Credit Management Guide: Everything You Need to Know

With companies realizing the importance of credit analysis, its value is increasing every day. It becomes the job of analysts to review data and approve scores, and the way in which it is done has evolved from the past and is yet to morph further. We will be going through the credit process, how it was in the past, what is the present scenario, and what the future holds.

• Understand the challenges of the manual credit management process
• The role technology plays in streamlining the credit management process
• Leverage AI in Credit- what is it and some real-life use cases

What Is Credit Management?

Credit management is the process of extending credit to a buyer while reviewing the creditworthiness of the customer. Essentially, it involves analyzing the buyer’s ability to repay if they purchase goods on credit.

The supplier’s credit team typically assesses the buyer’s creditworthiness by reviewing various factors, such as their credit history, financial statements, and payment behavior. They then make a decision on whether to grant credit and, if so, what credit limit to set. Effective trade credit management can help businesses reduce the risk of non-payment and improve their cash flow.

Steps Involved in the Credit Management Process

Effective credit management is a comprehensive process that includes a few key steps aimed at assessing credit risk, setting credit limits, and monitoring payment behavior. Based on the 5Cs of credit (capacity, capital, conditions, character, and collateral), the key steps involved in the credit management process are as follows:

Step 1: Review the customer’s credit application

The first step in the credit management process involves reviewing new customers’ credit applications to gather detailed business information, credit references, billing and shipping information, and more. The credit application acts as a consolidated record. Existing customers may not require this step.

Step 2: Review the customer’s financial health

Credit teams download reports from credit agencies to analyze the customer’s credit ratings and payment scores. They also review public financial statements, such as cash flow statements, profit and loss statements, and balance sheets, to assess the customer’s financial health. For existing customers, credit teams review the payment behavior along with 3rd party credit ratings and financials.

Step 3: Ask for credit references

Credit teams request credit references, such as bank and trade references, to verify the buyer’s financial position and creditworthiness.

Step 4: Calculate the credit score and limit

Credit teams use sophisticated risk models to quantify the customer’s creditworthiness. These risk models are customized to the industry and the credit policy followed by the organization. Various parameters are used in these risk models, and they have different weightages across organizations. These parameters generally fall into the following buckets:

Financial Health – Income Statement, Balance Sheet, and Cash Flow Key financial ratios (some of them being industry-specific) are used in the model as financial health indicators.

Payment Behaviour – For existing customers, their payment history is a proxy for predicting future payment behavior. KPIs such as average days Late (ADL) are used to quantify payment behavior.

Operational Indicators – Age of business, length of relationship as a customer, number of employees, number of customers, etc.

Environmental Factors – Sometimes, it is essential to consider environmental factors such as the country of operation of the customer (factor in political and regulatory risk), and the region of operation (if it is prone to natural calamities).

3rd Party Credit Agency Rating – D&B Paydex score and Experian FICO score have relevant weightages in the credit scoring models.

Upon calculating the credit score, a credit limit corresponding to that score is assigned to the customer.

Step 5: Get credit approvals

Once the credit limit is assigned, it has to be approved by various stakeholders. For instance, a credit analyst might be able to approve credit up to $10k, beyond which the credit manager, VP of credit, and other stakeholders get involved.

Chapter 2: Key Challenges Encountered in Credit Management Process

Economic uncertainty has increased the demand for proactive credit management. To effectively manage credit, you need to be aware of the challenges that can impact the efficiency and effectiveness of the business credit management process. Here are some key challenges encountered by credit teams.

