Credit Management Toolkit: How to manage Credit effectively ‘Cross-border business in the EU made easy’ Dr. Michael Sauter CCM, Bundesverband Credit Management e.V. / Germany Tallinn, 19.09.2013 Agenda •  •  •  •  Basic Credit Management Principles European Perspective on Credit Management Effective Credit Management Organization and Processes Outlook and Future Trends 2 Is this the reality of Credit Management in your company? 3 Credit Management today starts early in the customer lifecycle and has a strong impact on profitability Marketing/ Sales Profit • Target client identification and selection Contracting • New customer credit check • Fraud prevention • Securities • Credit insurance • Pricing • Factoring Controlling Monitoring • Information management • Limit Management • Limit management • Payment control • Fraud detection Dunning • Dunning management • Securities • Write-downs Collections • Collection management • Collection factoring With Credit Management Customer… Without Credit Management … identification … evaluation … controlling … monitoring 4 … dunning … collection Multiple objectives in Credit Management (selection) Activities / Tasks Objectives Liquidity Prevention of Bad Debt Process Efficiency • Ensure ability to pay • Make sure receivables match open invoices • Manage minimum liquidity • Rolling cash forecasting (short term, mid term, long term) • Cash planning and controlling • … • Agreements with clients • Credit check before contract •  Credit limit approval • Continuous credit check (even with long term clients) • Effective collection process • Managing large risks with credit insurance • … • Definition of responsibilities and processes • Definition of decision and escalation processes • Detailed and consistent reporting • Continuous monitoring of client portfolio • … Enabling profitable business more often and as such increasing profitability! 5 Credit Management has positive effect on DSO and bad debt (1/2) (1) Revenue growth required to compensate bad debt Revenue: 200 Mio. EUR Profit Margin: 3% Profit: 6 Mio. EUR Bad debt 0,60% 0,45% Difference: 0,15% Profit reduction 1.200.000,-‐ EUR 900.000,-‐ EUR 300.000,-‐ EUR Required revenue growth 40 Mio. EUR / +20% 30 Mio. EUR / +15% 10 Mio. EUR / +5% Summary: a reduction of bad debt by 0,15% compensates 10 Mio. EUR revenue growth. (2) Positive effect through DSO reduction Revenue Current 200 Mio. EUR DSO (Cost based on 5% interest rate) Current 1.111.111,-‐ EUR (at 40 days) Effect 138.889,-‐ EUR Savings (at 35 days) Summary: a reduction of DSO by 5 days results in savings of 138.889,-‐ EUR. 6 Credit Management has positive effect on DSO and bad debt (2/2) Bad debt reduction and DSO reduction with strong positive effect Revenue: 200 Mio. EUR Profit Margin: 3% Profit: 6 Mio. EUR Bad debt 0,60% 0,45% Difference: 0,15% Profit reduction 1.200.000,-‐ EUR 900.000,-‐ EUR 300.000,-‐ EUR Required revenue growth 40 Mio. EUR / +20% 30 Mio. EUR / +15% 10 Mio. EUR / +5% DSO (improvement by 5 days) Savings (interest expense) 138.889,-‐ EUR Required revenue growth 4,63 Mio. EUR / +2,32% TOTAL Required revenue growth 14,63 Mio. EUR / +7,32% Summary: a reduction of bad debt by 0,15% and reduction of DSO by 5 days compensates 14,63 Mio. EUR revenue growth. 7 Customer opportunity and risk need to be managed simultaneously Cred i Polic t y Risk •  Representation of risk principles for a consistent understanding of the risk policy 360 degree view on customer •  Definition of significance of Sales and Credit Management by the Management •  Written specification of objectives of individual credit policy areas Opportunity Combining sales and credit management expertise – opportunities and risks need to be managed together and simultaneously! 8 Agenda •  •  •  •  Basic Credit Management Principles European Perspective on Credit Management Effective Credit Management Organization and Processes Outlook and Future Trends 9 The overall situation of EU cross-border business Problem Solution Approach •  •  •  •  A Business A situated in the EU has a customer in another member country Payment under the contract is made on credit after product or service has been delivered Business A would like to secure payment or at least minimise the risk of non-payment How far can this (1) be regulated by contract and how far (2) can arrangements be made beforehand to safeguard rights of recovery •  Analysis in two phases required •  Prospective: involves contract management and credit control •  Retrospective: involves claims policy and dispute resolution •  Strategic decisions and a sound understanding of the underlying business required so that terms of trade reflect the nature of the business (e.g one-off vs. continuing business, individual vs. multiple customers) •  Specific cross-border questions need to be addressed, e.g. •  Applicable law: scope and choice of the law applicable •  Dispute resolution: what to go for and how to set it up •  Procedural / logistical questions: enforcement and required support / cost •  Arbitration, litigation or mediation: