Credit Today Benchmarking Survey: Order Approval Parameters and Processing

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1 Credit ToDAY Tomorrow s tools for today s Credit Professionals May 2010 CONTENTS LEAD STORY: Credit Today Benchmarking Survey Results: More orders than you d imagine are on hold at any given time in the U.S. economy! Hard data on this critical process revealed. How efficient are you?...1 CREDIT INSURANCE TODAY A Tumultuous Time in the Credit Insurance Industry. Two experts give the low-down on what s happening today....1 DISPATCHES: Receivable-based borrowing on the increase Do you have unclaimed property on your A/R? New portal announced by Sun- Gard for placing claims with multiple collection agencies Early warnings on distressed small businesses...4 CREDIT & THE LAW: Are there regulatory protections in factoring?...5 CREDIT DEPARTMENT PRO- FILE - EMI CGG Distribution: Yes, Virginia, You Can Integrate Sales and Credit, Sometimes!...8 STREET BUZZ: CREDIT ON THE MOVE...12 LEADERSHIP PROFILE: Scott Goen, Credit Manager, Big Lots Stores, Inc., Wholesale Division, Columbus, OH...15 Credit Today Benchmarking Survey: Order Approval Parameters and Processing By David Schmidt Order approval is maybe the most visible of all credit department activities. It is a critical function that often forces credit to perform a balancing act. As Jaco Kruger, Director of Financial Services with William M. Bird & Co. observes, There is a fine line between upsetting a customer in order to raise their credit to meet our requirements and promoting/ supporting the sale. We are all in sales, including the credit department. However, we have the additional responsibility to ensure payment by balancing credit versus risk. Credit risk Today Understanding Credit Insurance Today This is a perfect time to look for insurance, declares Frank A. Musto, vice president and CFO of Franklin Electronic Publishers. Insurers are all hungry. You can get yourself a pretty good policy at reasonable rates. It almost doesn t matter what business you re in. It depends on the type of accounts you Given the importance and prominence of the order approval process, we were surprised to discover that a significant number of credit departments are struggling to cope with this task. This is reflected by: A high percentage of orders hitting the hold queue 25 percent report over 1 of 4 orders are held A lot of time spent releasing orders 24 percent report order approval takes 3 or more hours of their day Repeatedly checking the or- Continued on page 2 There is a pervasive misunderstanding today of what credit insurance can do for you. The confusion has a lot to do with its roller coaster history during the past decade. During boom times it was readily available very cheaply. With the Recession, premiums soared as availability evaporated. Now, with the economy improving at least for some industries, it has become widely available at low cost again. have, but most companies have decent accounts. Tom Corbett, a credit insurance broker with Marsh USA, recalls working for a carrier that insured $4.5 billion in sales for a miniscule $1 million premium with a very small deductible back in boom times. But if you think of what s hap- Continued on page 10 May 2010 CREDIT TODAY 1

2 CREDIT TODAY OUR MISSION: To give you the tools and insights that will empower you to excel in credit, customer service, and business, while providing a forum for the best thinking in the field. Editorial Advisory Board Elizabeth Aurelio Vice President of Credit & A/R Nintendo of America, Inc. Bill Balduino Leader, Credit Segment, D&B William Creim, Esq. Creim, Macias & Koenig, LLP Bill Edgar Credit Manager, Zippo Manufacturing Ronald J. Hoffman National Group Management Corp. James H. Hopkins, Esq. General Counsel, Sicklesteel Cranes, Inc. Pete Knox, Director of Credit & Collections, Nestle U.S.A., Inc. G. Fred Marlatt Chairman, Turnmire Logistics, Inc.. Michael D. Rodgers Executive Vice President FINACITY Corporation Patrick J. Rohan Vice President, National Retail Credit, CIT Group Commercial Services, Inc. Robert S. Shultz Partner, Q2C David L. Uranga Director of Financial Services Bell MicroProducts Managing Editor: Wayne Muller Contributing Editors: Dave Schmidt Leigh Anne Kelley Ann Morales Olazábal, MBA, JD Editorial Consultant: Robert Ferris Customer Service: Anne Lawson Publisher: Rob Lawson Credit Today is published monthly by Credit Today, LLC. Subscription rate $129 a year. Copyright 2009 by Credit Today, LLC. Reproduction without permission is prohibited. POSTMASTER: Send address changes to Credit Today, Box 720, Roanoke, VA Subscribers may send address changes to or call Send submissions to Credit Today, P.O. Box 720, Roanoke, VA Subscriptions: ; Fax ; Credit Today does not render legal, accounting, or other professional services. Legal and other expert assistance should be sought from competent professionals. Continued from page 1 Benchmarking Order Holds & Approvals: Constant Pressure der queue 26 percent check it more than 10 times each day Lack of an automated approval mechanism 25 percent are wholly manual This group is in contrast to the significant segment of credit departments that appear to have the order approval process well under control. 57 percent report no more than 1 out of 10 orders hit the hold queue 42 percent spend less than an hour per day on order approval 48 percent check their order queue four or fewer times per day 39 percent are able to clear their credit holds within two hours, on average Clearly, there are striking dichotomies relative to order approval efficiency. We point these out more fully in the following write-up of the survey findings, and trust you will find this survey useful in benchmarking your operations against those of the rest of the credit profession. The survey results should help you to itemize areas for improvement, establish reasonable performance goals, and build a case to garner the support of your executive staff. What is interesting about the chart below ( Please tell us about your order approval environment ) is the seeming disconnect between the findings that, while most credit departments are pressured to release orders and most orders are released after a phone call to the customer, most respondents are of the opinion that orders are not being put on hold unnecessarily. On the surface, it would appear that having fewer orders flagged for credit hold would result in somewhat less pressure to get orders off hold. That most orders are able to be released with a phone call also suggests that the problem is not so much creditworthiness, but the timeliness of collection follow up efforts. If collection efforts were up to date, one could assume that more orders could be released without having to make a phone call. Taking this train of thought a step further, if you were confident that all delinquent customers were being contacted within an appropriate time frame, you should be able to loosen up your credit hold parameters. Then again, the current economic climate may dictate otherwise. A key advantage to fewer orders hitting the credit hold queue involves the amount of time spent approving orders. The survey found that the typical credit pro spends 2 hours, or about 1/4th of their day approving orders. Our concern is that it also means that a very large number of credit pros are spending more Tell us about your order approval environment... The credit department is under constant pressure to release orders Most hold orders are released after a call to the customer More orders get flagged for credit hold than is necessary Sales or customer service are notified when orders are not approved True False 67.2% 32.8% 69.8% 30.2% 36.2% 63.8% 90.6% 9.4% 2 CREDIT TODAY May 2010

