Credit management is an important business function in any organization. Credit management, also called credit control, consists of multiple techniques to ensure that buyers pay on time, credit costs are kept low, and past-dues are recovered without damaging the relationship with customers.
Credit risk management should be seen as one of the unheralded drivers of B2B success and as a fundamental aspect of revenue enhancement and risk containment. Poor credit policies, lax credit terms, inefficient credit reviews, and broken correspondence chains are common potholes on the road to shorter collection cycles, reduced financial risk, and improved cash flows. Businesses spend precious time and resources reducing liquidity risk exposure and ensuring smooth cash flow. This effort is distracting and time-consuming, and companies need to look at smarter mechanisms for improving credit risk management, not just for better financial yields but also to facilitate compliance with corporate governance rules.
To firmly establish a credit risk management culture, forward-looking companies are increasingly seeking help from new technology, and their weapon of choice is automated credit risk management delivered via workflows. Credit management workflows enforce credit policy while providing adequate support for increasing top-line business growth. They eliminate the convoluted process and time-consuming work of credit decisionmaking, drastically slash response times, and improve compliance while reducing related overhead costs. This e-book explores the essential elements for modeling and executing credit management workflows and the five most significant workflows that help organizations leverage credit operations as a strategic function to drive liquidity while maintaining optimum business risk level.
Essentials for Modeling a Workflow
Credit management workflows facilitate automation of the process flows relating to credit data and decisions associated with them. By automating parts of the business process of extending credit to a customer, credit workflows reduce the risk of error, standardize a set of consistent practices, and enable tremendous improvements in the flow of information.
There are five essential elements that go into the modeling of an optimized credit management workflow:
- Origination: Every workflow has an origination point – an execution condition or a work function (also called a task/atomic workflow) that is necessary for the workflow to be initiated. It is used to specify if and when a given workflow should be executed. For instance, for a credit management workflow, an origination point could be a new sales order, a blocked order, a periodic review notice or a new credit limit request by an existing customer. When the origination point is triggered, the workflow is set into action and the subsequent workflow instances are executed, contingent on their respective constraints and requirements being met.
- Information: Every workflow operates on a set of data or information (documents, forms, tables et al.) to be processed and transferred from one workflow instance to another. The information component assigns input and output parameters to single tasks and, hence, covers data dependencies between them. For example, when a buyer submits a new credit application, the information that is essential to carry out the next step of assessing that application is the application form with all of the relevant buyer information. Backup data and decision inputs (credit reports from rating agencies, credit bureau and trade groups, public financials, income statements, balance sheets, key financial ratios, and insurance details) to assess applications and for periodic reviews and inter-departmental correspondence for information and approval/denial of credit decisions are a few of the other information components of a workflow.Individual tasks can only be plugged together if the output of previous step is a mandatory input to the next step. This form of data dependencies is called data flow and is an important functionality to guide and control the flow of logical units of work associated with a business process.
- Operations: This component describes the elementary operations performed by resources using the workflow. All credit management workflows require a certain set of actions to be performed at specific stages of the process. These operations could be to create, review, modify, or approve the information component that flows as an input of the given step. Assessing the credit application form details, reviewing external credit reports of the buyer, assigning a credit limit, initiating inter-departmental correspondence, approving/denying a decision, and modifying pre-assigned credit limits of buyers are a few of the operations associated with a credit management workflow.
- Workflow Efficacy: Underlying improvements in the credit operations design and the empowerment of credit teams with structured workflows could drastically improve the accuracy of credit decisions made by the team. A credit workflow contributes to accurate and reliable credit decision making by enabling faster and easier procurement of rich input data from multiple sources and a platform that facilitates real-time collaboration between different functional units and respective stakeholders with less effort. This translates into process improvement at multiple levels which is reflected in improved KPIs and business metrics such as DSO, percentage bad debt write-offs, cash conversion cycles, and accounts receivable turnover.
