Credit Management Toolkit: How to manage Credit effectively

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 Contracting Controlling Monitoring Dunning Collections Profit Target client identification and selection New customer credit check Fraud prevention Securities Credit insurance Information management Limit Management Limit management Payment control Fraud detection Dunning management Securities Write-downs Collection management Collection factoring Pricing Factoring With Credit Management Without Credit Management Customer identification evaluation controlling monitoring dunning collection 4

Multiple objectives in Credit Management (selection) Objectives Liquidity Prevention of Bad Debt Process Efficiency Activities / Tasks 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 Profit reduction Required revenue growth 0,60% 1.200.000,- EUR 40 Mio. EUR / +20% 0,45% 900.000,- EUR 30 Mio. EUR / +15% Difference: 0,15% 300.000,- EUR 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 DSO (Cost based on 5% interest rate) Current 200 Mio. EUR 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 Profit reduction Required revenue growth 0,60% 1.200.000,- EUR 40 Mio. EUR / +20% 0,45% 900.000,- EUR 30 Mio. EUR / +15% Difference: 0,15% 300.000,- EUR 10 Mio. EUR / +5% Savings (interest expense) Required revenue growth DSO (improvement by 5 days) 138.889,- EUR 4,63 Mio. EUR / +2,32% Required revenue growth TOTAL 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 Risk Credit Policy 360 degree view on customer Representation of risk principles for a consistent understanding of the risk policy 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 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 Solution Approach 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 iwantobuy Ltd Country/Business Unit 2 Acct. # 2 & Credit Limit 2 Country/Business Unit 3 Acct. # 3 & Credit Limit 3 Fragmentation in decisions Overall exposure management is complex Different approach (order control, past due follow-up) Difficult to manage under a centralized process (not impossible) 14

International Credit Management organization (example 2) Country/Business Unit 1 Acct. # 1 & Credit Limit 1 iwantobuy Ltd Country/Business Unit 2 Acct. # 1 & Credit Limit 2 Country/Business Unit 3 Acct. # 1 & Credit Limit 3 Fragmentation in decisions Overall exposure management is slightly improved Different approach (order control, past due follow-up) Can be better managed with a centralized organization if in presence of a common systems platform 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 Exposure management can be consolidated/centralized Common management approach across the organization Can be supported both in a centralized and decentralized organization 16

Clear Credit Management processes required Information mgmt Application mgmt Existing customer mgmt Claims mgmt Assess customer Determine credit Control credit Monitor customer Track claim Realise claim Credit agency, bank pools, internal sources Optimise quality of information Provide most current information Credit application Analyse / evaluate existing information (scoring / rating) Determine suitable limit Credit insurances, own captives, collaterals Identify and close gaps in coverage Alternative contract versions Independent from individual providers Early warning system Reduction in failure ratio Working capital management DSO optimisation Reduction in interest paid Overview terms and settlement dates Guidelines Dunning strategies Lawyer, own legal department, collection, at home and abroad Prompt realisation Customer retention New dealings Reduction in cost Increased success rate Clear organization and processes required! 17

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 Credit Decision 18

Increasing complexity of data in the decisioning process (examples) EXTERNAL EXTERNAL Strong local data provider Agency report (short version) Agency report (long version) Specialized local data provider Agency report (Hungary) Big? Data 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) International data provider Agency report (international data) Family trees DUNS number Credit insurance Credit insurance report INTERNAL From IT systems Payment history (internal) From team Credit Manager information Sales Manager information Payment pools Payment history pool (Germany) Generic «web» data Key words, company news, investor news, facebook, Twitter, etc. 19

Popular data providers worldwide (selected examples) DACH Germany Austria Switzerland 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 Creditreform AT Deltavista AT Deltavista ZMR KSV / IDB KSV / BoMo KSV / KKE & WKE Creditreform CH Deltavista CH Teledata ZEK Europe Belgium Bulgaria France Hungary Italy Luxembourg Netherlands Poland Spain Turkey UK Graydon BE Creditreform BG Banque de France Altares Opten Cerved IT CRIF IT Experian IT Creditreform LU Crimimail Experian NL Creditinfo ASNEF Informa ES Axesor Cedar Rose Equifax UK GB Group Graydon UK Rest of World world Global Brazil China CIS / Russia India Malaysia Middle East Oceania USA Europe World Serasa Sinotrust IGK Cedar Rose CTOS Cedar Rose VedaAdvantage Creditsafe D&B Bureau van Dijk Coface C. Europe Creditsafe D&B World-Check Bureau van Dijk Coface @Score Coface @Rating D&B Graydon International World-Check 20

Collection process needs to reflect motivation of debtors Willing/ Unable Payment agreements Willing/ Able Solutions Voluntary payment Solution-oriented approach Securing a claim Motivation Professional defaulters Claims Minimal time and cost expenditure Enforced payment Escalation Unable/ Unwilling Able/ Unwilling Returns Legitimate claim (mal-, deficient-, non-performance) 21

Collection process based on customer group and default risk A Individual contact in advance Additional measures to reduce risk Customer group B C Collection with all consequences D Out-of-court collection Low Medium High Very high Default risk 22

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 days 10 days Provider Order to pay Titles Irrecoverable Barred 0 days 27-32 days 55-68 days 125-158 days 275-408 days 30 years Time Inhouse dunning activities Outsourced dunning activities 23

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 Sales Credit Management Operations... Organisation Staff Controlling 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 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) 26

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 Economic situation hardly considered ("sales deterrent") Limited use of customer data Marginal use of external data Exceptions rather than clear rules Late / forgotten request for payment Central function in the company Advisory function for other departments in the company (especially sales and top management) Credit policy for determining policy towards risk Use of mathematical / statistical method 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 Effectively integrate with sales to boost performance! 2 Holisticly improve your credit management function! 3 Innovate and adapt continuously! 29

THANK YOU! Dr. Michael Sauter CCM sauter.drm@gmail.com 30