a delicate art form in terms of the range of issues with which we deal as well as the tact required in various scenarios;  both with customers and key stakeholders.

Credit Management “in a bubble” is relatively easy and is mostly based in common sense;  if a customer is late with a payment, over their credit limit or is considered a high risk then you can withhold new orders, reduce their credit line and/or ask for cash in advance or another form of 100% hard security or terminate them as a customer altogether.

Credit Management within the context of a commercial organisation is much more of an art form where we are required to balance the growth & revenue driven aspirations of the business vs the need to protect your company’s debtor asset.

In this recent era of increasing number of business insolvencies, squeezed cash flow, weak balance sheets and P&Ls, timing has also become a crucial factor for Credit Professionals to consider as to when to “drop the hammer”.  What I mean by this is that in instances where a customer’s risk portfolio has increased either due to a deterioration in their financial situation and/or payment performance and the inevitable failure of their business looms, the timing of when to exit that business becomes paramount.  Exit too early and the customer survives (and potentially even thrives), then you are seen by your company as too risk averse and “not commercial”.  Exit too late and you are left with a potential credit loss and the extra and pain staking debt recovery workload.

In my career, I’ve had customers which, on paper, have either been on the brink of failure or should have failed long ago but have have limped on for years and years after the statistical model suggested that failure was imminent.  If my department had exited when the risk models / scorecards suggested failure, my company would have lost out on significant revenue and profit.  However, by managing the risk, developing an exit strategy as well as execution of the timing of said strategy, meant that my company could continue to trade with the customer and realise additional revenue and profit opportunities.

This delicate form of Risk Management and timing is definitely an art form more than it is a science and is generally not recognised as a specific skill set by those outside of the Credit profession.   It is not an easy skill to acquire nor is it a linear learning;  it’s a matter of experience, business nous, the ability to “read between the lines” and sometimes good old fashioned luck !  In these difficult market conditions, this skill is becoming more and more crucial for the Credit Professional to possess and will be vital in your business’s overall success.

“There is an art to science and a science in art; the two are not enemies but different aspects of the whole”. – Isaac Asimov