Virtually all modern management fads and theories have at least one common theme running through them: focus on the customer. We need to understand customers so we can increase their satisfaction and therefore keep their business, so that it keeps our business as well. In terms of credit approval process means that as well as reaching our financial credit targets we must also make our customers as happy as possible with our credit approval processes. This post discusses about the credit approval process in old and new business world with a hope that we have a better understanding and selection to set the credit approval process for the business. This should be one of a controller and CFO‘s [or small business owners] focus on thier roles to improve company’s financial performance.
Traditionally, the credit approval process is reactive; that is, a sales order arrives and the credit department evaluates credit worthiness of the customer. The credit process can be classified in three phases:
- Assessing quantum of and collecting information about the customer
- Evaluating the information
- Deciding credit worthiness of the customer
Credit approval decisions encompass trade credit, consumer credit or equipment financing. The time and expense involved in credit decisions depends on:
- Whether the customer is new or established
- Availability of current information
- Whether an order is above or below the credit limit
- Algorithms applied to evaluate the credit worthiness of the customer
- Other factors deemed important by the credit manager
This approach has worked fairly well in established traditional commerce. However, in the new e-environment, this approach can be costly, delay credit approval and cause inconsistency in decision-making, and result in lost sales or un-collectibles.
Now, incoming orders are automated, 24/7 and customers are geographically scattered. This environment forces corporations to respond to routine and non-routine credit approvals in real time. The traditional credit approval process may become a bottleneck in the revenue-generation process, since alternate suppliers are only a click away.
Historically, corporations have attempted a variety of techniques to accelerate the credit approval process; for example, reengineering, automation and artificial intelligence techniques. Internet resources provide other options to manage the credit approval process. Internet-based resources and services can be used to collect information on the customer, can provide standard and customized decision mechanisms, or can be used to automate the entire credit approval process.
The Internet has numerous resources to collect general information regarding new or prospective customers. The illustrative list of resources is provided below in section (A-I):
The resources listed provide the following types of information:
- Financials, standard filings (such as 10-K, 10-Q and S-8 for U.S. users)
- Address of the company, incorporation information, product lines and top management information
- Current and historical stock quotes and movements
- News and current events such as mergers, acquisitions, new products and new personnel
- Industry and sector news
These services provide a good starting point in the credit approval process. Costs vary based on the brand name of the service, depth of the information desired and extent of the required information. However, information concerning small businesses or international businesses can be hard to obtain.
Specific information regarding the customer can also be obtained using the resources listed in (A-II). These Web-based companies collect information from various sources and compile a comprehensive information portfolio. Available information is as follows:
- Name, address and contact information
- History of the business
- Financials, financial summary, key financial indicators and graphics
- Credit lines
- Credit score based on proprietary models
- Telephone, fax and Web address
- Names and information of the top managers
- Lines of business, product lines and Standard Industry Codes (SIC)
- Public filings concerning tax liens, judgments and liens, and UCC filin
- Country risk analysis
The information provided is quite comprehensive and, according to vendors, updated constantly. These services are cost effective even for ad-hoc queries and accessible by a browser; search and retrieval of this information is available in real time. For example: prices can vary from $X per query to thousands of dollars for an annual contract. Information on small businesses, privately held businesses and international businesses is also available.
The disadvantages of these services are difficulty in verifying accuracy and integrity of the information, continuing need for cost-benefit analysis and stability of the service.
Internet-based services also provide tools to aggregate the information to derive credit rankings. Illustrative sites that provide these tools are shown in the above list in section (B). The risk assessment tools use proprietary algorithms but also allow customization based on criteria specified by the customer. For example: a vendor can tailor the program to a specific company’s needs, design rules and criteria based on that company’s input, offer standardized decision engines, interpret results and push the results to the credit manager’s desktop.
The decision engines employ a variety of algorithms; for example: advanced statistical methods, expert systems and artificial intelligence techniques. The users need not understand technical intricacies of the program, but should have a general understanding of the strengths and weaknesses of various algorithms. The outputs of the system can include: a credit risk score, comparison of risk level of the business with other businesses, background information regarding the business and other items specified by the user. These services can be tailored to small businesses, international businesses or large businesses.
The primary advantages of these decision tools are: minimized manual intervention, reduced cycle time for decisions, consistency in credit policy enforcement and reduced operating costs. However, the tool needs to be chosen carefully, and there are upfront and recurring costs, such as software and hardware investment, programming and validating the tool, continuing maintenance or monthly payments to Web-based services.