1. Manual customer onboarding negatively impacts the customer experience. Credit applications are often paper-based, leading to missing or incomplete business information. This results in multiple interactions between credit teams and customers to capture the correct and complete information. Slow credit reference verifications further delay the customer onboarding process, negatively impacting the customer experience.
2. Manual credit data aggregation, credit scoring, and approvals are time-draining. Manual data aggregation, scoring, and approvals can be time-consuming and labor-intensive. Credit teams are burdened with downloading credit reports from various agencies for each customer, especially with large portfolios. Manually reviewing credit ratings, and financials and calculating credit scores adds further delays to credit approvals, especially if it involves multiple stakeholders.
3. Lack of real-time visibility into portfolio risk Periodic reviews pose a struggle for credit teams to pinpoint at-risk customers, as the credit risk of a portfolio can change unexpectedly. With thousands of customer portfolios to manage, staying up-to-date with the frequent credit profile changes becomes a daunting task.

A majority of credit operations involve significant manual intervention, leaving credit teams immersed in clerical tasks instead of focusing on core credit decisions. These challenges result in credit approval delays, increased bad debt risks, and a potential negative impact on the overall customer experience.

Chapter 3: Streamline Your Credit Management Process with Autonomous Receivables

Now that you are aware of the challenges involved in the credit management process let’s look at how to address them – automation is the key to success. By automating credit management, credit managers can swiftly make highly accurate credit decisions, promptly flagging prospective clients with poor credit records. Let’s delve into the benefits of adopting automated credit management.

Benefits of Automated Credit Management Process

• Faster Customer On-boarding: By automating credit management, customer onboarding becomes faster and more efficient. Automation streamlines the credit evaluation process, eliminating manual data entry and processing, and automatically extracting data from online credit applications, financial statements, and credit bureaus. This reduction in time required to gather and evaluate information enables a seamless and swift customer onboarding experience.
• Eliminate Inaccurate Manual Credit Scoring: With the help of existing credit data (gathered through the application forms) and pre-written models and algorithms configured with various industry-specific best practices, the risk scores, risk categories, and credit limits can be automatically assigned.
• Standardized Credit Management: Establishing a structural workflow for credit risk management will help ensure that all the critical credit decisions are approved through a proper hierarchical channel.
• Lower Bad Debts: By establishing a transparent and visible system and introducing reports and analytics, the C-Suite can keep a track of the entire process as well as monitor the status of credit risk. Real-time risk monitoring can help identify risks of bankruptcy, a downgrade of payment ratings, and other news that can help in proper decision-making to ensure lower bad debts.

How Does an Autonomous Credit Management Process Work and What Does It Look Like?

With the HighRadius Credit Risk Management system, you can lower bad debt and improve analyst productivity. Sounds intriguing, right? Let us understand how that is possible.

1. Faster customer onboarding with online credit application Implementing a configurable online credit application can significantly reduce the time and effort required for customer onboarding. Online credit applications can be customized based on customer segments and configured in multiple languages. Pre-filled credit applications from the sales team can further streamline the process, allowing customers to complete the application quickly and easily.
2. Automated credit data aggregation Leverage technology and auto-capture credit ratings, financials, and credit insurance information from 40+ global and local agencies in one go.

Automating credit management can help you in so many ways, from acquiring customers faster to fueling revenue growth. Let’s explore a success story to understand how businesses leverage the benefits of automating account credit management and how it can revolutionize your business.

Chapter 4: Chevron Phillips Chemicals: The Success Story

About Them

Chevron Phillips, an American chemical manufacturer, enabled proactive credit management to achieve 61% faster customer onboarding while fostering strategic credit-sales collaboration to drive top-line growth.