- Workflow Efficiency: Implementing accurate credit decisions is not the sole objective of the credit department. The timeliness of these decisions is an equal contributor to successful credit operations. By reducing the time between credit request and decision, a business and its customer both come out ahead. Companies stuck in outdated operations may eventually arrive at the correct credit decision, but it’s often too late to use that information optimally. For example, not leveraging cross-sell opportunities at the time of sale because the final credit decision is rendered later in the process is a direct dollar loss from the bottom line. Efficiency and expediency lie at the core of credit management workflows. They improve process efficiency and provide a framework that enables fast, accurate credit decisions based on dependable, up-to-the-minute information.
Five Must-Have Credit Management Workflows
As part of their daily routine, the credit analysts need to execute various tasks. These include reviewing the credit-worthiness of business partners, deciding credit limits assigned to the business partner, verifying credit-blocked orders, and so on. Most of these scenarios are repetitive and comprised of a similar set of tasks. These tasks involve different members of the credit team – including the analyst, supervisor, manager, director, and treasurer. Workflows are generally designed while keeping in mind the delegation of authority on the credit limit assigned to customers.
Workflows automate a majority of these repetitive tasks and divide them among different users so that everyone can concentrate on a particular area. They bring transparency and proactivity to credit risk management. While organizations add industry and company-specific workflows for credit management, there are five workflows that are globally recognized by credit and A/R professionals as must-haves for any organization working towards an optimized credit management system.
2.1 New Credit Application Workflow
The Credit Application Workflow manages the process flow of capturing buyer credit application data, gathering and analyzing their credit data, and making and implementing credit decisions. The workflow encompasses the following sub-processes:
- Receive the credit request – The point of origin for this workflow is the generation of the credit request by the buyer through the submission of a credit application. The workflow captures the data provided by the buyer for analysis and processing of the request to extend credit lines.
- Gather analysis data – For credit analysis of a customer, multiple data points are required. The analysts log into external credit rating agency websites and pull credit reports. These reports contain data including risk scores, average days in arrear, and so on based on the independent evaluation of the agency for business-to-business customers. The workflow initiates correspondence with internal business teams and buyer references to validate information and pulls credit reports, public financials, bank guarantees, income statements, and insurance details. This information is collected, scanned, indexed, and processed through subsequent validation checks.
- Calculate credit score and assign credit limit – The workflow calls the scoring engine and calculates a credit score based on the automation rules defined as per the credit policy and a credit limit is arrived at. If no credit scoring model exists or if a scoring model exists but data points are missing, then the workflow routes this function to a credit analyst to assign an appropriate credit limit to the buyer.
- Initiate approval process – All credit decisions need approval from the concerned authority at the right stage. The workflow notifies the designated authority of the recommendations submitted by the credit analyst after performing the credit analysis or those generated by the automation engine based on pre-defined rules, along with all of the supporting documents needed to accurately decide whether to grant or deny credit to the buyer.
- Notify all stakeholders – The workflow sends notifications to interested parties when a recommendation is approved or rejected. The credit analyst is notified of the decision to update customer status in the system (business partner/customer master) and complete the onboarding process. An appropriate notification can also be sent to the buyer regarding their application status.
The customer onboarding process involves an exchange of sensitive information back and forth between the customers and credit department. The process is prone to breakdowns due to correspondence issues such as lost documents, missing information, missed out emails and phone calls, misinterpreted details, management sign-off, and much more. This results in dissatisfied customers and undue delays in application review. The turnaround time of customer credit review can make the difference between closing and losing the deal. At the same time, accurate decisions cannot be a trade-off for faster review. Due time and diligence need to be invested in analyzing the applications and conducting thorough background validation.
