Efficient Credit & Collections Management: The Way to Optimize Your Working Capital Nathalie Nolf Consultant Crion Stefaan Ovaere Partner Intensum SAP Lounge, Brussels October 3-4, 2007
Optimizing Order-to-Cash Management How SAP FSCM supports the Order-to-Cash Process
Optimizing Order-to-Cash Management - Agenda I. Working capital Improving working capital Impact of managing accounts receivable II. Order-to-cash management Analyzing the process from order to cash How taking control of each phase of the CM process? How defining a well designed credit policy? Situation nowadays Ingredients of a well designed credit policy Optimization of credit risk management Credit worthiness assessment Automatic credit control Business process new & existing customers Order blocking & deblocking Centralize credit information Optimization of collections management Optimizing collection methods Efficient collections management Feedback. I. II Tool Reporting Automation
I. Working capital Accounts receivables
Improving working capital Critical for the organisation Management of working capital = measure of a company s health Financial management : treasury receivables payments Receivables management Lower DSO Decrease past due Reduce bad debt Mitigate corporate credit risk Improve sales productivity Increase cash flow
Impact of managing accounts receivables FACT You have a yearly turnover of million Euro ACTION You reduce your customers credit with 5 days RESULT You generate Euro additional working capital Optimize order-to-cash management
II. Order-to-cash management Analyzing process Control Defining credit policy
Analyzing the process from order to cash Order-to-cash process Prospect Invoice Due date Collection Payment Order Payment term Reminders/disputes Juridical collection Credit risk assessment Billing Cash Forecast Collections management Dispute management Reconciliation Each phase has an influence on the credit risk In order to reduce credit risk : take control over each phase by predefined solutions
How taking control of each phase? Defining the policy Implementing Efficient application Evaluation Setting up a well-designed credit & collection policy clear responsibilities (financial, commercial, ) operational rules Credit risk management : * credit approval * order blocking & deblocking Collections management : * defining pro-active collection strategies * dunning functionality * handling disputes
How taking control of each phase? Defining the policy Implementing Efficient application Evaluation Efficient application of policy by automation of ingredients (e.g. automate credit reviews) Evaluation of the policy reporting adjusting policy
Situation nowadays Credit operations have historically been highly inefficient Disparate systems and paper based processes Lack visibility to accurately measure performance No uniform implemented policy
How defining a well designed credit policy? Mission/vision Strategic goals Success factors Critical performance Objectives Actions Purpose (mission) Why should any business incur the costs of credit & collections? Goals Maximize sales, minimize risk, increase working capital, Key success factors (cfr. BSC) defining KPI (e.g. DSO : performance of payment) Performance monitoring & measurements Do the performance measurements compliment the purpose?
Ingredients of a well designed credit policy Optimization of credit risk management Optimization of collections management
Optimization of credit risk management On the pro-active side : credit worthiness assessment monitoring existing credit limits : automaticcredit control business process new & existing customers order blocking & deblocking centralize credit information
Credit worthiness assessment For each customer : Granting credit limit Need for information Sources File per customer Granting credit limits : external credit limit of the credit insurer internal credit limit calculation (basic advanced scoring model with weighted parameters) risk classes Need for information in order to fix a credit limit : financials : credit reports (key ratios, ) historic payment behaviour informal information sales people or visits negative signals (judgements, )
Credit worthiness assessment Granting credit limit Need for information Sources Sources External information Formal : financial information providers (D&B, Graydon, ), the customer, public institutions, Informal : e.g. credit circles Connection with external sources of information Internal information Formal : internal payment experiences Informal : sales people (checklist) Easy check of internal information
Automatic credit control Permanent monitoring of existing customers and early-warning-system Top accounts need to be analysed every quarter to ensure that the credit line is adequate Input : financial and non-financial information of internal and external sources Comparison of those information with the existing credit line : * no change * automatic change without any direct influence on the line and operations * automatic forwarding to the credit manager with recommandations for action
