Executive Summary. Situation: Sluggish Economic Conditions Create Uncertain Accounts Receivable Cash Flow

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2 Executive Summary Situation: Sluggish Economic Conditions Create Uncertain Accounts Receivable Cash Flow During the recent economic downturn, enterprises have been deeply concerned about the financial stability of their existing customers and the strength of their outstanding accounts receivable. Sadly, many enterprise financial decision makers address the issue of credit and collections policies only when the amount of bad debt approaches dangerous levels. Many don t take the preemptive steps necessary to construct a sound credit strategy and, as a result, place their organizations in weaker financial positions that render them unable to withstand the onslaught of a sluggish economy. Problem: Extending Terms Absent a Methodical Credit Discovery Process Creates Greater Risk Many enterprises unknowingly create credit risks as the result of several shortsighted mistakes. Some enterprises become enamored with the size, scope, or brand of a highly recognizable customer and fail to conduct the kind of background research on that organization that would uncover potential credit problems. Others fall into the trap of decentralizing the decision-making process, allowing a salesperson or midlevel manager to extend credit terms in support of a lucrative transaction without a centralized, formal process that sheds light on the prospect s financial position. When these and other creditrelated mistakes occur, enterprises increase the potential for greater financial risk to their accounts receivable and diminish the chances for future profitability. Solution: A Multifaceted Process Workflow That Enables Better Credit Strategies Every business customer has unique operational nuances that must be taken into consideration when formulating a sound enterprise credit policy strategy. Taking these attributes into consideration, CreditPoint Software has applied its extensive corporate business experience to compile five best practice strategies that help enterprises better manage credit accounts and reduce accounts receivable risk. These best practices empower enterprises with real-time data from a variety of public and private records to generate more detailed credit portfolios on each prospective customer. Once assembled, these analyses can also be used to improve decision-making practices such as targeting specific areas of opportunity or industries with a track record of superior creditworthiness. Result: Better Decisions, Less Risk, Faster Credit Payments, and a Better Bottom Line The implementation of these best practices enable today s global organizations to access the most upto-date financial information, build accurate and detailed workflows, construct more thorough analyses, and develop credit strategies that protect the enterprise during periods of greater economic risk and uncertainty. The Result: Better credit policies, smoother credit department workflows, and real-time decision making help enterprises lower the level of risk associated with extending credit and managing their accounts receivable, resulting in an improved bottom line for the entire enterprise

3 Introduction: Collecting Bad Debt a Greater Challenge During a Recession Since the start of the recession more than three years ago, enterprises have been deeply concerned about the financial stability of their existing customers and the strength of their outstanding accounts receivable. Many are asking, Will my customers be there in the future, and will they pay me on time? Sluggish economic periods place a greater emphasis on the enterprise credit and collections function. Without sound credit policies in place, your company may be exposed to greater financial jeopardy as past due credit accounts mount. As a measure of this looming problem, according to statistics compiled by the Internal Revenue Service, U.S. corporations and partnerships took a total of $152.5 billion in deductions for bad debt write-offs in 2007, up from $135.4 billion in The current problem is best exemplified by this report from one news story: A generation ago, a good collections department used to collect up to 25 percent of a company s outstanding debt, keeping 50 cents per dollar collected. Now, recovering more than 2 percent is a reason to rejoice. 2 For any enterprise in this situation, the task of writing off bad debt, as a result of poor credit policies can have a severe impact on bottom-line profitability. During more sluggish economic periods, this is magnified further as the number of companies that choose to default on their debt obligations increases. This trend stresses the importance of enterprises to revisit their existing credit and collections practices and make sound strategic policy changes. These improvements will not only reduce the amount of existing bad debt, but also ensure that extending future business credit protects the enterprise from the impact of credit-related liabilities. A generation ago, a good collections department used to collect up to 25 percent of outstanding debt now recovering more than 2 percent is a reason to rejoice. Sadly, many financial decision makers address the issue of credit and collections policies only when the ratio of bad debt approaches dangerous levels. By taking the preemptive steps necessary to construct a more sound credit strategy, enterprises can be in the best position to weather the onslaught of severe economic storms. CreditPoint Software has identified five best practices that businesses can implement that will protect their credit accounts from the repercussions associated with credit risks. By constructing a more sound enterprise credit strategy around these best practices, companies can be in the best position to survive today s severe economic downturns and, more importantly, diminish the potential of future creditrelated losses to negatively impact the bottom line. 1 Source: The Association of Credit and Collections Professionals, The Value of Debt Collection 2008, page 3. 2 Source: St. Petersburg Times, For debt collectors, it s the best and worst of times, November 29,