The objective of the credit application workflow is to eliminate the convoluted process and time-consuming work of onboarding new customers, accelerate the approval of new customers, and improve compliance while reducing related overhead costs. One way that companies could differentiate themselves is by adopting tools like online credit application, standardized credit scoring rules, and e-signatures. The old days of turning in paper applications and then waiting for mail or a phone call to arrive with the decision of whether credit would be offered or not are gone. E-processing simplifies things for creditors and customers while reducing the amount of paperwork customers are responsible for, attracting more applicants overall.
2.2 Blocked Order Workflow
An order amount exceeding the discretionary credit limit of the customer is one of the most common reasons for a trade order getting blocked and not released to fulfillment. The blocked order workflow manages the process flow of resolving blocked orders by expediting due checks, approvals, and collaboration involved in the following sub-processes:
- Notify the credit department and the customer – When an order exceeding the assigned credit limit of the customer is placed, it is blocked to prevent its release to fulfillment. The workflow automatically notifies the credit analyst and also sends automated correspondence to the customer to give them an update on their order status.
- Analyze blocked order case – The credit analyst needs to analyze the case for the appropriate blocked order resolution strategy. Based on the customer portfolio and their payment history, the analyst could manually release the order by creating an exception or revise the credit limit of the customer by performing an ad-hoc credit review. The required approvals and information exchange with other business teams for this process are facilitated by the workflow.
The case could be assigned to the collections team to recover payment for previous orders and free up the credit limit. The workflow initiates automated correspondence with the right stakeholders along with all of the backup data (past orders, payments, and other order attributes) for an easier and faster payment recovery.
- Resolve blocked order – Based on the outcome of the previous process, the credit data of the customer is revised in the system, and the workflow automatically updates the order management system to release the order to fulfillment.
One of the major challenges that the team faces in speeding the resolution of blocked order cases is the time lag in getting information from the order management system. In the absence of real-time information flowing in from the system, the credit department is in a constant race against time in processing and reviewing these orders. What adds to the complexity of the situation is the lack of backup data and order statuses at the analyst’s disposal. Customer experience also takes a hit when the customer calls to get an update and customer service agents need to cherry pick order statuses from all of the different systems to give a straight answer.
Blocked order workflows eliminate the time lag in information relay between departments. Expeditious order release is facilitated through a one-stop shop for all of the analysis data and electronic collaboration for approvals and e-signatures. The best performing companies are also able to enhance post-sale experiences by providing customer service representatives with the tools to effortlessly locate past orders, payments, and items based on any given order attribute – all with a few clicks.
2.3 External Events Workflow
Events such as bankruptcy, rating downgrades, and financial results could adversely impact a customer’s ability to honor commitments WRT open A/R. This is where credit departments conduct periodic credit reviews and stay on top of critical accounts to reduce credit risk exposure. One of the ways to do that is to integrate a workflow to credit bureaus such as D&B, Experian, Coface, or Euler Hermes to fetch data and proactively conduct credit checks to revise credit limits or collect on past-dues. The external events workflow is triggered whenever a customer gets any agency monitoring update and manages the process flow for updating the credit data in the system for optimum credit risk levels.
- Capture agency monitoring data – The workflow captures real-time data from credit agency rating downgrades and the public financial results of companies and keeps a constant track of changes in the credit data of your customers.
- Alert credit analyst – The credit analyst assigned to that account is alerted to the event, and the credit data is collected, indexed, and made research ready. The analyst performs validation checks and analysis of the data to arrive at the recommended actions to be taken for that account.
- Initiate approval process – The workflow notifies the designated authority of the recommendations submitted by the credit analyst after performing the credit analysis or that generated by the automation engine based on pre-defined rules, along with all of the supporting documents for approval.
- Update customer credit data – Based on the decision of the sign-off authority, the workflow could edit customer credentials in the system such as the agency rating, key financial information, and risk class or calculate the credit score and assign the updated credit limit.
Access to real-time customer credit information from credit monitoring services is non-negotiable for efficient risk management in any business. The sheer amount of time and manual effort required in this process proves to be a big deterrent for companies, especially when they have a large customer base spread across multiple regions. Failure to adopt a pro-active approach to managing risk exposure could prove to be fatal in the long term with the credit department extending credit lines to high-risk customers, thereby piling on bad debts.