3 than 2 hours per day working on orders. In fact, 15 percent of those surveyed spend over half their time approving orders. When that is the case, you are not left with much time for other critical activities and life becomes a constant fire drill. In contrast, 42 percent of our sample spent less than one hour daily on order approvals, which we believe is very commendable. The amount of time spent on order approval is a factor of how many orders need to be released from credit hold and percent of our survey sample reported over a 40 percent hit rate while nearly two-thirds of the sample kept that figure under 20 percent. As a rule of thumb, you might want to review your order approval systems and policies if more than 1 out of 4 orders are being flagged as credit holds. The issue is proportionality, and anything more than a 25 percent hold-rate is indicative of a credit hold process that is out of balance. In contrast, 57 percent of our sample realized a hold rate of 10 percent or less. How Many Hours Per Day Do You Spend Approving Orders? (in hours) least 24 hours. The median figure was 6 hours, which still seems somewhat high, though the economy is possibly a factor here. This is a statistic we will certainly revisit in a future survey. Nonetheless, 39 percent of our sample reported that the average time an order spent on credit hold was less than two hours. It is also interesting that 25 percent of survey participants reported that their systems could not be programmed to automatically release orders that satisfied specified parameters. That is a higher number than we expected, and imposes a manual burden on the credit department to review each order. That takes valuable time, especially when you consider that most orders will be released without further action. However, when we isolated the two groups, those that do not have an automated release system only spent 1.9 hours on order approval, while the automated group was fractionally above the 2 hour overall average. how often you check the order queue. Of course, how efficiently you can approve orders is another factor, but the more orders there are and the more often you check the order queue, the more time you will spend releasing orders. When we examined how frequently the order queue is being checked for holds, we found that 19 percent check on orders at least twice per hour compared to the 48 percent of the respondents that review orders four or fewer times per day. The former group that frequently checked orders averaged 2.6 hours per day working on orders compared to an average of 1.7 hours for the latter group that checked orders much less frequently. The difference of nearly an hour has the potential of being a significant factor in overall performance. In terms of the percentage of orders that are initially put on credit hold we found a similar disparity. In this case, 15 In light of the pressure credit departments are under to release credit holds, the average amount of time an order spends on hold is critical. We were surprised to learn that the average was 14.3 hours, which generally means that credit holds are being released the next What percent of orders are initially put on credit hold? business day. Obviously the average was skewed upward because 30 percent of our sample reported that, on average, credit hold orders stay in the queue for at This finding suggests that many of those with automated order release systems are not taking full advantage of those systems or possibly that there are limitations associated with their automation that is counterproductive. Kim Braun, Credit Manager with FS Partners notes that their computer system isn't capable of handling this type of process. We must put the customer on hold until payment arrangements have been made and then advise the billing location when this has been lifted. They cannot invoice a customer that is on hold until we take it off and download an updated file to them. Unfortunately, this doesn't stop them from sending the product out the door. Good policies and Continued on page 7 May 2010 CREDIT TODAY 3

