New technologies allow unprecedented speed, productivity, and insight into the credit management process. However, many credit departments are still using traditional ways of processing credit. These traditional processes rely heavily on manual, paper-based tasks. The credit employee spends large amounts of time faxing, filing, following-up, emailing, aggregating data, analyzing data, etc. These tasks have significant costs in terms of resource use and opportunity costs.
Long Credit-to-Cash Cycle
The longer it takes to turn sales into cash the more funds a firm must borrow to maintain business operations. Manual tasks that mark the traditional credit management process slow down credit approval times and increase the Credit-to-Cash Cycle. As rising interest rates result in increased borrowing costs, firms will have to ensure they are getting their cash as quickly as possible to reduce the costs of carrying their receivables.
Assume Company ABC has $500 million in annual credit sales that occur linearly over the year, DSO of 60 days, and can borrow at the current prime annual rate of 4.25%. Under these assumptions, Company ABC has to finance roughly $83.3 million of receivables over 60 days. This results in interest costs of $590,278 for the 60 days and $3.5 million for the year.
Digital platforms eliminate manual tasks through process automation and digital workflows. Removing these bottlenecks from the process immediately reduces the Credit-to-Cash Cycle enabling more efficient working capital management.
Incorrect Credit Decisions from Lack of Standardized Scoring
Credit management ensures credit approval policies are in line with the risk appetite of the company. You cannot manage this risk well unless you measure it in a standardized manner. Lack of risk measurement or subjective credit scoring results in incorrect credit decisions. These incorrect decisions have costs.
The costs of incorrect credit decisions are lost revenue by refusing credit to customers who are credit worthy and credit defaults or bad debt from extending credit to customers who are not credit worthy.
Evaluation of risk through a digital platform ensures that each credit request is evaluated instantly and objectively based on all the data present. Standardized scoring through a digital platform removes subjectivity and places the data at your fingertips ensuring objective, risk-based credit decisions that result in less bad debt, lower DSO, and increased revenues.
Freed Working Capacity
The traditional credit management process is filled with tradeoffs between low and high value tasks. These tradeoffs often result in missed opportunities. For example, an employee may process a low-risk $20,000 credit request instead of applying a $2,000,000 check across multiple invoices.
These tradeoffs delay DSO and represent a suboptimal allocation of resources in a digital age. Digital platforms eliminate these tradeoffs by automating tasks and streamlining the credit management process.
When employees no longer have to fax, follow-up with customers, file papers, email, gather and aggregate information, manage documents, and analyze data they are freed up to focus on high-value tasks such as risk management, performing site visits, collections, dispute resolution, and complex cash application.