Every day, credit professionals are challenged to handle sensitive financial situations for businesses. They are trusted to analyze complex situations and to make an educated judgment about how to financially interact with other companies. This is a big job. It can make drastic impacts on a company; that is, drastically good, or drastically bad.
Essential Reading: What does a credit manager do?
If you are a credit professional, just reflect on the decisions that have recently crossed your desk. Maybe you had to recently decide on giving a modest trade credit line to a small family company who is in a constant cash management battle, and they relied on your decision to make ends meet. Or, maybe you’ve been trying to collect on a substantial debt from a company that your organization has had a long and successful relationship with. What is the best decision? And what do you even rely upon to make these hard calls – experience, policy, data, gut, or something else?
Credit professionals have a challenging and rewarding job, but just like any other career, the best credit professionals are naturally curious and constantly educating themselves in their industry, and in the world. They wake up every day and dig deeper into their craft. They pile up their experiences and knowledge to punch their way towards possessing the ultimate knowledge of their profession.
This article presents a comprehensive guide for credit professionals. Whether you’re a rookie or seasoned veteran in the industry, this guide will help you better understand your role and become a star in your organization.
Table of Contents
The traits of great credit professionals
As stated in this article’s introduction, the best credit professionals are naturally curious and constantly educating themselves in their industry, and in the world. Succeeding as a credit professional is about more than simply understanding the mechanics of issuing credit and collecting money.
Having a CCE certification from the NACM is maybe a notch on your belt, but it’s not going to make you a well-rounded credit professional who deeply understands the industry challenges that your customers are facing, human psychology, the high-level executive needs of your own business, and the decision making process.
Great credit professionals, in other words, are actually students of business and humanity. More than many other professional roles, those in credit and collection are constantly confronted with the intersection of human decision-making and bottom line requirements.
Way back in 2012, we wrote an article that reflects some of these traits and remains relevant: 3 Traits of a Great Credit Manager. Here is a summary of those three traits:
1) Great Credit Managers Understand That Hard Work Comes Before Credit is actually Extended: Too many credit professionals think about the mechanics of their job. If you’re just going through the checklist to make credit decisions or following policy to make collection efforts…you’re not quite understanding the role. Great credit managers go upstream to understand the reasoning behind those policies and checklists.
2) Great Credit Managers Are Interested in Taking More Business: Related to this first point, great credit professionals understand why they are there: to help the company make more money. This means they extend credit whenever possible, and they get dollars in the door. It boils down to that. Credit professionals must use everything available to them to accomplish these ends, which means doing everything they can to get to a yes. A good credit manager will find creative solutions to save a sale — even when the customer has less-than-stellar credit.
3) Great Credit Managers Make Tempered Decisions on Accounts: Decision making is one of the most difficult aspects of a credit professional’s job. Making a good decision requires an analysis of a lot of information, and oftentimes, shutting out emotional components of a decision. One of Levelset’s advisors, Chip Heath, actually wrote an excellent book about decision making that should be on every credit professional’s desk: Decisive. Great professionals are students of decision-making processes.
Great credit professionals are accounts receivables experts
Credit professionals are in the business of managing a company’s accounts receivables, but truly great credit professionals deeply understand what this means. If you’re a credit professional, ask yourself whether you think about accounts receivables in the same way that your CFO does? Do you even know how your CFO thinks about accounts receivables and accounts receivable management?
CFOs are typically interested in how accounts receivables impact the company’s balance sheet and working capital, and therefore, the cost of capital to the company. These interests manifest themselves in various credit policies and practices, which we’ll separate here into four key areas: Credit Policies, Credit Applications, Lien or Security Policies, and Collection Policies.
1) Credit Policies: A credit policy is just a set of written guidelines to set the customer qualification criteria, the terms and conditions for supplying goods or services on credit, the procedure for making collections, and the steps to be taken in the case of customer delinquency. See the article What is a credit policy, and how do I make a good one? to learn more about creating a credit policy. All organizations should have a well-thought-out credit policy, and great credit professionals understand why and understand the nuances of their company’s policy. The remainder of the key areas can all be incorporated within a single, broad credit policy. Download a sample credit policy to get started.
