Credit 2010
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It was January 1, 2010 somewhere in Europe..

Having just enjoyed spending New Year’s Eve with friends at a coastal hotel, Ron Wells (International Credit Manager at large) decided to take an early breakfast alone.  As he nursed a particularly good cappuccino, he gazed at the scenic view presented through the huge dining room window, and contemplated the changes that his career had witnessed over the past 10 years.

How naive he had been when trying to predict the role of an International Credit Manager at that fondly remembered Workshop in Rome, all those years ago…



Ironically the role of the International Credit Manager had not changed markedly but the structure and activities of the job had changed beyond recognition.

In January 2010, Ron still found his job challenging in the same three respects:

Asset Management (ROCE):

Minimise the Receivables Balance.
Maximise Cash Flow received.

Costs (Profit):

Minimise Bad Debts written off.
Minimise Cost of Capital.

Sales / Turnover (Profit):

Match the Competition.
Provide a Competitive Edge.
Expand the Market.

Yes Total Stockholder Return was still the driving force in business – so much for the fabled "Third Way" which politicians and economists had searched for in vain since the late 90’s – like the Arthurian knights searched for the Holy Grail.

Still if only he had not been so complacent about the future back at the turn of the century. Then all the talk was of the promise of the new millennium and the pace of change was accelerating almost daily. In 2000 the real and the virtual worlds seemed to be merging and (with hindsight) several ‘straws in the wind’ gave clear indications as to the future direction of Credit Management.

What was it the Credit Research Foundation had quoted in its 1997 report?

"You can either be the sculptor or the stone". 1

How apt…



The "straws in the wind" in early 2000 namely;

Credit Derivatives and
the Internet

created opportunities which progressive Credit Managers exploited, while the ‘me-to’ Managers were left several steps behind struggling to catch-up, or were ‘terminated’ mercilessly by ambitious Treasurers.

In 2010 Ron considers himself an "Asset & Risk Manager specialised in Receivables".

Ten years ago Credit Managers were being tasked with management of "the seamless order to cash process". Receivables Accounting was being merged with Credit Analysis and Control. It was thought that this was a way to broaden the role of Credit, an opportunity for the Credit Manager to add more value.2   However that approach was merely a step along the way and "the seamless order to cash process" was outsourced around 2003. The specialist firm which took over the process offered an amazing price - based on economies of scale and optimum use of technology - consequently the VP Finance could not find a good enough reason to retain this non-core activity in-house.




Management Reporting
Accounts Receivable
Legal / Bankruptcy
Cash Application
Supplier Analysis
Analysis Beyond Credit
Billing / Invoicing
Customer Service



Processing collateral (payment security) such as Letters of Credit and Bank Guarantees is still handled in-house for high value transactions, but this is undertaken by bank employees in terms of an outsourcing contract. The bank employees work in company offices but they will soon be moving to bank premises, since all documentation is executed online these days.



In respect of Credit Analysis, early in the decade Ron set about encouraging the organisation of an independent Credit Rating Agency to deal specifically with "payment risk in relation to his portfolio of Trade Receivables". Once this Agency was established and recognised by banks and fund managers, in 2005, an important transition took place.

Ron smiled when he recalled how he used to enjoy credit analysis (more of an art than a science) and how much like a philanthropic banker he used to operate, supplying working capital to all buyers without charge. Ron was good at credit analysis…. now of course all of that is outsourced and automated. Sadly he had had to let go of that favourite-of-all-tasks but c’est la vie.



Credit Analysis
Customer Visits
Credit Scoring Model
Global Risk Management



Company policy now requires Cash in Advance or Letter of Credit cover from all non-rated customers.

Credit Ratings are specifically researched and created by specialised, independent rating agencies in respect of trade receivable risk.

Buyers purchase trade Credit Ratings in order to qualify for credit or, in cases where sellers wish to sell on credit to uncooperative buyers, sellers purchase the Ratings. Most target companies (buyers) are happy to cooperate with rating agencies in order to enjoy supplier credit.

It took a while for some Treasurers, back at the turn of the century, to realise the negative impact that trade credit was having on their cost of capital. Likewise buyers were slow to realise that they were often locked-in to higher priced suppliers simply because the latter provided "free" trade credit.

When the cost of capital implications were realised, policy was quickly changed so that in 2010 any buyer that does not have a credit rating is not given credit.



The company policy is to require Cash in Advance or Letter of Credit cover from all non-rated customers.