Web-enabled Credit Approval Process
The traditional, off-line credit grantors will benefit from the resources listed so far. However, in the case of Web orders, the credit decision must be delivered in minutes or seconds. This calls for automation of the entire credit approval process. The credit approval decision can be completed in a matter of minutes. Web-based services that provide such support are listed in section 10 (C). The process flow can be described as follows:
- Business installs the automated credit decisioning system. The system needs to be integrated with a legacy accounting or ERP system, connected with approved credit bureaus, able to access designated public information sources and be embedded with the required decision expertise.
- Customer information is forwarded to the credit system once the sales order arrives. The credit system pools data from the accounting system, credit bureaus and public information sources.
- The collected information is filtered through the decision engine to arrive at a credit score and the consequent decision. The decision engine is provided by the vendor and is generally customized by the business.
- If the decision is yes, then the system can generate the necessary documentation or can forward the decision to the approved personnel or machine.
- Exceptions are handled on basis of the rules programmed in the system.
The costs and successes of such services are based on a variety of factors, i.e.:
- transaction volume
- difficulty in integrating a credit system with accounting systems
- types and number of credit bureaus used
- intangible costs, such as process redesign or reengineering, and resistance from the credit personnel, among other things
Friendly Precaution Of Web-enables Credit Approval
A number of factors should be considered before using the Internet. An illustrative list follows:
- The speed with which credit needs to be approved.
- The frequency of routine vs. non-routine (such as exceptions, high-dollar value items or risky customers) credit approval decisions. The higher the frequency of non-routine decisions, the lesser the use of the credit approval system.
- Accuracy and integrity of the information available on the vendor’s Web site.
- The decision tool should be evaluated for accuracy, customization capabilities, expertise and training required for using the tool, updating routines and data import/export capabilities.
- Ability of the automated service to integrate with existing legacy or ERP systems.
- Relative costs involved in in-house vs. outsourced credit approval decision. For example, costs saved — such as redeployment of credit personnel, no investment in software and hardware, no recurring maintenance expense; against costs incurred — such as lost expertise, treatment of exceptional cases, monthly payments, cost of dedicated connections and stability of the service provider.
Web-enabled Credit Approval Case Study:
Gateway Corporation builds and sells computers to consumers and businesses. The computers can be built to the customer’s or business’ specification. Gateway’s business is based on high volumes and low margins. In 1997, Gateway financed $377 million; about 20% of Gateway’s customers used installment-type financing, and 60%-70% used credit cards. Gateway benefits if the customers move from credit cards to financing, because Gateway saves the upfront fee (average 1.85%) on the credit cards and earns about 4.5% on the financing side.
These percentages make a great difference in a low-margin business. Gateway installed an online credit system to streamline its credit approval and financing processes in 1997. Gateway used the system to check online credit and offer individuals and small businesses financing by partnering with multiple finance partners. Mark Scoular, director of business development in Gateway’s financial services division, indicated that a loan application can be processed in 15 seconds, and completing the paperwork is much faster. He added that reviewing loan applications is a fully automated process and two people oversaw loan applications worth more than $4 billion, out of which $2 billion were financed. The percentage of customers availing of the financing option had gone up considerably. Gateway was also able to generate new revenue streams such as loan origination, develop customer profile information for CRM, and use its financing arm for some of the financing deals.
Gateway’s financing program later faced some difficulties. It goes to show that any automated or Web-based method can only be as intelligent as the programmers who program it.
Cisco is a giant company that sells Internet networking products. Cisco also used online credit approval software. The experience for Cisco was positive. However, Cisco faced the following problems:
- Interfacing of the online credit approval software with the ERP system (Oracle) was time consuming. Development time, estimated by Cisco, was approximately 60 days.
- Cisco had an automated credit application process. However, only 25% of applications came back electronically; the rest were mailed or faxed. These non-electronic applications had to be manually keyed, delaying the credit decision.
- Cisco leases a lot of its equipment. Leasing business rules are different, and Cisco had to develop a separate interface for its leasing activities. Cisco used an outside firm to develop an e-lease product.
The Internet has opened new ways to approach credit approvals. The Internet-based resources can speed up the credit approval process and support various degrees of automation. Various levels of services are offered by such Internet-based companies. Acquiring information about the customers from proprietary and public databases, feeding customer information into decision tools available on the Web or customizing the entire credit approval process; whatever the requirement, the Internet can be profitably leveraged to improve the credit approval process.
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