This e-book explains the five essential credit management workflows for every business to optimize credit operations for fast, accurate decisions based on dependable, up-to-the-minute information. The findings are based on responses from 271 companies to a very extensive questionnaire which gathered data on a number of areas related to credit management and business performance.
Credit management is an important business function in any organization. Credit management process, 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.
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:
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.
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:
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.
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:
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.
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.
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.
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.
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.
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:
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:
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 HighRadiusTM Integrated Receivables platform reduces cycle times in the order-to-cash process through automation of receivables and payments across credit, electronic billing and payment processing, cash application, deductions and collections.
Powered by the RivanaTM Artificial Intelligence Engine and FredaTM Virtual Assistant for order-to-cash teams, HighRadius enables organizations to leverage machine learning to predict future outcomes and automate routine labor-intensive tasks. The radiusOneTM 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
Integrated Receivables optimizes accounts receivable operations by combining all receivable and payment modules into a unified business process. The Integrated Receivables platform provides solutions for credit, collections, deductions, cash application, electronic billing, and payment processing – covering the entire gamut from credit-to-cash.
The HighRadiusTM Integrated Receivables platform stands out by enabling every credit and A/R operation to execute real-time from a unified platform with an end goal of lower DSO, reduced bad-debt, and faster dispute resolution while improving efficiency and accuracy for cash application, billing, and payment processing.
HighRadiusTM Integrated Receivables leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes. The Integrated Receivables platform also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier Accounts Receivable process to the buyer Accounts Payable process.
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HighRadius Credit Software automates the credit management process, enabling credit managers to make highly-accurate credit decisions 2X faster and enable faster customer onboarding with 4 primary components: configurable online credit application, customizable credit scoring engines, credit agency data aggregation engine, and collaborative credit management workflow. Along with that, there are a lot of key features that should definitely be explored some of which are online credit application, credit information aggregation, automated credit scoring & risk assessment, credit management workflows, approval workflows, and automated bank & trade reference checks. The result is faster customer onboarding, better internal collaboration, higher customer satisfaction, more targeted periodic reviews, and lower credit risk across the company’s customer portfolio.