The external events workflow eliminates the wastage of time and resources in tracking customer credit data, provides up-to-the-minute information of changes in customer financials through multiple sources, and facilitates timely course correction through faster decisionmaking and approval. It is an efficient, error-free, and cost-effective way of maintaining optimum risk levels with minimal manual intervention.
2.4 Periodic Credit Review Workflow
One-time assignment of credit limit at the time of customer onboarding with no periodic review is a sure-fire way to a doomed credit management system. Businesses need to conduct periodic reviews of the credit limits assigned to their customers so as to ensure that appropriate credit terms are extended, and you are doing business at the optimum risk exposure level. The periodic review workflow automatically identifies accounts for review and places them on the analyst’s worklist. It manages the process flow of assessing the customer portfolio on multiple parameters, realigning the customer credit portfolio while reducing overhead costs.
- Analyze payment trends – One of the most important factors when assessing of the credit limits of your customers is their payment trends. The workflow allows users to analyze the payment behavior of customers based on multiple parameters such as average days to payment, past due date, payment terms, open item values, average sales of previous months, and average arrear details. These data points give meaningful insights for determining accurate credit limits and risk category at the account level.
- Check collateral expiry – The workflow checks for expired or expiring collateral such as bank guarantees, securities, and insurance documents. by comparing the expiry date with the current date and alerts the analyst if the request for valid collateral needs to be raised for any accounts. Subsequent work processes get triggered as explained in the Collateral Expiry Workflow section below.
- Check credit data – The workflows reference data from credit reports, public financials, bank guarantees, income statements, and insurance details. This information is collected, scanned, indexed, and processed through subsequent validation checks.
- Recalculate credit score and reassign credit limit – The workflow recalculates the credit score based on the aforementioned data points, and the credit limit is realigned.
- Initiate approval process – The workflow notifies the designated authority of the recommendations submitted by the credit analyst after performing the analysis along with all the supporting documents for accurate decision making to modify the credit limit, if at all. Accordingly, the account is updated in the system to reflect the relevant credit limit, risk category, new review date, interest indicator, and hard block parameters
Organizations still stuck with outdated systems for credit management fail to implement a culture that supports regular and accurate reviews of customer credit profiles. The process requires collaboration with external agencies for credit information and internal business teams for customer data, approvals, and sign-offs. In the absence of a framework that facilitates an easy process flow, businesses are unable to lower risk exposure without bearing the cost of establishing a separate system for it.
Workflows simplify the convoluted process of performing periodic reviews and accelerate the process through tighter integration with other business units while improving compliance through a taut audit trail. Top performing businesses strategize their periodic reviews by segmenting their customer base based on business size, risk category, payment behavior, or other relevant parameters and determine the frequency of review for each group accordingly. This helps them prioritize high-risk or high-value customers who require a more frequent credit review while at the same time managing to touch base with all business partners at regular intervals without any segment falling through the cracks.
2.5 Collateral Expiry Workflow
In order to issue credit profitably to businesses, creditors need to be confident that loans will be repaid in a timely fashion, in accordance with credit covenants. Customers submit guarantees that often provide for a specific remedy to the creditor if the debtor turns delinquent and does not return his debt. Credit guarantees are very helpful to avoid the fear of non-payment. The fact that default leads to forfeiture of the collateral reduces the chances of risky behavior or fraud. However, this guarantee does nothing if it has expired. Therefore, credit teams need to stay on top of the validity of guarantees submitted by customers. The collateral expiry workflow identifies securities that have expired for a partner and puts the partner in the corresponding user’s worklist. This workflow also recalculates the approved credit limit value by considering valid securities and triggers Credit Review workflow if needed. The following workflows are performed as part of this workflow:
- Alert credit analyst – The credit analyst assigned to that account gets notified of the collateral expiry for him to perform validation checks and initiate a request for fresh securities and guarantees such as letters of credit, credit insurance, mortgages, or bank guarantees.
