Q1: Why do executives not act on my credit report?

Because the report is too busy. When the monthly pack lands with ageing, account-by-account detail, DSO history and customer lists, nothing specific jumps out, so the executive committee (ExCo) nods, notes it and nothing changes. The more accounts in the ledger, the worse this gets, and ledgers can run from a few thousand to well over 100 000 accounts.

What to do:

• Treat the front page like an advert on a billboard: it should speak to the reader without a word of explanation.
• Say what the risk is, what it is costing the business, and what decision the ExCo needs to make now.
• Move everything else to the back of the pack.

Q2: What decisions does the ExCo actually make from a credit report?

Four decisions sit behind every credit report. These are the decisions from the report the executive receives, not the bureau report.

The four decisions:

• Risk and cash: how much credit risk the business can carry given its cash flow, and where that risk should be invested. Cash flow decides how much risk you can afford.
• Provisions and write-offs: how much provision to make, on what, what must be written off and why.
• Limits and terms: large limits are usually a board decision. Terms must also be tested against margin.
• Intervention: stop supplying, change policy, or resource the credit department differently.

Q3: What should the front page of a credit report show?

Risk, cost and decision, in half a page. It must be quick, short and thoughtful, and it must carry the bad news first.

What to do:

• State the risk, for example overdue exposure and how it has risen over the last four months.
• Name the biggest customers that make up that risk. For example: two customers owe us 3.5 million of a 50 million ledger, which is 7% of total exposure.
• Show what it is costing the business, how it is being funded and how it affects cash flow.
• End with the decision needed, so the ExCo can ask whether they should visit the client with you, whether the client is strategic, or whether legal action is needed.

Q4: Which five numbers should be on the front page?

Five numbers, in the same order every month, and nothing more.

The five numbers:

• Exposure against limits: total exposure compared with the limits you have approved.
• Overdue exposure: the portion of the book that is overdue and how it affects cash flow.
• DSO against terms: your terms versus your actual DSO, and who is pushing DSO out (for example 65 days against 30 day terms).
• Concentration: the share of exposure held by your top customers. The 80/20 pattern is common and 90/10 does occur.
• Write-offs and provisions: what must be written off or provided for and the effect on the bottom line.

Q5: Why do I need trends and top exposures, not just a snapshot?

A snapshot shows where you are. A trend shows where you came from and where you are heading, which is what lets an executive act early.

What to do:

• Add a 12-month view of exposure by risk band, so movements are visible against your tolerance limit.
• List the top exposures with the decision needed, the owner and the date.
• Explain the reason where you know it, for example a rise in fuel prices hitting a logistics customer.
• Over time the ExCo will recognise a pattern and ask what you are doing to stop another account going bad.

Q6: How should I show risk, and when should I flag bad news?

Group exposure into low, medium, high and unknown, spend your words on the risky end, and flag bad news early, even if you might be wrong.

How to show it:

• Low risk: one line. The money is in the bank and no discussion is needed.
• Medium risk: highlight the one or two accounts that could become a problem.
• High risk: show the trend, where it came from, why it is a problem, and what must be done, by whom and by when.
• Unknown: find out why the customer is not paying, even if that means sending someone to visit, so the unknown becomes known.
• Phone your executive when you see a risk, not only at month end. Regular updates build the trust that makes the formal report land.

Q7: How do I turn credit metrics into a commercial story?

Attach a cash value and a consequence to every number. DSO becomes cash, and a write-off becomes the sales needed to replace it.

How to do it:

• Value of one DSO day: divide your sales by 30. The larger the ledger, the more each day is worth.
• Use it to show the effect if a customer does not pay: DSO rises, cash flow falls, the overdraft grows and funding costs go up.
• Write-offs: a 1 million write-off at a 5% margin needs about 20 million in sales to recover.
• Remember that late payment also carries a capital and interest cost.

Q8: What belongs at the back of the pack?

The detail that supports the front page: ageing, accounts by name, collection activity and call notes, queries and dispute blocks, and customer letter details.

What to do:

• Reference the annexure from the front page, for example: see annexure 5 for the full detail on this customer.
• Keep the front page clean so the ExCo can ask specific questions and you can point to the supporting evidence.

Q9: What should go to the ExCo and what should the credit team decide?

The ExCo should only see what only the ExCo can decide. Everything else is your job.

What to do:

• The credit team decides within the mandate set in the credit policy.
• Senior management approves elevated risk and higher limits.
• Executives decide on exceptions, overdues and high limits.
• Do not send them items you could already have resolved. If you do, they will start micromanaging and questioning individual debtors.

Q10: How do I know whether my report passes the test?

Check the first half page against these questions. If the answer to any is no, rework it.

The test:

• Does the first half page cover the risk, the cost and the decision?
• Are the same five numbers in the same order as last month?
• Is the 12-month trend shown against your tolerance limit?
• Is the bad news on the first half page, with values and owners?
• Is every number tied to a commercial consequence?
• Is the detail in the back, with nothing on page one that needs no decision?

Q11: How long should the report take, and what should I do next?

Once the format is set up, it should take under an hour each month, compared with days for a traditional board pack.

What to do:

• Pull the information, refresh the charts, find what has moved, write the half page and check the analysis.
• Rewrite the first half page of your last pack as risk, cost and decision.
• Take it to your CFO or financial manager, explain the new format and agree it with them.

Need more help?

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