4 Understanding the Challenges with Traditional Enterprise Credit Policies To better understand how to design policies that protect the enterprise from risky credit policies that increase the potential to take on bad debt, it s important to understand where organizations consistently make their most common mistakes. Based on an extensive history of working with large businesses, CreditPoint Software has compiled five key areas that represent the greatest amount of risk with traditional enterprise credit policies: Challenge #1: A Failure to Fully Understand the Customer One of the most risky credit mistakes is the too big to fail mentality, which occurs when an enterprise becomes enamored with the size, scope, or brand of a highly recognizable customer and fails to conduct sufficient background research on them. History serves as a good guide, and the companies that blindly extended credit to organizations such as Enron, WorldCom, and Tyco provide good examples of organizations that fell into this credit trap. By limiting the depth of their investigation to traditional public records, reports, and data bureaus, enterprises are at greater risk when these highly visible accounts experience a bad quarter, or worse, suddenly declare Chapter 11 bankruptcy. Challenge #2: The Lack of a Formal, Centralized Credit Approval Process This challenge can be best described as the who-what decision. Who is the best person to be making the credit decision, and what terms are they extending to the prospective customer? These organizations get themselves into trouble by not controlling the decision-making process, allowing a salesperson or division to extend credit in support of a large transaction without a centralized, formal process that reviews the customer s financial position. One of the biggest credit risks occurs when an enterprise becomes enamored with a highly recognizable customer and fails to conduct sufficient background research on that organization. Challenge #3: The Failure to Know One s Risk Appetite This problem occurs when a company grants credit that is inconsistent with its business model or the ownership s risk tolerance. Businesses may overextend themselves by granting credit in support of a lucrative transaction, becoming blinded by the potential reward of a large sale, increasing the potential for greater credit risk. By taking on more risk than is appropriate for its business model, the company can be in greater financial jeopardy when its receivables with that account go beyond 90 days. Challenge #4: The Failure to Understand the Customer s Position in the Industry Another credit policy mistake is the failure to compare one customer to a similar peer group as a measure of the target customer s creditworthiness. This occurs when a company sells to a variety of industries. For example, comparing the financial strength of a company within a stable industry, to a company in a riskier industry, will hide the true risk of the potential customer. Challenge #5: The Failure to Enable Greater Intradepartmental Transparency Failing to share credit-related information across different divisions can present certain credit risks for the entire enterprise. Due to a lack of information transparency, the organization can end up with different credit policies in each of its countries or divisions. For example, a large Fortune 500 corporate customer may be granted a $40 million line of credit in one country or division and be granted an additional $40 million line of credit in another. By not sharing credit information across every country or division, the enterprise takes on an exponentially greater amount of credit risk with that customer. Enterprises that fail to enact sound credit policies experience a greater potential for financial risk, reduced or slower revenue growth, and more significant financial losses, especially during more sluggish economic periods