- Request valid collateral – The workflow, at the analyst’s discretion, could initiate correspondence with the customer or third-party guarantors requesting guarantees or securities with updated validity tenures.
- Revise credit limit – Once the updated collateral is made available or in case of non-availability of required documents or documents with unfavorable security terms, the analyst could revise the credit limit of the customer and trigger the credit review workflow to recalculate the credit score and assign an appropriate credit limit.
One of the main challenges that make this workflow a must-have for any credit department is the inability of teams to manually track the validity statuses of multiple documents for each of their customers. As a result, companies either have to invest resources dedicated to this process or the system falls off the grid and faces high risk exposure. This workflow helps businesses implement a tight grip on customer guarantees, thereby ensuring that risky customer behavior does not dig a hole in their bottom line.
As a best practice, leading organizations adopt a more proactive approach in tracking collateral expirations by triggering this workflow before the guarantee or security expires. The workflow is initiated when the validity date is at least a week in advance of the current date, so the credit analyst is able to fetch renewed collateral before the eleventh hour.
As outlined above, credit management is the lifeblood of all businesses. The function continues to increase in importance within a company’s management hierarchy. More and more companies are making a value judgment by comparing the risk of non-payment (client insolvency) versus additional sales volume – an elusive balance that can be struck only through an efficient credit management system.
Not long ago, credit risk management was an excel spreadsheet in the CFO’s office. Technology has come a long way since then, but these legacy solutions tend to have outdated approaches to data management with manual processes for updating data, manual collaboration with internal and external business teams, and high IT support costs for deployment and installing periodic patches and updates.
Innovative new technology solutions extend the use of credit risk management across the enterprise through a cloud-based technology platform. Cloud-based solutions offer the benefits of reliability, mobility, and scalability while eliminating IT, data infrastructure, and upgrade costs. These solutions enable dynamic credit management workflows and process improvements that result in not only lower risk but improved response times, reduced costs, and better customer service.
Workflows bring transparency and proactivity to credit risk management. They can be deployed to streamline all business processes linked to credit management and help organizations deal with routine challenges in following ways:
- Faster customer on-boarding and reduced overhead
- Real-time access to critical credit data for accurate credit decision making
- Better transparency and accountability across all process hierarchies
- Limited financial impact from vagaries in customers’ financial situations
- Centralization of data across all business units and process levels
- Enterprise-wide implementation of standard credit policies
- Increased team productivity and efficiency by reduction of errors and re-work
- Improved customer experience along with strong support to top-line business growth
Modern technology gives B2B organizations a proven ability to reach their goals. Its effect is real, immediate, and increasingly indispensable for any business looking to not just survive but thrive in today’s competitive world.
For a real-world implementation of these workflows, check out this video by C.B. Ananthan, Manager, Global Credit and A/R Reporting at Air Products and Chemicals where he explains how his team automated credit operations for 125,000 customers.
HighRadius is a Fintech enterprise Software-as-a-Service (SaaS) company. The HighRadius™ Integrated Receivables platform optimizes cash flow through automation of receivables and payments processes across credit, collections, cash application, deductions, electronic billing and payment processing.
Powered by Rivana™ Artificial Intelligence Engine and Freda™ Virtual Assistant for Credit-to-Cash, HighRadius Integrated Receivables enables teams to leverage machine learning for accurate decision making and future outcomes. The radiusOne™ B2B payment network allows suppliers to digitally connect with buyers, closing the loop from supplier receivable processes to buyer payable processes.
HighRadius solutions have a proven track record of optimizing cash flow, reducing days sales outstanding (DSO) and bad debt, and increasing operational efficiency so that companies may achieve strong ROI in just a few months. To learn more, please visit www.highradius.com