Business process new & existing customers Credit assessment processes : * business process new customers : order inquiry procure information create customer fix credit limit and term of payment * existing customers : order inquiry credit limit control - order within the credit limit determination of credit limit and term of payment automatic approval of the order - order exceeds credit limit order stop or human resources approval
Order blocking & deblocking Orders can be blocked due to credit limit exceeding, overdues, Release the order Human approval : Authority levels defined in the credit policy : action for CM, decision management, Other solutions defined in the credit policy Depending on the exceeding amount, overdue, customer (risk class, amount of turnover, )
Order blocking and deblocking Blocking and deblocking orders needs to happen fast in order to : improve operational efficiency alert the right person for action (e.g. alert sales person to collect delivery) alert the right person for fast decision speed information delivery increase customer satisfaction
Centralize credit information An efficient credit risk management needs a technological support : Need for checking credit limits online Visibility total exposure common customers (decentralised companies) Improve communication between financial and commercial people & facilitate collaboration Automate credit decisions Consistency in credit approval Credit reviews : a time consuming activity Efficient processing of customer data Incorporate third party data Provide credit ratings for other applications Using risk classes for the collection management in order to adjust collection strategies
Ingredients of credit policy Optimization of credit risk management Optimization of collections management
Optimizing collection methods Time consuming activity for the collector : Creating a collection work list Sending reminders Calling customers Preparing customer contacts Documenting customer contacts efficient working method and tool Using the right collection method is important : adapted to the culture and the country of the debtor defining the right actions with the right frequency adequate content of the reminders and call actions Strategically segment customers and apply different collection strategies for different risk classes of customers change of collection method according to risk class
Efficient collections management Efficient follow-up of overdues : pro-active collection of outstanding receivables improve productivity and collection effectiveness by automatically prioritize activities Efficient handling of disputes : Identify dispute valid solution invalid continue collection procedure Evaluating collection methods through reporting of collection effectiveness
Tool Reporting Automation
Reporting Vital for management to monitor risk exposure & track performance : credit risk warnings/alerts dispute cycle time top X customer analysis collection effectiveness Management needs ongoing feedback concerning : order blockings, overdues, aging, reminders, disputes, DSO, losses, Management reporting for decision support taking action on base of key information
Automation What in case an order is blocked? What in case a customer doesn t pay nevertheless he made a promise to pay? What if there is a complaint on the invoice : continue sending reminders? Exceptions Management by exceptions Need for automation processes & workflows need to be automated (e.g. credit assessment : automated credit application & decision processes) advantage : more time to concentrate on the exceptions No efficient credit and collection management without tool. FSCM provides a fully integrated solution.
Optimizing Order-to-Cash Management How SAP FSCM supports the Order-to-Cash Process
Live demo SAP FSCM Credit management Master data Update of credit management profile customers Automatic / manual calculation of credit score & risk class Local versus global management of credit limits Business process Creation of sales order Automatic credit limit check results in blocked sales order Analysis Analysis of credit exposure, DSO, aging list & credit limit history Comparison credit exposer, payment history and overdue volume per credit segment Release of blocked sales order Update of credit information & payment behaviour
Live demo SAP FSCM Credit management
Live demo SAP FSCM Credit management
Live demo SAP FSCM Credit management
Live demo SAP FSCM Credit management
Live demo SAP FSCM Credit management
Live demo SAP FSCM Credit management
Live demo SAP FSCM Collections management Master data Collection management strategy & collection segments Worklist generation Business process Worklist processing according to priorities Online analysis of payment issues Updating the customer contact history Creation of promise to pay Automatic clearing & update of worklist Worklist management & follow-up Reporting and analysis tools Effectiveness of collections management Analysis of customer contacts, resubmissions, dunning, promises to pay, etc.
Live demo SAP FSCM Collections management
Live demo SAP FSCM Collections management
Live demo SAP FSCM Collections management
Live demo SAP FSCM Collections management
Questions? Contact Info Nathalie Nolf Credit Management Consultant Crion www.crion.be nathalie.nolf@crion.be Stefaan Ovaere Partner Intensum www.intensum.com stova@intensum.com Michel Haesendonckx Solution Advisor for the Office of the CFO SAP Belgium Luxembourg michel.haesendonckx@sap.com