2) Credit Applications: The first thing a credit policy must accomplish is to establish the “customer qualification criteria” and the “terms and conditions for supplying goods (or services) on credit.” While the credit policy sets forth these criteria and terms, it is the credit application that collects the customer data, enabling the organization to figure out how the customer fits into the policy. Helpful article on this topic: Creating a concrete credit application.
3) Lien & Security Policies: While the construction credit professional must put a construction “twist” on the credit policy, the credit application, and the collection policy, the lien policy is truly unique to the industry. The lien policy is probably the most overlooked of the bunch, but also probably the one that could make the biggest bottom line impact to organizations.
Lien and bond claim rights are a huge asset for the construction and building material supply industries. These remedies are effective even when they go unused, as it’s proven that simply sending preliminary notice to protect claim rights has a powerful impact on a company’s DSOs and underlying collection rates.
4) Collection Policies: The “collection policy” is not simply getting an unpaid and default account into the hands of a competent collector. The collections policy is the entire life-cycle of your invoice. Your collections policy, in other words, will touch 100% of your company’s revenue. For more on this topic, read: The collections policy overview.
Great Credit Professionals Deeply Understand The Legal Issues That May Be Confronted
Credit professionals encounter a variety of legal issues as part of their every day tasks. In fact, anyone serious about a career in credit should think about how they can get a basic understanding of legal concepts.
One cannot think about the credit professionals jobs without running across complex legal items such as contractual agreements, collection laws, litigation decisions, bankruptcy involvement, and more. The following items will summarize a few of the most commonly encountered legal issues, especially if you’re a credit or collection professional in the construction and building supply industries:
1) Joint Check Agreements: Joint check agreements are common documents in the construction industry. In fact, since they are multi-party documents and construction projects are multi-party endeavors, they are almost exclusively used in the construction industry.These documents may be a perfect fit in a particular situation, but they are not as simple or risk-free as they seem. This lesson will help you better understand joint check agreements so your company can use them without getting burned.
Yes, you can get burned with a joint check agreement gone wrong. While these documents are commonly signed and exchanged in the construction industry, they are very loosely regulated and you may be surprised by how little protection many agreements actually provide.
2) Contingent Payment Provisions: Contingent payment provisions, commonly referred to as “pay-when-paid” and “pay-if-paid” clauses, are a creature of contract. This means that these clauses are not mandated or sanctioned by any state or federal laws – they all arise out of agreements. In the construction industry, these clauses are commonly found in subcontracts which are obviously important to credit professionals within subcontractor or trade contractor businesses.
It is less common for a pay-when-paid or pay-if-paid provision to be agreed to with a material supplier or equipment rental company. Nevertheless, the clauses are important to credit professionals for these companies since the clauses can create payment delays for their customers. Read more about this topic here: An Introduction to Pay If Paid and Pay When Paid Provisions.
3) Bankruptcy: It is an unfortunate reality that bankruptcy plays a disproportionately large role in the construction industry when compared to other large industries in the United States. It’s not uncommon for bankruptcy, or even a potential bankruptcy, to significantly impact multiple parties on a construction project. So, what can a company do to maximize its chance of getting paid in the face of a bankruptcy petition?
For those in the construction industry, the mechanics lien (i.e. security right) is the antidote to the bankruptcy risk. Understand why by reading our Indispensable Guide to Construction Bankruptcy.
4) Litigation & the Legal System: Unfortunately, you usually lose in litigation. As someone who has been in the courtroom for trials and hearings, and who has guided cases from their initial disputes through final judgment, take my word for it when I say that litigation is bad news for everyone and is very rarely worth its risk and trouble.
However, when collecting money and unpaid accounts, it is a fact of life. Successful credit professionals must learn as much as possible about the litigation process to make sure their company can actually navigate the legal system to collect effectively without getting burned.
Great Credit Professionals Understand Why Payment Problems Arise
Do you really, really know why payment problems arise? Sometimes, those responsible for making never-ending phone calls and sending piles of letters to collect a debt can forget or overlook why the payment problem arose in the first place. And this does not refer to the “micro” reason why a single payment problem arose, but instead, it refers to the “macro” reason why payment problems occur across the industry.
