5 Biggest Credit Mistakes Part 5

Leaving Credit Decisions to Non-Credit Staff

Who should make Credit decisions?  

The answer seems obvious: the Credit Team should make Credit decisions.  

But should they make all Credit decisions?  Or are some decisions so important that they should be made by someone more senior than the Credit Manager?  During my career, there have been times when the company’s senior management and even the board of directors made the final call about whether to grant Credit, or not.  None of these people worked on the Credit Team.  So, what gives?  Well, all companies have some credit decisions made by staff who are not members of the credit team.  That is a fact of life and of business.  

The important thing to keep in mind is how and when decisions are made by these other people, and more importantly, how staff members are authorized to make the decisions that they make every day.  So how are credit decisions made within a company, how is the authority delegated and how are those delegations controlled to ensure that the right person or persons are making decisions in any given situation?  Establishing who is empowered to make decisions is a complicated issue, and companies, especially publicly traded companies, spend a lot of time ensuring that their delegated authorities and controls are functioning properly.  

For example, in the Spring of 2017, my wife and I sailed on a cruise ship into the Panama Canal.  It was wonderful, and I recommend the experience to anyone who is curious about seeing this engineering marvel.

During the day we spent in the canal, we were talking to a member of the ship’s crew, and he explained how the payment terms for passage into the canal worked.  Our ship paid a total of US $300,000 to enter the canal; not to sail all the way through, just to pass through the Gatun Locks and anchor in Gatun Lake for the day, then sail back out again.  We were also told that the payment terms were: 50% of the balance was due 30 days in advance and the remaining balance was due 24 hours in advance of sailing into the Canal.  If either of the payments was less than the expected amount or late, then the ship would not get to transit the Canal on the appointed day.  Does that mean that a member of the Credit Team has a chair in Canal Traffic Control to advise them in real-time?  I don’t think so.  Canal Traffic Control would be periodically advised, by their Credit Team, which ships were approved for transiting the Canal and which were not, based on the payments that had been received.  And the Traffic Control team would adjust instructions to allow passage accordingly, or not.

As we entered the waters around the entrance of the canal, we could see dozens of ships anchored and I wondered how many of those ships were waiting for payments to be processed.  It seemed clear to me that the Panama Canal Authority had their procedures and policy locked down tightly.  

So, if your company managed a canal how would you do? Would you be in sync, with locked-down procedures and policies? Would your influence as the Credit Team allow the procedure to flow smoothly and at the same time ensure that you were being paid?

Or would you have a long line of vessels with unpaid balances?

At your company, who decides whether to grant credit and release orders?  Are your procedures and policy locked down tightly?  How much credit can each member of the team approve on their own and when do they have to seek approval from someone more senior?  If you follow the company Credit Policy, most decisions will be made by the Credit team, with each member of the team making decisions according to their delegated authority. 

So, who makes the decision to grant Credit and to release orders?  

The Credit Team.  

How do you know?  

It says so in your Credit Policy and in your company’s delegation of authority.  

What is a delegated authority?  

It is your licence to make decisions and it is, or it should be, a part of your Credit Policy.  Essentially, a delegated authority comes from the top of the company and flows downward through your organization.  If it is written properly, it describes what each staff member can do on their own and it also describes when approval is required from someone with greater authority.  This authority will flow downward from the board of directors to the company’s executive, to senior management, and so on.  And sometimes, senior managers, executives or even the board of directors may have to make the final decision to about whether to grant Credit for an account or to approve the release of an order.  

I used to work for Shell Canada and for some of the credit limits we wanted to establish or to renew, we had to get approval from the board of directors at our parent company, Royal Dutch Shell. That meant our files were prepared with a recommendation at our office and passed upward for sign-off at the national, regional and global levels in the Downstream Credit group, then signed off by a Vice President, before being sent to the board of directors for their approval.  At one time in my career, I was the Country Credit Manager, but that doesn’t mean I made every decision about credit. I still had to rely on senior staff to manage some of our largest accounts.

