Misalignment Between Credit and Sales Spells Trouble
Promoting Company-Wide Risk Awareness Reduces Internal Friction and Boosts AR Performance
For a small business owner or executive, navigating credit decisions can be challenging, especially when they clash with the goals of other stakeholders within the company. Situations often arise when the prudent action involves denying credit to a potential customer, imposing limits on existing accounts, or delaying the fulfillment of large orders until payment is received. Due to a lack of risk awareness and misaligned priorities these actions often perpetuate internal friction, which can sometimes overflow into the customer experience.
While prudent credit decisions are made to safeguard a company’s financial interests, they can sometimes be perceived negatively by sales representatives whose commissions may be impacted, or by procurement and production personnel who are driven by their own set of metrics and incentives. It's essential, however, for everybody to recognize that credit decisions also have broader implications across various aspects of company operations. In order for that to happen, everybody needs to be aligned in regard to sales and credit in general and the objectives of the order-to-cash process (O2C) in particular.
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The Consequences of Misalignment
When the credit function is not aligned with other stakeholders in the O2C process, several issues can arise, impacting the overall efficiency and effectiveness of the process. Wen that happens accounts receivable (AR) performance also tends to suffer. Here’s a rundown of the issues that arise from misalignment and a lack of risk awareness:
Delays Processing Orders: If credit approvals are slow or inconsistent, sales orders may be held up, resulting in frustrated customers, sales reps, and potentially lost revenue.
Increased Bad Debt: Inadequate credit checks can result in over extending credit to high-risk customers, leading to slow payments and ultimately bad debt write-offs.
Customer Dissatisfaction: For example, if credit limits are too restrictive or payment terms are unclear, customers may become frustrated and take their business elsewhere.
Inefficient Cash Flow Management: Delays in credit approvals or ineffective collection efforts can lead to an increase in DSO (Days Sales Outstanding), impacting working capital and liquidity.
Internal Friction: Sales teams often blame credit for lost opportunities due to overly strict credit policies, while at the same time credit may blame sales for demanding credit terms for high-risk customers that become bad debts.
Missed Opportunities for Cross-Selling or Up-selling: When credit insights indicate that a customer has a history of timely payments and low credit utilization, sales teams are often aware of the opportunity to offer additional products or services.
Compliance Risks: For example, if credit practices are not compliant with fair lending laws or data privacy regulations, it can result in legal penalties and reputational damage.
Difficulty in Forecasting and Planning: Without clear visibility into credit risk and collection trends, finance teams may struggle to make informed decisions and develop reliable forecasts, especially in regard to cash flow.
Ensuring alignment between the credit function and other stakeholders in the order-to-cash process is essential for minimizing risks, optimizing cash flow, enhancing customer satisfaction, and driving business growth. Alignment is more likely to be achieved when all parties understand the impact of credit risks and systemic failures in the O2C process.
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