4 Dispatches FROM THE CREDIT FRONT Receivable-Based Borrowing on the Increase Asset-based financing chiefly secured with accounts receivable and inventory was estimated to be three to four times the dollar amount of factoring last year. For many companies this has provided sorely needed replacement of working capital lost when their bank lines of credit were cancelled or reduced. But it comes at a steep cost, and is certainly more expensive than the lost bank lines. It often entails more rigorous reporting on receivables and collections, while providing less flexibility in negotiating terms with customers, Guy Guinn, a partner at Squire Sanders Dempsey told CFO Magazine. And since lenders may impose tight controls over the borrowing company s cash flow, it can result in a big loss of self-esteem and independence. Asset-based lenders screen clients books extensively to decide which receivables are eligible for the borrowing base, says Laurence Kaplan, executive vice president of Gerber Finance, an asset-based lender. Some red flags that will lower the dollar amount the lender is willing to advance: Concentration (more than 20 percent of sales with one customer). Dilution (a high percentage of returns and chargebacks). Excessive aging. Kaplan says that government and foreign receivables often won t qualify at all and that the lender will also demand that borrowers provide robust weekly reporting on portfolio trends. Do You Have Unclaimed Property In Your Accounts Receivable? Cash strapped states are aggressively targeting unclaimed property collections as a significant source of revenue, and old receivables balances that haven t been returned to customers are a favorite target. Depending on the state, a receivables balance becomes unclaimed after you have had no contact with the owner for three to five years. At that point you have a due diligence responsibility to attempt to contact the customer. If there s no response after 30 days, the balance must be turned over to the state. Failure to comply can result in penalties and interest charges, not to mention the time, expense and aggravation of an audit through your financial records. Unclaimed property, which can amount to tens of billions of dollars, provides many states with the working capital that would otherwise have to be raised through taxes, said Noel E. Hall, Jr., principal and practice leader for the unclaimed and abandoned property service line at Ryan, a major tax services firm. Today, both the largest companies and also smaller companies are increasingly being targeted for aggressive collections efforts. When you identify an unclaimed receivable balance, he says, you should remove the item from the AR aging ledger, shift it to unclaimed property and hold it until it s time to report. If the state fiscal year ends June 30, as 80 percent are, it must be reported by November 1. Send a letter to the customer at their last known address indicating that your books and records show an item of question, giving the date and amount and stating that if they fail to reply within 30 days, according to state law, you will be required to turn funds over to the state. At one time you could relax on this due diligence, but not anymore, says Hall. The states are now aggressive in enforcing that rule. Unlike some other forms of unclaimed property, the receivables issue is very, very contentious because the burden of proof falls on the shoulders of the holder of the property to show that the item truly is not unclaimed. Incorporated in Delaware? WATCH OUT! A company incorporated in Delaware is particularly vulnerable, since the state has a look-back period going back to No company that I m aware of maintains detailed records going back to 1981, he continues, so if you re identified as an audit target, this allows Delaware auditors to extrapolate an exposure number, which could run into the millions. What he is most concerned about are those credit managers who routinely write off these items as income. Many, he says, still have that policy of small-balance write-offs today. The problem is that, with unclaimed property, there is no de minimus rule. Even it it s a penny, it s separate and still reportable to the state. A lot of companies take the position that they re not going to research any overages or underages at a certain threshold, he says. It could be $50 or $1,000. That doesn t make these funds unclaimed property. It s just that you ve made an executive decision that you re not going to research or do any work on it. Typically a company may have hundreds of transactions with a customer, and there may be underages and overages. The first thing you do to total them up to find a net balance. If that s a net credit balance, the state s position is that they re going to take possession of that money and hold it for the owner. 4 CREDIT TODAY May 2010

5 Editor s Note: Be sure to check out CreditToday s comprehensive Unclaimed Resources Portal at There you ll find sample unclaimed property policy templates, checklists, contact info for all states s unclaimed property info, spreadsheets with state escheatment dormancy periods, and much more... New Portal Announced by SunGard For Placing Claims With Multiple Collection Agencies Juggling collection work between two or more outside agencies is one of those challenges that often makes outsourcing less efficient and more time consuming that it should be. It can be highly manual and complex, creating a lack of efficiency and transparency for both the company and agency, points out Credit Today editor David Schmidt, also principal of A2 Resources, a consultancy firm focused on credit and collections best practices. For this reason, many clients and agencies are migrating toward technology that provides portal access and advances in networking, resulting in an improvement in claims recovery. Announced in late April, SunGard s Avant Gard is an agency placement portal, designed as an extension of its AvantGard Receivables solution, to help streamline the placement of claims. Described as a comprehensive solution offering credit risk, collections, dispute management and cash application processing, Sungard is intended to benefit agencies by earlier and more complete transmission of claims, thereby helping them deliver enhanced service to their clients, according to the announcement. For creditors, the purpose is to manage the placement of accounts and invoices, as well as putting controls into place for the tracking, reporting and reconciliation of all collections data that is placed at an agency, says Jim Mangano, senior vice president of receivables solutions for SunGard s AvantGard business unit. Faster and earlier delivery of claims will help improve recovery rates, helping agencies to deliver a greater level of service to their customers. Early Warnings on Distressed Small-Business Customers Are any of your small-business customers in danger of becoming severely or chronically delinquent on a commercial credit card, installment loan or lease or other financial instrument within the next 12 months? If so, Experian s Small Business Credit ShareSM financial acquisition score is designed to warn you. The scoring system was developed from performance data taken both before and after the Recession to make it highly relevant and predictive, according to Allen Anderson, president of Experian s Business Information Services in an April announcement of the new service. The aim is to maximize clients customer relationships by providing them with more attractive credit terms and limits. credit and the LAw: The situation Are There Regulatory Protections in Factoring? By Ann Morales Olazábal, MBA, JD Harbor Bay Industries had a cash-flow problem. Despite the best efforts of Credit Manager Jake Walters and his staff, DSO was higher than it had ever been, and the sales picture was getting grimmer by the day. The CFO had approached Harbor Bay s bank about a line of credit secured by the receivables portfolio and been turned down flat. She summoned in Jake, told him the bad news and gave him a new assignment. See what you can work out with a factor, she told him. Jake got right to work checking out factors, and what he learned was that there seemed to be no end to the variety of deals available. The first few outfits he researched offered such a range of requirements from a requirement that all receivables be factored to the need to route all communications with customers through the factor s office and to the automatic purchase of credit insurance along with the factor s services. Besides variation in the discount to be charged, the fees from one factor to the next were variable some charged new account setup fees, management fees, per transaction fees, line of credit fees, wire transfer fees, and others didn t. There just diwdn t seem to be any way to compare apples to apples. After reading the fine print on a few of the proposals and mulling over all of these questions, it struck him that something didn t make sense. Factors clearly play a role in the financial industry, so shouldn t there be some federal or state law guidelines establishing minimum standards or maximum constraints on a factor s services? Does the law provide any guidance here? Make your decision and turn to page 6 for the answer! May 2010 CREDIT TODAY 5