Challenges That They Faced

• Delayed Onboarding At Chevron Phillips Resulting In Poor Customer Experience And Hindered Sales Growth Customer onboarding is the primary touchpoint of the Order To Cash (O2C) process; thus, the customer’s purchase journey is supremely contingent upon it. Manufacturing firms like Chevron Phillips are subjected to a highly volatile market landscape; thus, ensuring a smooth and fast onboarding process is critical to building long-term customer relationships. However, a manual credit review process at Chevron Phillips incurred long delays. The credit team configured paper-based credit applications for the customers to fill in manually. The applications got further caught in multiple to-and-fros between the credit team and the end customer due to missing or inaccurate information. It took the Credit team at Chevron Phillips almost seven days to onboard a new customer. The delayed onboarding sabotaged the sales team’s growth targets as they were likely to breed poor customer experience, putting Chevron Phillips at a higher risk of customer turnover.
• Lack Of Prioritization Leading To Common Review Criteria Across All The Credit Profiles Chevron Phillips faced a challenge when it came to managing customer accounts. While they wanted to focus on reviewing the larger $10M+ accounts, the smaller $1000 accounts also demanded a significant amount of effort and time. The high-dollar value accounts took priority and had to go through a complex approval process, resulting in delays. To address this issue, Chevron Phillips sought an automation solution that would enable them to approve credit reviews easily via email, streamlining the process and saving time. Additionally, they were concerned that the low-dollar value and low-risk credit profiles could potentially turn into unexpected credit risks. To mitigate this, they realized the importance of an automated periodic credit review for all low-risk customer profiles. This way, they could gain better visibility into the overall credit risk exposure of their business.
• Absence Of A Centralized Repository for Customer Data Restricting Real-Time Accessibility Every analyst relied on their data reserve to work through customer profiles. Hence, examining customer-specific data was challenging as it often involved manually seeking out every nook and corner of the database within the ERP. Moreover, the manually updated customer master data was susceptible to inconsistencies and human errors. Even a marginal error in the customer’s credit data could result in adverse outcomes due to unassessed risk, thus adding trouble to the credit process.
• Credit Reviews For Customers With Joint Venture Setups Stirred Up Confusion For Analysts With Chevron Phillips’ constant business association with Joint Venture Holding Companies, the Credit Team had trouble figuring out how the credit limit assigned to the customer split across their ventures. Besides that, the credit scoring for every individual venture was challenging.

How Did HighRadius Help?

• Chevron Phillips Prioritized Credit Management To Impact Their Topline While automating accounts receivable, a critical focus area for most manufacturing companies is collecting and processing payments. Having already secured a 90%+ collections rate alongside a low Days Sales Outstanding (DSO) with HighRadius solutions, Chevron Phillips now wanted to mitigate their credit risk exposure in an attempt to impact their topline. Hence, they had been contemplating ways to secure proactive credit management, which seamlessly aligned with their sales growth targets. Chevron Phillips figured HighRadius Credit Risk Management Software was the perfect fit for streamlining its credit management process.
• Achieving 61% Faster Customer Onboarding With Online Credit Application The multi-language online credit application helped retrieve all necessary data, such as tax exemption certificates, business details, and trade references while fast-tracking bank reference approvals. The online form also allowed specific fields to be marked as mandatory, which helped the credit team to capture complete and accurate customer information without much to and fro.
• Automated Approval Workflows Across Complex Stakeholder Hierarchies The Automated Approval workflow allowed the credit team to frame workflows based on credit policies. For instance, credit reviews of high-dollar value customers could be automated to follow a hierarchy in the department while enabling the upper management to approve/reject the reviews with just a single click, and that of low-risk customers be auto-approved.
• A 360-Degree View Across All Customer Portfolios Provided Seamless Visibility Across The Credit Department The Credit Decision History offered a consolidated view of all interactions and credit decisions taken for a customer. The credit solution served as a comprehensive source of truth for all customer-related data, thus eliminating inconsistencies and manual errors. Real-time visibility into any negative payment trends, macroeconomic fluctuations, and dip in credit rating helped Chevron Phillips eliminate credit risks.
• Customer Hierarchy Helped Simplify Credit Review Across Customers With Joint Venture Set Up Customized Customer Hierarchy enabled by the HighRadius solution helped the analysts maintain and analyze all credit-related data of complex parent-child scenarios for the joint venture holding companies, thus eliminating the primary challenge. The Credit team effortlessly gained visibility over the hierarchical and individual credit limits and exposure across all divisions. The solution further lets them set up and modify these hierarchical frameworks straight through the User Interface.