Another thing that delegated authorities can help with is “what if” situations.  The delegated authority can clarify who does what and when.  Suppose you agree to release an order to a customer on the understanding that there will be a cheque waiting for pick up prior to unloading the product.  Now suppose that the product has been loaded on a truck, and shipped, and when the truck arrives, the cheque is not there.  What do you do?  Do you let the driver decide whether to unload or not?  I don’t think so.  If there is no payment, then you should insist that the order remain on the truck and be returned to your warehouse.

Pro Tip:  Expect a call from Sales when this happens, as they will have had a call from their customer.  Such calls frequently involve a high decibel level and some bad language.  Remember to be professional, hear them out and don’t interrupt or talk over them.  Calmly explain what occurred and what your position is.  At this point, expect more high decibel level responses and more bad language.  Remember, if you react badly, that will be a distraction from the real problem which is that the customer did not have their cheque ready when they said they would.  BTW, the high decibel level and the bad language are probably indications that Sales and the Customer know that you are doing the right thing and reflect their frustration with that situation. 

The delegation of authority also has implications for how you do business.  In the case of the “no show cheque”, if the order is going to be released and shipped, it really should be after payment is received and not before that.  The same thing is true for orders where the customer comes to your location to pick up.  Payment first, order release second.  What do you do about older releases when the account is past due?  How much can be released and when?  Your delegated authority will tell you if, and when, higher approval is required.

Pro Tip:  A new order for an account with a past due balance is a golden opportunity to use the new order as leverage to negotiate payment.  You have something the customer wants (another order) and they have something you want (the money to pay the balance that is past due).  These mutual “wants” are the basis for successful negotiations.  If you handle the situation correctly, (and I know you will) you will collect that past due balance.  For best results, you should let Sales know that you are using the new order as leverage.  That way, when the customer calls them, they will not be caught off guard and you can avoid some of the high decibel/bad language calls referred to earlier.

How do you know that staff are using their delegated authority properly and not exceeding their authority?  Good question.  

Most companies with delegated authorities also use controls, audits, tests, and sampling to ensure that staff act using only the authority that has been delegated to them.  They review a sample of new accounts to ensure that the credit limits fall within the authority of the person who signed off, approving the new account.  They do the same for account renewals and order releases.  

Who does these reviews?  

For junior Credit Staff, that can be the Credit Manager, who will tasked with doing monthly, quarterly and annual reviews and with keep documentation showing that they have performed these reviews.  Reviews can also be conducted by accounting staff or staff working for the Controller.  

How do they know which files to review?  

Most Enterprise systems, like SAP, JD Edwards and Oracle offer a suite of reports intended for this purpose.  These reports are produced on a monthly, quarterly or annual basis and then circulated to the responsible parties to be completed.  

How do you know who gets what report?  

It says so in your Credit Policy and the delegated authorities.  For larger companies, they have their own in-house audit teams who will also follow up, review and sample to ensure that authorities are being adhered to.  If the company is publicly traded there will be an external auditor who will also review, sample and test to ensure that decisions are complaint with policy and with delegated authority.

Pro Tip:  The Credit Policy and delegated authorities are the “rule books” that auditors both internal and external use to determine if staff and teams are compliant.  Try to write yours with out any “Audit Traps” (rules or requirements that are too difficult to ensure compliance).  What I mean is, make the requirements as reasonable as possible.  Once the “rules” have been accepted as policy, you must adhere to them.

Really, that is all there is to it.  Write a Credit Policy, then write delegated authorities, follow up with controls, reviews, tests and audits.  And if you do that, you will have policies and procedures that are locked down tightly.

So, who makes Credit decisions?  Look it up in your Credit Policy and your delegated authorities.

And if you are really stuck trying to figure out how to write a Credit Policy or delegations of authority, reach out to the Credit Institute of Canada; we can recommend some experienced Credit Managers to advise you. 

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