6 Continued from page 5 Credit & the Law: Analysis Factoring Is a Business Proposition Short Answer: No. A factoring arrangement is like any other business proposition. The parameters of the relationship are established and governed by the terms of a written agreement, which will be interpreted and enforced by the general law of contract. Factoring, also sometimes known as invoice factoring, accounts receivable financing or funding, or sale of accounts receivable, is an ancient financing niche available as long as business has been business, indeed to as far back as Roman times. In more recent years, factoring has always been a fairly mainstream option for smallish, expanding businesses to turn receivables into cash rather than incur debt. And in today s economic climate, when delays in receiving payment may be longer than usual, more and more small and large creditors may be turning to factors to provide cash-flow relief. So, it is important for the credit manager considering factoring to understand some legal basics. The Factor Owns the Invoices At its heart, the standard factoring arrangement involves the creditor assigning or selling its right to receive payment of its receivables to the factor, at a discount, in exchange for immediate cash. After the creditor has assigned all or a portion of its receivables to the factor, legally, the factor steps into the shoes of the creditor for collection purposes. So rather than the should read proposed factoring agreements very carefully, and, in addition to analyzing their financial impact on the firm, also seek professional counsel before committing to what may be a less desirable arrangement from a legal standpoint. acting as security for a loan, the factor actually buys the invoices and has the exclusive right to collect them. But in the current environment, the factoring arrangement is highly variable. Because the market is the only real constraint on factoring services, they have become increasingly complex and, perhaps somewhat like insurance, hard to compare directly. In fact, many factoring facilities today do not amount to factoring in the traditional sense at all. Instead they involve financiers who simply advance a percentage usually somewhere between 80% and 90% of the invoice value against current invoices and take their fees out of the balance, returning the remainder when the invoice is collected. This type of factoring does not involve legal assignment of the account, and therefore would not in itself give the so-called factor any right to contact the customers or to collect in court in the event the receivable were not paid. Like a Loan, But... Like a loan, the discount rate attached to a particular factoring arrangement is dependent upon some underwriting, which frequently considers such things as the spread (or concentration) of receivables over customers, creditworthiness of the customers, and the typical age of the receivables. Though factoring facilities are similar to loans, they are almost always more expensive than credit. And unlike a loan, factoring does not require tangible collateral like real estate, Key Definitions Factoring - The process of selling a receivable for immediate cash. The factor buys the receivable at a discount and collects the receivable. Assigning - The process of turning over a receivable to a third party, typically a factor. Recourse - Means the factor can come back to the company selling the receivable if the debtor doesn t pay. Usually, you ll pay a lower fee to the factor if they have recourse, as that shifts the risk to you (the seller of the receivable). Discount Rate - This is the fee charged by the factor, typically 3 to 5% of the value of the invoice, or how much the invoice is discounted from face value. and it does not generate either a longterm liability or an interest expense. Indeed, precisely because it is not a loan, the factoring arrangement avoids all of the federal regulation that loans trigger, as well as the constraints imposed by state usury laws. Therefore, you should read proposed factoring agreements very carefully, and, in addition to analyzing their financial impact on the firm, also seek professional counsel before committing to what may be a less desirable arrangement from a legal standpoint. Ann Morales Olazábal, MBA JD is Associate Professor of Business Law at University of Miami School of Business Administration. She can be reached at 6 CREDIT TODAY May 2010

7 Continued from page 3 Benchmarking Order Holds & Approvals: Constant Pressure procedures are vital no matter what your level of automation. Not surprisingly, nearly all automated release systems account for credit limits. Other popular parameters (see the graph to the right) include past-due balance, total balance due, and orders in progress but not yet billed. These are all traditionally accepted AR risk parameters. There was less acceptance of other riskbased parameters such as flags to mark an account always hold for review or always release, and the ability to factor in customer-type in the review algorithm. For other release parameters see the table on the bottom right. What we did find surprising was that only 29 percent of our sample reported having approval authorities built into their order release systems. With compliance issues holding a lot of corporate attention, we expected most respondents would have some sort of capability to restrict who could release an order based on order amount, total customer exposure, or some other factor. Usually, approval authority parameters are stipulated in the credit policy manual, and are not usually difficult to program into the order release software system. Other Factors Used in Order-Release Algorithms A flag for hold and do not allocate inventory A flag to hold for review all orders that include specialty items or require labor Allowance for chargebacks/deductions Assigned risk factor Automatic approval below a set limit Credit days Credit expiration date/last review date Credit status Customer terms Customer first order Days past due/grace days Fixed dollar amount past due Inactive beyond a set number of days Master level hold Maximum order amount New customer No payment in last 30 days Pending credits Percent past due Promised payments Price discount percentage off list price Sovereign risk Third party finance flag May 2010 CREDIT TODAY 7