5 Five Best Practices That Can Overcome Traditional Credit Policy Challenges Each organization has unique business nuances that need to be taken into consideration when formulating a stronger credit strategy. CreditPoint Software s extensive experience with a wide variety of customers and industries has resulted in the compilation of five best practice strategies that have helped businesses better manage their credit accounts and improve their accounts receivable policies. Best Practice #1: Create a Single Agnostic, and Centralized Source for All Credit Data Companies that implement a single agnostic, and centralized source for all data pertaining to their credit accounts create one of the best hedges against destructive credit risk. This central data source will provide the enterprise with a better analysis of each credit customer, in addition to in-depth enterprise portfolio risk reporting. This perspective should include a combination of all public and private data sources, ranging from third party data providers of financial statements, ratings, company background, news articles and more. Best Practice #2: Construct a Defined Customer Approval Process Organizations that use a well-defined action/notification workflow for their credit approval process are better prepared to avoid damaging credit risks during sluggish economic periods. Such workflows include a standardized chain of events. This allows each employee involved in the credit authorization process to either approve or disapprove each step of the credit extension process and understand which information needs to be passed on to the next person in that workflow chain. These practices use alerts, which are defined and constructed by the organization for each person involved in these workflows. This enables people to know exactly what is expected of them, what information needs to be sent, who needs to receive that information, and the time frame in which that information must be delivered. Best Practice #3: Define Your Company s Risk Appetite Your Credit Policy should define the type and amount of risk your company is willing to accept. The company s management combined with the strategic plan of the business model and industry determines the risk level. The level of risk defined will then drive the analysis process of the credit department and the required types of customer information to gather. The combination of the assessment, decision matrix, and related guidelines ensures credit policies will be in line with the risk appetite to better protect the enterprise. Best Practice #4: Generate a Portfolio Analysis That Provides Greater Industry Awareness The greater the amount of data, the better the decision-making process, especially with industries that fall outside of an organization s prior experience. A single credit information data source populated with data sources that match your customer base and risk policies, will support summary level reporting on Key Performance Indicators (KPIs). Such analysis can also be used to determine target industries that have stronger portfolios and superior creditworthiness. Best Practice #5: Build a Well-Defined Reporting Plan That Enables Greater Financial Transparency Once customer intelligence information is generated, the next step is to enable greater reporting transparency by making these reports accessible to all regions or countries across the enterprise. Such reports should include tables, graphs, summaries, and portfolio views that make it easier for each location to consistently make better credit decisions. These divisions should also employ robust security protocols ensuring that only authorized personnel have access to sensitive financial information. Each of these five best practices is supported via CreditPoint Software solutions, which ensure that organizations have access to the most up-to-date credit information, build detailed workflows, while lowering accounts receivable risk. These practices also allow businesses to construct more thorough credit policies that provide greater protection during periods of greater economic risk and uncertainty

6 Concluding Summary The impact of a sluggish economy has now placed greater pressure on every enterprise to ensure that its existing credit strategies strengthen the bottom line rather than weaken it. With costs being of paramount importance during these periods, financial executives must find new ways to enact better credit policies, which minimize the risk of bad debts, without growing the costs associated with larger head counts or internal infrastructure resources to accommodate those strategies. CreditPoint Software has developed, through its solutions, five best practices that provide better credit policies, smoother workflows, and real-time decision making that helps enterprises improve their bottom line. These practices are particularly beneficial during sluggish economic periods, without dramatically growing costs. Three bottom-line business advantages gained by implementing CreditPoint Software s five best practices include: Improved Cash Flow The five best credit policy practices enabled through CreditPoint Software solutions create faster accounts receivable payment turns, ensuring that credit customers meet their payment obligations in a shorter time frame. Sharper Focus on the Decision-Making Process The five best credit policy practices remove the traditional administrative effort and cost of gathering data, providing a greater amount of time to focus on analytics that result in higher-quality decision making. Lower Cost via Improved Automation The five best credit policy practices allow enterprises to do more with less, essentially using improved automation processes that result in lower costs, fewer human processes and errors, and better credit/collection policies. For more information about how CreditPoint Software solutions can provide your enterprise with better credit and collection policies and strategies, please visit the website at or call About CreditPoint Software The CreditPoint solution is all about you. That s why we believe the best answers to business challenges can be found in the relationships with our existing customers. Once our clients see the dayto-day value of our solutions and the unmatched dedication to support that comes with it they simply don t leave CreditPoint. Our company has been in business for over a decade, providing comprehensive credit and collections solutions for a wide variety of industries and business sizes. That gives us the experience and track record you re undoubtedly looking for in a solution partner. We welcome the opportunity to learn more about your needs and show you how the entire CreditPoint team is dedicated to ensuring your success. CreditPoint Software N 138 th E Avenue Suite 200 Owasso, OK Phone Fax Copyright 2013 CreditPoint Software. All rights reserved