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Balancing Act

A few years ago, a good friend of mine who worked in the automotive aftermarket industry lost his job as a credit manager as a direct result of his management of bad debt losses and DSO.  More specifically, he was fired because, under his guidance, the credit department had not written off any bad debts for three years.  Sales had complained that the credit decisions being made were far too conservative and way too risk averse.  The company’s senior management eventually looked at the information about losses and concluded that sales management was correct.

Credit decision-making is a balancing act with unexpected and unbudgeted losses on one side and lost sales and lost profits from overly conservative credit risk management decisions on the other side.

Is it common that a credit manager loses their job because they are too risk averse?  I think it is more likely that the opposite is true meaning that credit professionals lose their jobs because they accept too much risk resulting in higher DSO or higher bad debt write offs.

Michael Dennis, MBA, CBF, LCM

However, the fact that my friend was fired is a good reminder that credit professionals are expected to manage credit risk according to their employer’s expectations.  They are not expected or required to eliminate the risk of slow payment or nonpayment.  What do you think?

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

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4 Responses to “A Balancing Act – Michael Dennis, CBF”

  1. Chris Nordlund says:

    Dennis, I agree with the balancing act theme. The CFO and the Credit manager should agree to certain realistic benchmarks for Revenues, Profits, Collections, DSO, Bad Debt, DDO, Credit Risk Exposure, etc. that align themselves with the company’s goals and implement the reporting tools to communicate regularly. The appetite for risk can frequently change, and the Credit Manager should not find themselves out on a island whether that appetite has increased or decreased. Understand your customer portfoilo and identify potential risks or opportunities. Engage and find methods where the Sales Team are an integral part of the credit risk process initially and monitoring risk. Understand potential operations roadblocks and re-engineer the process to alleviate customer disatisfaction and align themselves with good credit risk management. Be prepared. Avoid surprises.

  2. Margaret Spencer says:

    This balancing act is difficult. There were plenty of times when you and I disagreed Michael about credit limits and credit risk.

    As Chris noted, to do it well this process requires a great deal of discussion and time and effort to ensure that the amount of risk being taken is appropriate from the company’s point of view.

  3. Adam Gussen says:

    Vey often the most powerful tool a credit manager can have for achieving that balance is Credit Inurance. Having a partner in risk helps the credit manger greatly.

  4. Michael Dennis says:

    Thanks Adam. In addition to sharing the risk, as many of you know credit insurance carriers can often provide feedback that helps credit professionals to reduce risk on accounts not covered by insurance. For example, if you request $1 million in insurance coverage for a customer and get only $25,000 it should tell you something valuable about how the insurance carrier views the risk associated with extending credit to that customer.

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