8 Credit Department Profile - EMI CGG Distribution Yes, Virginia, You Can Integrate Credit and Sales- Sometimes Two-thirds of EMI CMG Distribution s customer base accounts for only 4 percent of the company s sales volume. But until two years ago, a $300 delinquency with one of these small customers typically a mom-and-pop music and book stores would take up the time of a credit specialist. This was hardly the most effective use of the credit department s professional staff, and the problem was aggravated because the company was in a downsizing mode due to contraction throughout the music industry. So John Vogelaar, then credit services director and now customer services and sales support director, was asked by senior management to come up with a reorganization plan. Now complete, the most conspicuous aspect of this reorganization has been the creation of the position of Customer Services and Support Representative (CSSR). Two CSSRs now integrate all telesales, all credit and collection responsibilities and all customer service needs with all of these small accounts. They thereby free up the other seven members of the department to the needs of the medium-sized and larger accounts. As something of a bonus, the CSSRs have significantly improved relations with the smaller accounts. One Phone Call Usually they re dealing with one person who handles all responsibilities, Vogelaar points out. If there are two, they re sitting next to each other. They can get a lot of things handled in one phone call that before might have taken two or three people, and we get a lot of customer satisfaction with that. These customers no longer have to talk to one person about one thing and another person about something else. Kelee Littrel had ideal qualifications when she was assigned to a CSSR position two years ago. She d been a book store manager before joining the EMI CMO telesales group in 2007, so rapport with the 150 to 170 customers even delinquent customers she s responsible for came naturally. Customer relationships are the bottom line, she says. Most calls, even col- lection calls, start as sales calls. These calls are a great way of saying, We want you to get this new product, but you re a few days late. If she knows she s talking to someone other than the owner or manager, she s very discrete. Sometimes the owner doesn t want the store s music person to know the financial situation. She ll ask to speak to the person she knows is handling finances. If that person isn t available, they ll transfer her to that person s voice mail. Often the person she reaches doesn t realize the account is past due. It may be a mom-and-pop operation where the owner has so many pieces of mail to open that they haven t gotten to it. Or it may have slipped their mind, or they thought their husband or wife had sent the check. With the rapport Littrell has developed over time, these customers can speak more comfortably about payment issues. They know that, if need be, I m going to work with them on a payment plan that won t be going into any kind of collection service, she says. The Reorganization Study When Vogelaar was directed in 2008 to look into the feasibility of reorganizaing the department, he was given about 30 days to do it. In his research, he tried to find companies with similar programs. He did locate people who had made such reorganizations involving the integration of credit, sales and customer service and interviewed them to find out what had worked and what hadn t. Some, he found, hadn t liked the results and had gone back to the traditional methods and organization. What we found was that it works really well in some circumstances and not so well in others, 8 CREDIT TODAY May 2010

9 he says. That s why we didn t integrate roles for our medium- and larger-sized customers. It s a real challenge to juggle, not just the two priorities of credit and sales, but the time that it takes as well. What I ve found in talking to other managers was that, invariably, one was favored and the other suffered. That s why we decided to have some roles integrated and others remain specialized. Today, in addition to the two CSSRs, the team consists of three sales specialists and two credit specialists. The sales specialists work with mediumsized independent stores and small and regional chains but not with the larger chain customers. Vogelaar notes that retailers have gone through a lot of changes themselves in recent years. Typically there will be an owner, a buyer or a floor manager who takes care of the music or the video area and another who takes care of the books. So there are specialized roles with those customers. For some customers, the sales specialists are the only sales reps who work with them. But there is also a field staff of four people around the country, and some of these customers are field-served. So the sales role is a cooperative arrangement between the field rep and the inside sales person. Of the two credit specialists, one focuses on credit and collections and the reconciliation aspects of the relationships with major accounts and the other specializes in working with medium-sized retailers. There s also another position that specializes on the customer service needs of the major accounts, sales support and customer service, as well as supporting the account managers who work with those accounts. Everyone on the integrated services team shares customer service responsibilities. Bifurcated Reporting Responsibility Prior to the restructuring, these staff- ers all worked within more a traditional organizational structure, as indeed the rest of the company still does. Sales and Customer Service reported up through the sales and marketing organization and Credit reported up through the finance side of the company. But now Vogelaar has a bifurcated reporting responsibility to the sales and marketing VP and the other to the financial VP and CFO. This is not a problem, he says, because it s all become one cohesive thing. Credit Department - EMI CMG Distribution At-a-Glance Corporate Headquarters: Brentwood, TN Credit executive reports to: Financial vice president and CFO and to the Sales and Marketing vice president. Staff size: Nine Type of computer information system: Legacy Major responsibilities: Leading the Customer Services and Sales Support Team in a fashion that assures maximum profitability and customer satisfaction. Main credit interchange group: National Christian Suppliers Credit Group (administered by NACM Midwest) Number of active credit customers: 1,000. My two bosses have their own specialized interests in what the team is doing, he notes. They re the ones who had to agree to do this, and I ve always had fairly strong relationships with both of them. I consider myself to be a progressive credit manager not willy nilly pro sales although I d take offense if we were called the sales prevention department. What we re trying to do is maximize profits, he continues. And the way you do that is by maintaining a good balance between sales and credit. Because of that there hasn t been any significant tension between the credit and sales functions. We were able to transition smoothly because, prior to this reorganization, these functions were already working smoothly together. For companies where there is this tension, he believes there would be more of a challenge in making this kind of a transition. We wondered why the word Credit Continued on page 13 Major current challenge: Decreasing physical music product sales and the continuing consolidation and contraction in the Christian retailer market. Biggest achievement: Helping create and lead this integrated team. Professional publications read regularly: Credit Today; Customer Relationship Management (; CRF s The Credit and Financial Management Review; Vendor Compliance Federation s Business Credit Report May 2010 CREDIT TODAY 9

10 Continued from page 1 Credit Insurance: After Some Rough Years, Things Are Easing Up For Buyers pened in the Recession, insuring those kinds of dollars at those prices, you can see why the insurance companies were getting nervous. Now, as things are getting better and credit managers are happier with their insurers, it will go back to the way it was. Insured creditors will see fewer of their policies canceled, except those customers who everybody knows are about to go down the chute. What Is Insurable No insurance is supposed to cover events with relatively high probabilities of occurring. Insurance should be for losses that you can t predict or afford, no matter what you re insuring. Credit insurance is written either as cancelable or noncancelable, and it s essential to understand the differences between them. For cancelable credit insurance the basic premise is that carriers know more about your customers than you do and that they, therefore, should be the ones making the credit decisions. A whole turnover policy (WTO) covers all of your credit sales domestic, international or both. There is also Key Buyers coverage (usually the largest buyer) and Single Buyer coverage. All of these policy types can be bought on cancelable or non-cancelable limits. The most common type of credit insurance policies sold are WTO cancelable limit policies, and, in the US, these policies are offered primarily by Euler, Coface and Atradius. You might say, says So policy holders around the world have been slammed with a high volume of limit cancellations, which naturally upset them. It wasn t just on a couple of buyers. It was on a large number of buyers. Corbett, I have $1 million in revenue to insure. Here s my list of buyers. Tell me which you ll approve. They will look at the top 20 and say, We like 17 for the credit amount you ve requested and will approve those. One we won t approve at all because we think it s a bad risk. There are two we ll approve for half or two thirds of the limit you want. If you buy, you have a cancelable limits policy, which means that the insurer reserves the right to cancel the limit at any time based on any information they pick up that makes them believe it s a bad risk. So you ll get a notice saying, We approved that limit for $3 million on X Company. We don t like it anymore. We think it s a bad risk. So we re coming off cover on this date, after which you won t have coverage anymore. Anything up to the date of cancellation is covered. What happened for years is that you d get that occasionally, but you didn t see a tremendous amount of it, explains Corbett. So you might not have liked it, but nobody got hysterical about it, and often you could see the rationale for it. But for the past 18 months, with worldwide economic distress, insurers have chosen to protect themselves by being much more aggressive in canceling limits. Through all the good years the carriers for the most part would approve limits of certain sizes in the absence of negative information. When the losses started to mount what they all did was look at those limits and decide they were not Frank Musto good enough anymore. It couldn t just be the lack of negative information. They needed financials annual and interim financials otherwise they were sitting on a time bomb. So policy holders around the world have been slammed with a high volume of limit cancellations, which naturally upset them. It wasn t just on a couple of buyers. It was on a large number of buyers. Some said, I can t stand getting these limits cancellations. I should have a non-cancelable. I don t care what it costs or if the deductible is bigger. But getting non-cancelable credit insurance isn t that simple. Non-cancelable coverage in the US is offered by Ace, FCIA, Chartis (formerly AIG), HCC, QBE and Zurich. Many who have cancellable policies wouldn t qualify for non-cancelable coverage since the underwriting perspective is very different. As noted above, in a cancelable policy, the insurance company s position is that it knows more about your customers than you do. They will tell you when it s a good risk or a bad risk, and you have to accept that. 10 CREDIT TODAY May 2010

11 In stark contrast, non-cancelable carriers underwrite your company. They assess how good you are at managing risk, how effective your credit staff is, what kind of policies and procedures you have, what kind of history of bad-debt losses you have. You ve got to be a pretty high quality company in most respects. Typically, they re looking to underwrite larger companies with very good credit departments and very low bad-debt loss histories. The non-cancelable companies don t employ all the risk underwriters (equivalent to credit execs) that the cancelable insurers like Atradius, Coface and Euler do. These companies have thousands of people around the world looking a buyers risks. The non-cancelables have a handful of people, relying on their customer base the insured to be experts on their own customers. The second part of a non-cancelable policy is a much larger deductible. The insurer is saying, We re giving you a lot of autonomy, so we want you to share more of the risk than if we were offering a cancelable policy. In that vein of autonomy, non-cancelable carriers also provide large Discretionary Credit Limits (DCLs) which enable you to make credit limit decisions without prior carrier approval. So if you ve got a non-cancelable policy, you ve got a large deductible, and you re going to have to take some losses before you even think about making a claim. A non-cancelable policy means the insurance company can t send you a notice saying they think a customer is a bad risk and you don t have that limit anymore. But the policy language still requires you to be proactive in your credit risk management, so the onus of cancelling a limit switches liability from the insurance company to you (the insured). If you see in the newspaper that a customer just hired a chief restructuring officer and has admitted they may be in violation of their bank loan covenants, you can t just continue to ship saying, I ve got a noncancelable limit. The policy requires you to act as a prudent insured, which means you would continue to ship on your own if you didn t have an insurance policy. Glossary of Key Terms Cancelable insurance - Credit insurance carriers can write policies where the buyer s credit limits are defined as either cancelable or non-cancelable. Obviously, cancelable gives the insurer the right to cancel a credit limit with very little notice. The premise is that the cancelable limits carriers have more knowledge about your customers and keep control in their hands Non-cancelable insurance In contrast to a cancelable policy, a non-cancelable policy provides coverage on buyers that the insurer cannot withdraw coverage on. To be eligible for such a policy, you must meet certain strict criteria as defined by the credit insurer for them to be comfortable with your credit risk policies and procedures. The onus of monitoring your receivables under the policy shifts from the insurer to the insured. Discretionary Credit Limits (DCLs) When an insurance carrier offers you the flexibility to make credit decisions without their prior approval this is known as your Discretionary Credit Limits or DCL. This is offered on both cancelable and non-cancelable however will likely be much higher on a non-cancelable limits policy. There will be terms and conditions to your DCL coverage Whole Turnover Policy (WTO) This is a credit insurance policy that covers all of your credit sales domestic, international or both. It can be either cancelable or non-cancelable. Key Buyers Credit Insurance - There is a credit insurance policy that covers a group of key customers, usually your largest buyers. It can be either cancelable or non-cancelable. Single Buyer Credit Insurance Very similar to Key Buyers credit insurance, it does just as it says covers a single customer. As with other policy types, it can be purchased with either cancelable or non-cancelable limits but non-cancelable is much more common. Prudent Insured This is a concept, particularly in reference to a noncancelable credit insurance policy on a customer, which requires you to act prudently when confronted with obviously bad news about a customer. Even though the insurer can t cancel your policy, if you knowingly ship to a customer that is obviously going down the drain, it may void the coverage. You must act as a prudent insured. The concept is also in force on cancelable policies. Would a reasonable person continue to ship if all they re seeing is bad news? You get financials from a private company and they re not pretty. You must realize that having non-cancelable limits doesn t mean you re free and clear to ship no matter what is going on economically in the big picture and for that company Continued on page 14 May 2010 CREDIT TODAY 11

