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.
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.