In other words, great credit professionals understand the mechanics of financial risk. When credit is extended, an organization is accepting some level of financial risk, and they are sacrificing some working capital for the benefit of making a sale and achieving a revenue goal. How do companies balance their working capital needs, revenue goals, and financial risk tolerances, and what impact does this have on the credit manager’s daily tasks: getting money?
Great Credit Professionals Understand The Weapons Available To Get Their Company Paid
Will more phone calls and emails work? Is waiting for the stars to align really acceptable to a company’s bottom line? We started this guide by analyzing standard credit management practices and policies, and then we explored the construction industry-specific legal issues confronted by credit professionals. This all built up to the financial risk paradigm in the industry, which puts a company’s neck on the line.
There are real reasons why payments are delayed, and why sometimes, payments are difficult to get. But, will more phone calls and emails work? Is waiting for the stars to align really acceptable to a company’s bottom line?
Security rights — that is, mechanics lien and bond claim rights — is a solution for the construction industry. These rights are hard-hitting, easy to use, and available for the specific purpose of mitigating financial risks for construction and building supply companies. Understand them in-depth, and leverage them.
Credit professionals have difficult jobs that require a mastery of a very defined skill set, but also experience and understanding of many other areas. Those who are naturally curious and commit themselves to learn about their industry as a whole will find much success in their roles.
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As an expert in credit management with extensive experience in the field, I've had the privilege of navigating the complex landscape of financial interactions for businesses. My knowledge is not only theoretical but grounded in practical, hands-on experience, providing me with a depth of insight into the challenges faced by credit professionals on a daily basis.
The article emphasizes the pivotal role credit professionals play in making crucial financial decisions for businesses, decisions that can significantly impact a company's well-being. Let's delve into the key concepts discussed in the article:
1. Traits of Great Credit Professionals:
The article highlights that successful credit professionals are not merely focused on the mechanics of their job but are genuine students of business and humanity. This involves:
Understanding the Reasoning Behind Policies: Great credit managers go beyond following checklists and policies; they understand the rationale behind them.
Interest in Business Growth: They are aligned with the goal of helping the company make more money by extending credit whenever possible and ensuring dollars come in.
Tempered Decision Making: The ability to make well-considered decisions, analyzing information and avoiding emotional biases, is a crucial trait.
2. Accounts Receivables Management:
Great credit professionals are experts in managing accounts receivables. They align their understanding with CFOs by focusing on key areas:
Credit Policies: Establishing customer qualification criteria, terms and conditions, collection procedures, and actions in case of delinquency.
Credit Applications: Collecting customer data to assess how they fit into the established credit policy.
Lien & Security Policies: Unique to industries like construction, understanding the importance of lien and bond claim rights.
Collection Policies: Recognizing that the collections policy is the entire life-cycle of an invoice.
3. Legal Issues Faced by Credit Professionals:
Credit professionals often encounter legal complexities, and a solid understanding is vital:
Joint Check Agreements: Common in construction, these agreements can have risks and require careful consideration.
Contingent Payment Provisions: Understanding "pay-when-paid" and "pay-if-paid" clauses in contracts, particularly in the construction industry.
Bankruptcy: Recognizing the impact of bankruptcy in the construction industry and leveraging mechanics lien as a remedy.
Litigation & Legal System: Acknowledging the challenges of litigation and the importance of navigating the legal system effectively.
4. Understanding Payment Problems:
Great credit professionals comprehend the macro reasons behind payment problems, considering the delicate balance between working capital needs, revenue goals, and financial risk tolerances.
5. Weapons Available for Getting Paid:
Understanding that more phone calls and emails may not always be effective, credit professionals in the construction industry leverage security rights, such as mechanics lien and bond claim rights, to mitigate financial risks.
The article concludes by emphasizing that credit professionals need a mastery of a well-defined skill set along with a broader understanding of their industry. Those who are naturally curious and commit to continuous learning will find success in their roles.
Talk to Us:
The article invites readers facing payment challenges to seek assistance from payment experts.
In summary, credit professionals must not only be proficient in credit management mechanics but also possess a holistic understanding of business, legal issues, and industry-specific challenges to excel in their roles.