12 Street Buzz: Credit on the Move... Christine Alix Thom Beaupre Steven Berz Karen Brown Bill Lovitt Dave Panicko Randy Perry Michael Puccinelli Mary Reschke James T. Rimmer Adam Ross Jay Snyder Christine Alix, CICP, Corporate Credit Manager, The Chamberlain Group, Elmhurst, IL is on the Board of Directors for NACM/Chicago-Midwest. Thom Beaupre, CCE, Corporate Credit Manager, Metal One America, Inc., was elected to the position of Chairman of the Board of NACM/Chicago-Midwest. Steven Berz, Manager of Credit Services, Syngenta Horticultural Services, Lisle, IL is now serving in the role as Councilor of the Board of Directors of NACM/Chicago-Midwest, just finishing his year as Chairman of the Board. Karen Brown, CBF, Credit Executive, United Stationers, Deerfield, IL was elected to the NACM/Chicago-Midwest Board of Directors, for a term ending in John LaRocca is now Director of Global Credit at Hitachi Data Systems, Santa Clara, CA. He was a founder of Quote to Cash Solutions LLC and formerly Senior Vice President, Corporate Credit, Marketing and New Business Development for CreditPointe, Inc. Bill Lovitt, CCE, CICP, Corporate 12 CREDIT TODAY May 2010 Credit and Collections Manager, Klein Tools, Lincolnshire, IL was elected to the NACM/Chicago-Midwest Board of Directors, for a term ending in Dave Panicko, CCE, Director of Credit and Collections, Unisource, Itasca, IL is on the Board of Directors for NACM/Chicago-Midwest. Randy Perry, CCE, Credit Manager, Dearborn Wholesale Grocers, Chicago, IL, is on the Board of Directors for NACM/Chicago-Midwest. Michael Puccinelli, CCE, Director of Global Credit & Collections & AR at Verisign, Mountainview, CA, was awarded CMA's Credit Executive of the Year for Mary Reschke, CBA, Senior Credit Collection Representative, Elkay Manufacturing, Oak Brook, IL is on the Board of Directors for NACM/Chicago- Midwest. James T. Rimmer, CCE, CICP, USG Corporation, Chicago, IL, was elected to the position of Vice Chairman of NACM/Chicago-Midwest. Adam Ross, CCE, Regional Credit Andy Stavrou Dave Zahller Manager, Anixter, Inc., Mt. Prospect, IL was elected to the NACM/Chicago- Midwest Board of Directors for a term ending in Jay Snyder, Global Credit Manager, Shure, Inc., Niles, IL continues in his role on the NACM/Chicago-Midwest Board of Directors, with a term ending Andy Stavrou, Director of Credit & Office Services at Ball Horticultural Company, West Chicago, IL continues in his role on the NACM/Chicago-Midwest Board of Directors, with a term ending in Dave Zahller, Regional Credit Manager, Smurfit Stone Container Corp., Creve Coeur, MO, was elected to the position of Treasurer of NACM/Chicago- Midwest

13 Continued from page 9 Working Well: Integrating Credit and Customer Service appears nowhere in his job title. We debated that when creating the structure, he told us. Before we said it was Credit Service or Customer Financial Services. But then we had the sales side of what we re amalgamating together, which had been called Telesales and Customer Service. So it came down to figuring out what it was all about. Extending Credit To Make Sales The reason we extend credit is to make sales, and all of these things together are really services that we re performing for our customers. Whether it s credit or its sales service, we re not trying to get customers to do something that they shouldn t do. We re helping them and enabling ourselves to make profitable sales. The company s legacy computer system is just as customized as the reorganized department. It s old, he says, but it s really been supplemented with plenty of data extraction capabilities. Information in the system can be pulled out in almost real time to data bases that can be queried. Before the transition, Vogelaar himself was focused mainly on the credit and collections, but now he has less time to do that. He s juggling a lot of things. The organizational transitions, he continues, have had no significant impact either positively or negatively on such metrics as DSO because the majority of volume has not been affected. We still have specialized people handling most of our business, he notes. In terms of customer count, the integrated system is huge, but not as a percentage of volume. Since we re not managing collections with the smaller customers as closely, I know that payments from those customers have probably slowed somewhat, he says, but the people-cost of managing those customers is also down significantly. So we say we know we re not keeping tabs on those customers as closely as we did, but it s also costing us a lot less to do that. We haven t taken any bad-debt losses. Recently, they began supplementing monthly statements and personal collection efforts with a mid-month dunning notice, and they ve liked the results enough to begin using it with some of the lower-balanced medium-sized customers that the credit specialist is handling. Equifax is a registered trademark of Equifax Inc. Inform Enrich Empower is a trademark of Equifax Inc. Account Advantage is a trademark of Equifax Inc. International Decision Systems and Rapport are registered trademarks of International Decision Systems. Copyright 2010, Equifax Inc., Atlanta, Georgia. All rights reserved. in the past, thinking that they probably wouldn t be that effective, he says. But I m glad we tried it. It s certainly not anything like 100 percent effective, but it s effective enough to help make up for our inability to provide personal collection service to all these customers. Yes, collection is a service you do your customer no favor if you allow past-due debt to accumulate into an impossible situation! Contact Information: John Vogelaar can be reached at: or via at We hadn t employed dunning notices Account Advantage - Credit Today Ad:Layout 1 2/23/2010 3:52 PM Page COMMERCIAL IN FORMATION SOLUTIONS Effective risk management is often a complex and tangled process especially when it comes to managing risk for business customers. Simplify your process with Account Advantage from Equifax. Powered by International Decision Systems Rapport, Account Advantage automates credit review, workflow and approval processes. This enables you to quickly process new requests and manage risk of current customers with a single, flexible system. Account Advantage can be configured to meet your changing business needs and that can make your job a lot easier May 2010 CREDIT TODAY 13

