Get me a star credit manager now!
This article first appeared in MG Business in November 2008
The managing director of a consumer finance company asked to meet me late in 2005 and, after telling me how sound and careful his lending had been, asked me if I knew a good credit manager. He was willing to pay up to $150,000 per year for the right person. That's a big salary for a credit manager. He was looking for a star. I wasn't told what was really going on in the business and, as it happened, I couldn't help him with his request: six months later the business was one of the early casualties of the finance industry collapse. My point is that when your business is failing because of bad debts, you need someone good in the credit management role.
"For the first time in our company's history, our board is paying attention to credit management," a credit manager told me earlier this year. Suddenly, credit processes and systems and people need to be outstanding. Suddenly, this hitherto insignificant, lowly-regarded business function must be a star. In the circumstances, it's a lot to ask. There are some outstanding people working in credit roles, but of course there are a lot more who, at best, are run of the mill, unspectacular performers. They have been appointed because they were the best of the run of the mill, unspectacular applicants for a relatively lowly-paid, low-status job. Hopefully, they will rise to the occasion.
In hindsight, what did that consumer finance company need? It probably had a serious backlog of debt. Excellent people skills and the ability to work hard are obviously required in this relatively common situation. However, and this is the first of three key points I will suggest, star credit managers also need an effective strategy or strategies to work their way out of any existing problems and avoid future problems.
Without knowing what was really happening in the finance company I mentioned, I can't say what the right strategy would be. But as an example, of an effective strategy, I know a consumer collection manager who, among other things, encourages a Xmas Club approach. He talks new customers from his very difficult, bottom-of-the-barrel ledger into paying more than they should so that their accounts go into credit. Then, when they (inevitably) strike problems which stop them paying, there is a cushion which stops them immediately falling into arrears. As soon as he can, he gets them to build up the cushion again. This breaks the internal rules of his business, but he hides it from his bosses as best he can (and in some cases they turn a blind eye to it because it works).
However, the Xmas Club approach that works with low income debtors with no savings is unlikely to work with more affluent consumers, let alone trade creditors. And that's my second key point: the credit management experience - including the effective strategies - gained in one business won't necessarily apply in another business.
I saw something which reminded me of this point the other day - a newspaper article by a liquidator about how to manage credit in these difficult times. He advocated a ruthless approach which was certainly a good strategy for some businesses and some customers in some situations. Liquidators generally close businesses down, so ruthlessness is a good strategy for them. However, it's not always so good for managing a ledger so that the creditor keeps its customers and stays in business. For the same reason, debt collectors often can't immediately slot into a credit manager's role. Debt collectors can succeed to some extent by being brutal, but you can't do that and expect repeat business. Similar issues apply to bankers who move to trade credit management roles - the demanding approach that works in banking doesn't always apply in the new role.
What about moving in a star performer from another part of your business and making them the credit manager? This can work, but there will often be a steep learning curve. How expensive will these lessons be? There are plenty of fundamental mistakes to make on the road to wisdom, and most new people will lack an understanding of the commercial law that applies. They won't have any of the benefit of past experience - of having seen similar credit problems before. Some people, never having worked in credit management, assume that it's easy, but it's pretty hard to predict the future, and that's a lot of what trade credit management in the current environment is about. If you continue to supply customer X while they pay off their arrears, will they survive as a loyal, long-term customer or will they leave you with a bad debt twice as large?
At times when bad debt is only 0.5% of sales, bad credit decisions are not so important. But the next few years are not going to be like that. Think about the traditional problem of construction industry subcontractors failing because the main contractor goes bust; the failure of one company means the failure of others. That's the problem that overseas banks face at the moment and that's why the banking system has ground to a halt. Banks don't know which other banks are going to fail as a result of their customers not paying them. That domino effect is the problem lots of businesses are going to have in New Zealand over the next few years and that's why it won't be easy for credit managers to predict the future.
The last guideline is: look for intelligent people who make good business decisions. Intelligence counts in this game. The (rare) credit managers who are held in the highest regard in their organisations - credit managers whose titles are now "Director" or "General Manager" - are smart people who make good business decisions. Intelligence and experience and insight mean that they are right often enough to earn the respect and power to get their decisions implemented.
Superhero credit managers can see the future early, picking from early signs that a customer, or a type of customer, is going to be a problem, and avoiding or fixing that problem. For example, I know a credit manager who works in one of New Zealand's surviving finance companies. Partly as a result of his conservative, cautious approach, the business hasn't overstretched itself or strayed into business it doesn't understand, and therefore it's still in existence today. The shareholders should give him a medal.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting.