7 Steps to Create a Top-Flight Credit Department

Editor’s Note: In this new feature, Thea Dudley uses her 30+ years of experience in LBM credit management to answer your credit and collection questions. Got a future mailbag question? Contact her at tdudley@bp.guardian.com

Dear Thea:

I am a one-person credit department who occasionally fills in at the counter, drives the forklift, and picks up the coffee and toilet paper refills. I take a lot of pride in my work, but sometimes feel like all I do is fight fires. How can I run my credit department as professionally as the big guys that run circles around me in people and resources?

–Wanting more in Wyoming

Dear Wanting,

Don’t beat yourself up! Bigger doesn’t necessarily mean better. I have seen some big credit departments that were super dysfunctional and some that were great. I also have seen small departments that looked like a one-armed paper hanger running around with his butt on fire and some that were amazing. So let go of the size issue.

The difference is the people. It always starts with the leader, whether it is just you or a team of 20. Then consider how the department is organized and managed, as well as which resources you cultivate and use. You don’t have to be the biggest department in the game; you just have to be the smartest.

With determination, planning, organization, and some serious will power, you can be on your way to a well oiled machine of a credit department. Here’s my seven-step program.

1. Take stock of your skill sets. What talents and expertise do you have within your department? Are they good negotiation skills? Analytical talents? Knowledge of lien law? List what you have to work with.
   
2. Create key performance indicators. What metrics will help you best track and manage your department? If you are only tracking the percentage of customers who are current, consider adding your actual days sales outstanding versus your best possible DSO. How quickly are credit applications turned around; are you tracking account file reviews? Consider keeping track of bad debt write offs as a percentage of sales.
   
3. Gather best practice information and benchmark it against yourself. Compare yourself with other credit departments? What would like to be doing that you currently don’t and why? For example, if you like another department’s proactive stance on customer account reviews and wonder how they manage to do it, ASK! Most credit professionals are proud of their programs and processes and have no issue having a conversation regarding them.
   
4. Surround yourself with a network of resources that work for you. Regardless of size, no one is an island, so don’t worry about not having all the answers or skills. Need to keep up on mechanics lien law in several states? Then seek out a lien service that you can partner with. Same with knowing a few construction litigation attorneys, check guarantee services, credit reporting services, asset search resources, and an ever expanding list of websites that provide information and resources.
   
5. Understand your directive. What does your company want the credit manager to do? How much risk is your company willing to take? And in what business segments? One more thing: Is everyone clear on the risk vs reward of the directive?
   
6. Organize and finalize your vision. It’s not” don’t lose money”. Your vision should sketch out the standards that you believe a top-flight credit management department should possess. Here are examples.
   • Collection calls on accounts begin at XXX day.
   • Account reviews for credit lines over XXX dollars get completed by XX date.
   • All other account reviews are completed by XX date.
   • Preset policies determine when an account goes to the “next step” in the collection process.
   • Similar policies declare when it’s time to file suit or place a lien or bond claim.
7. Implement. This step is hard. Breaking old habits and moving forward takes time and resolve. I equate the process to dealing with teenagers: It’s a slow painful process filled with angst, self doubt, ego, and a certain amount of attitude.

And lastly, don’t underestimate soft skills, aka people skills. It takes a lot of personality and love of the job to do it well and convince others the credit management and collections is the best place to be in the company. A credit department can make or break your company with its approach, attitude (or lack thereof) and ability to think outside do the box.
I don’t want to mislead you. This process will take time, but it is achievable. Depending on the company and department, it has taken me seven months to two years to get the team/department on the “grow or die” path with results and success.

Never lose sight of the motto that credit is a sales function. Once you do, you become an accountant (no offense to my accounting buddies … or my husband).