14 Continued from page 11 Qualifying for Non-Cancelable Credit Insurance specifically. Values Beyond Risk Mitigation Beyond just trying to minimize risk as a credit manager, I ve always tried to look beyond the numbers, says Musto. I look at the benefit of cash flow. Some of these values include the following. Increasing revenues You may be leery about increasing your exposure to certain accounts. You may say, Well, we don t have enough information. Or, if you do have some financial information, I just don t like the ratios I m seeing. But if you have some credit insurance, you d feel more comfortable so you have the benefit of potentially increasing revenues. Generating new sales There may be accounts you haven t sold to before, but now you have credit insurance and you may be willing to take the leap. Improving your borrowing capacity The banks love companies to have credit insurance because you have the receivables or a basis for them, allowing you to increase your advance rate under a working capital line. Musto especially values the comfort level credit insurance can provide. Let s say we were doing $50 million in sales comfortably, but I d capped out on the amount of risk I wanted on some of those larger accounts. Now if I had credit insurance and I could insure the amount I was comfortable with, I can almost effectively double the amount we were doing before in terms of credit. Qualifying for Non- Cancelable Insurance What can companies do internally to qualify for non-cancelable insurance? I think they have to tighten their belt in terms of the credit files they maintain on each prospective account, Musto replies. An insurer will look at historical information, at the payment track record. If an account is having problems, they re going to get stretched out on AR turnover, so historical information does have some value. If you re able to get financial information you should do some ratio analysis. Look at leverage, debt to equity. If it s an asset-intense company, look at what your overall asset leverage is. You have to be able to provide enough information for them to make an intelligent decision on whether they should extend credit. Agency reports are often inaccurate and out of date, he continues, but at least you get some corporate information (e.g., who the players might be). If you re lucky and the company provides financial information, it gives you a basis. Reach out and build a relationship with a potential or an existing account and keep good notes on file, he advises. That s the best information because, if you have a relationship with an account, nine times out of ten you may get somebody to give you some inside information. That s what a credit insurer is looking for. They want to know how well you ve established credit procedures and policies. You can build yourself into qualification for non-cancelable insurance, he sums up. It takes a lot of hard work, but it s something that almost any company should be doing anyway. Maybe it s making it a bit more formal, but in today s world of electronics you should put everything up on the computer. You can easily do it on either Word or Excel. If you have a somewhat sophisticated system, you ll have modules that will keep some historical data (e.g., AR turnover, etc.) and build on it. Most brokers who sell these policies are the eyes and ears, at least initially, for the carriers. When you fill out an application, assuming it s filled out honestly, those are the type of questions that get asked and that brokers need to filter through before they submit. Contact Information Tom Corbett: phone: ; Frank A. Musto: Phone Ext 6275; 14 CREDIT TODAY May 2010

15 Leadership Profile Today Credit Philosophy Credit Today s Resource Directory and their online forum (ListServ) provide information on almost any credit-related topic you can think of. It is a great way to exchange information with other credit professionals. As the saying goes, You don t know what you don t know. Scott Goen Credit Manager, Big Lots Stores, Inc., Wholesale Division, Columbus, OH Be Proactive, Network and Follow up. My mentor taught me early on in my credit career that you generate better results by being proactive. He also taught that strong leaders build networks and utilize the networks to strengthen their skills and knowledge (i.e., NACM, Industry Groups, Credit Today s forum, etc). Dealing with a global customer base, it is critical to establish credit risk classes for each customer and then ensure that timely follow-up reviews are completed and risk classes updated. Understanding the risk level of your AR at all times allows you to determine when to accept or reduce risk and still provide proactive support in achieving your department and company s goals. Being proactive doesn t stop with Credit. Make sure you become an active partner with sales and management. Be proactive in your communications and take steps to prevent reactionary situations. Personal Resides in Columbus, Ohio Married 35 years and have known my wife 51 of my 56 years. 2 Children, 3 Grandchildren Career Highlights Credit Manager, Big Lots Stores, Inc/ Wholesale Division, 2001-present AR, Collections, Credit and Process Flow Consultant, GSG Consulting, 2000-present Started up a health and wellness business partnership, Wellness Tech International, 1999-present Director of Credit and Collections, CoreComm, Vice President of Operations, American Collection Systems, Interests & Hobbies Health and wellness Travel Investing Working with people to help improve their quality of life Speaker Professional Member of the NACM Great Lakes Region Central Ohio Planning Committee NACM-Ohio Credit Executive of the Year Chair of the Central Ohio NACM- Ohio Planning Committee Board of Directors for NACM-Ohio, including Chair of Budget Committee and Chair of Compensation Review Committee May 2010 CREDIT TODAY 15

16 Credit Today PO Box 720, Roanoke, VA Presorted First Class US Postage PAID Nashville, TN Permit 989 Please add my name to your Membership list. Name Title Company Address City/State/Zip Phone Fax Eail Enclosed is a check for the $ (see Member dues to right) Bill me/company Coming... Best Practices: Next month we offer up our best practices for establishing credit limits, assigning risk-classifications, setting approval authority and other matters related to controlling risk. Sit in while we bring you the story of a bankruptcy, from the INSIDE how a credit manager is coping with the bankruptcy of his own company and his unique observations on the process. Profiles of the best credit departments Street Buzz: Keep up with the movers & shakers in the credit community! Charge my VISA MasterCard AMEX Card Number Signature Remit to: Fax: Mail: PO Box 720, Roanoke, VA Secure online: 16 CREDIT TODAY May 2010 Expiration Date Annual Membership Rates Print & Online - $426 Online - $297 Print $297 Now only $129!

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