suitability for the type of business / customer •  … 10 The legal situation of EU cross-border business EU instruments / policy aims – status so far •  To enable court judgments to circulate freely within the EC/EU with the aim that they should be treated as domestic judgments in all EU member countries •  To harmonise rules for achieving enforceability of judgments across EU borders and to make procedures for recognition and enforcement progressively easier and less burdensome •  Harmonisation of rules for determining applicable law •  Limited harmonisation of service of documents and taking of evidence •  Approximation of procedural norms with limited unified procedures for certain types of claim Business impact of EU instruments •  If people and businesses want to take full advantage of the EU's single market, they need easy access to justice, on equal terms in all countries •  EU-wide rules are needed: •  in cases of cross-border litigation •  to ensure good cooperation between courts in different countries •  so that court judgments can circulate freely throughout the EU •  The business environment can be significantly improved by: •  better enforcement of commercial claims •  simplifying the enforcement of judgments in cross-border disputes (cutting red tape and costs) •  introducing rules to help creditors recover cross-border debt (63% of which is currently unclaimed) •  modernising EU insolvency proceedings to help some firms stay in business which otherwise would not survive •  EU countries are also encouraged to make their legal systems even more efficient and implement necessary legal reforms as part of their economic recovery programs, thus contributing to the policy of the "Justice for Growth" 11 Agenda •  •  •  •  Basic Credit Management Principles European Perspective on Credit Management Effective Credit Management Organization and Processes Outlook and Future Trends 12 Credit Management needs to consider various aspects simultaneously 13 International Credit Management organization (example 1) Country/Business Unit 1 Acct. # 1 & Credit Limit 1 Country/Business Unit 2 iWantobuy Ltd Acct. # 2 & Credit Limit 2 Country/Business Unit 3 Acct. # 3 & Credit Limit 3 •  Fragmentation in decisions Difficult to manage under a centralized process (not impossible) •  Overall exposure management is complex •  Different approach (order control, past due follow-up) 14 International Credit Management organization (example 2) Country/Business Unit 1 Acct. # 1 & Credit Limit 1 Country/Business Unit 2 iWantobuy Ltd Acct. # 1 & Credit Limit 2 Country/Business Unit 3 Acct. # 1 & Credit Limit 3 •  Fragmentation in decisions Can be better managed with a centralized organization if in presence of a common systems platform •  Overall exposure management is slightly improved •  Different approach (order control, past due follow-up) 15 International Credit Management organization (example 3) Country/Business Unit 1 iWantobuy Ltd Acct. # 1 & Credit Limit 1 Country/Business Unit 2 Country/Business Unit 3 •  Credit decisions are taken on behalf of the group Can be supported both in a centralized and decentralized organization •  Exposure management can be consolidated/centralized •  Common management approach across the organization 16 Clear Credit Management processes required Information mgmt Application mgmt Assess customer Determine credit •  Credit agency, bank pools, internal sources •  Optimise quality of information •  Credit application •  Analyse / evaluate existing information (scoring / rating) •  Provide most current information •  Determine suitable limit Existing customer mgmt Control credit Monitor customer •  Credit insurances, •  Early warning own captives, system collaterals •  Reduction in •  Identify and close failure ratio gaps in coverage •  Working capital •  Alternative management contract versions •  DSO optimisation •  Independent from •  Reduction in individual interest paid providers Track claim •  Overview terms and settlement dates •  Guidelines •  Dunning strategies Clear organization and processes required! 17 Claims mgmt Realise claim •  Lawyer, own legal department, collection, at home and abroad •  Prompt realisation •  Customer retention •  New dealings •  Reduction in cost •  Increased success rate Effective credit decisioning process is key Credit Decisioning Process Credit Application Application Check Information Gathering Information Evaluation Various internal data (payment history, sales information, etc.) and external data (agency data, balance sheets, etc.) Consolidated Scoring / Rating Securities Limit Calculation 18 Credit Decision Increasing complexity of data in the decisioning process (examples) EXTERNAL EXTERNAL Strong local data provider •  Agency report (short version) •  Agency report (long version) Big? Data Specialized local data provider •  Agency report (Hungary) Private balance sheet provider •  Balance sheet analysis (Europe) •  Financial KPIs «Public» balance sheet provider •  Balance sheets (Germany, free of charge) •  P&L statements (Germany, free of charge) INTERNAL International data provider •  Agency report (international data) •  Family trees •  DUNS number Credit insurance •  Credit insurance report From IT systems •  Payment history (internal) •  … From team •  Credit Manager information •  Sales Manager information •  … 19 Payment pools •  Payment history pool (Germany) Generic «web» data •  Key words, company news, investor news, facebook, Twitter, etc. Austria Switzerland Creditreform AT Deltavista AT Deltavista ZMR KSV / IDB KSV / BoMo KSV / KKE & WKE Creditreform CH Deltavista CH Teledata ZEK Belgium Graydon BE Bulgaria Creditreform BG France Banque de France Altares Hungary Opten Italy Cerved IT CRIF IT Experian IT Luxembourg Creditreform LU Netherlands Crimimail Experian NL Poland Creditinfo Spain ASNEF Informa ES Axesor Turkey Cedar Rose UK Equifax UK GB Group Graydon UK 20 Rest of World Rest world Accumio Bürgel Bürgel Conqueck CEG Commerzbank Creditreform Creditsafe Deutsche Bank D&B GenoRisk Hoppenstedt IHD Infoscore Post Direkt Schufa Schufa Kompakt Pool - IHD AÜ Pool - DDMonitor Pool - DunTrade Pool - GSG Pool - DRD Crefo Global Global DACH DACH Germany Europe Europe Popular data providers worldwide (selected examples) Brazil Serasa China Sinotrust CIS / Russia IGK India Cedar Rose Malaysia CTOS Middle East Cedar Rose Oceania VedaAdvantage USA Creditsafe D&B Europe Bureau van Dijk Coface C. Europe Creditsafe D&B World-Check World Bureau van Dijk Coface @Score Coface @Rating D&B Graydon International World-Check Collection process needs to reflect motivation of debtors Willing/ Unable Willing/ Able Voluntary payment Securing a claim Payment agreements Solutions • Solution-oriented approach • Minimal time and cost expenditure Motivation Enforced payment • Escalation Professional defaulters Claims Unable/ Unwilling Able/ Unwilling 21 Returns • Legitimate claim (mal-, deficient-, non-performance) Collection process based on customer group and default risk Customer group A Individual contact in advance Additional measures to reduce risk B Collection with all consequences C D Out-of-court collection Low Medium High Default risk 22 Very high Best practice collection process (example) Payment reminder Dunning letter Telephone call Hand over to external provider * 3-4 days 10-14 days Payment date * ) 4 10 days days 0 days * )* ))* )* ) ) ) Provider Order to pay 27-32 days Titles * Irrecoverable 55-68 days 125-158 days 275-408 days Inhouse dunning activities Outsourced dunning activities 23 ) Barred 30 years Time Agenda •  •  •  •  Basic Credit Management Principles European Perspective on Credit Management Effective Credit Management Organization and Processes Outlook and Future Trends 24 Change needs to be actively driven 25 Selected trends in credit management Marketing Organisation Sales Staff Credit Management Controlling Operations Processes Systems ... Auditing CM Policy Organisation •  Reorganization of sales and credit mgmt leadership •  Set-up of shared service centers •  More efficient processes, reduction of staff in credit management •  … Staff •  Continuous staff training •  Providing data analysis expertise to other departments (career steps for credit managers!) •  … Controlling •  Simplification of KPI systems •  Redesign of sales incentives (aim: based on profitable sales •  … Processes •  Improvement of master data management •  Increasing variety of data for credit decision •  … 26 Systems •  Implementation of IT systems to generally support the credit mgmt process •  Automation of (administrative) credit management processes •  … Auditing •  Investments in certification of credit management processes •  Use of certifications with external parties (e.g. banks) •  … The role of the Credit Manager has changed – from being an “Accountant” to being an “Adviser” Classic Credit Management: "Accountant for the Company" “New” Credit Management: "Adviser to the Company" •  Little communication, many interfaces •  Central function in the company •  Economic situation hardly considered ("sales deterrent") •  Advisory function for other departments in the company (especially sales and top management) •  Limited use of customer data •  Credit policy for determining policy towards risk •  Marginal use of external data •  Exceptions rather than clear rules •  Use of mathematical / statistical method •  Late / forgotten request for payment •  Use of additional external data sources; link-up of all relevant information •  … •  Assessment of all customer information •  Permanent monitoring and early warning system •  … Credit management should serve as an adviser to the whole company! 27 But please keep in mind: all optimizations must be balanced between value and cost Euro Value Investment Optimum Cost Best practice Time Individual approach required to effectively balance value and cost! 28 Key Take Aways 1 2 3 Effectively integrate with sales to boost performance! Holisticly improve your credit management function! Innovate and adapt continuously! 29 THANK YOU! Dr. Michael Sauter CCM [email protected] 30