This generally means that buyers have to pay an explicit or implicit charge for any trade credit enjoyed. The charge is based on their own trade credit Rating.

On the other hand it means that buyers are able to approach all potential suppliers on equal terms, and are more easily able to determine the best offer available. Internet based trading long ago introduced much more transparency into the market and swept away the opportunities to make additional margin based on liberal credit terms alone.



In common with many Credit Managers today, Ron covers the payment and transfer risk of individual receivables or pools of receivables by purchasing credit default protection derivatives. The cost of these is passed to the company’s sales group, which factors this into the selling price or adds on a separate charge. Only triple-A and double-A rated trade credit is not collateralised but even in these cases an internal charge is raised to cover the notional ‘cost of credit’.

The company Treasurer is free to discount receivables (collateralised by the derivatives) or simply borrow from banks based on an enhanced or protected own credit rating.

Thankfully video conferencing has not yet fully replaced the value of face-to-face meetings, so each quarter Ron travels to Vienna to attend a Rating Agency review of his employer’s own rating. He is expected to reassure the Agency that the quality of his ‘accounts receivable’ and ‘credit default protection’ portfolios supports continuation of his employer’s double-A rating.

He also regularly reviews the ratings of Credit Derivative investment funds and banks, in order to satisfy himself that they are still qualified to remain on the list of ‘credit default protection’ suppliers.

Hence Ron is no longer concerned with the trade credit risk of individual customers but rather manages the portfolio risk inherent in the overall receivables basket, which includes rated collateral and derivatives providers.

Ron now plays his expected roles in Asset Management and Cost Control by undertaking these activities.



Given the paradigm shift described, Ron’s role in respect of Sales promotion has also changed fundamentally. The new credit policy, which was implemented during that emotionally charged and stressful spring of 2005, requires all trade credit limits to be based solely on the recommendations of qualified Rating Agencies. Thus Ron’s role turned away from "credit analysis" and "customer consulting" to that of "manager of the relationships with Rating Agencies".

This role includes activities, such as;

negotiating the Rating supply contract,
vetting the Rating creation process utilised,
vetting the standards assurance procedure,
reviewing related default statistics and
requesting Rating reports.

Internally, Ron is responsible for;

determining the equivalency of various Agencies’ Rating decisions (several Agencies have developed since that pioneering startup engineered by Ron, however standards and methodologies are not uniform across all Agencies - it’s a free market),
hedging all Rated trade credit exposure (below triple-A and double-A) and
informing sales managers of the cost of credit protection, before sales contracts are finalised.

On a daily basis Ron reviews reports of Rated credit exposure and buys credit default protection as necessary. Naturally he accesses the Credit Derivatives’ market online, via the Internet, without regard to his location and without regard to the fact that he may be on vacation… but that is another side of the story…

All in all Ron’s job is not as much fun as it was 10 years ago. Gone are the customer visits, the creative instinct-based judgments, the frantic searches for silent payment risk-sharing partners and the free working capital handouts. Gone too are hours spent scrutinising annual financial statements and news reports and much enjoyed customer financial and strategic analyses.

Still the business had had to survive and prosper so, if more value could be added in other ways, even an International Credit Manager at large had to adapt and Ron was proud of the way he had managed the changes.




1 From a report in The Credit & Financial Management Review - Volume 3, Number 2, 2Q1997.

2 Postulated on the basis of the current and predicted roles of Credit Managers, gleaned from a report in The Credit & Financial Management Review - Volume 3, Number 2, 2Q1997. This report was constructed by the Credit Research Foundation after conducting extensive focus groups and a quantitative survey in the USA, during 1996 / 1997.




The Author has created this scenario entirely out of his imagination, based on his perception of the way in which some important trends may shape the future. This is just one of several possible scenarios. Scenario planning is a device which involves composing ‘stories about the future’ which could be possible. However, since the future is entirely unpredictable and often significantly influenced by unforeseen events or inventions, all scenarios are bound to be inaccurate to a greater or lesser extent. Nevertheless scenario planning is an extremely useful tool. The following quotations from "Russia 2010 and what it means for the World" (Daniel Yergin & Thane Gustafson – © 1993, 1995 Cambridge Energy Research Associates) explain the attractions of this method:

"Conventional forecasting (corporate planning) .... is pretty good at predicting continuing or patterned activities. Its great weakness ... is in discerning the turning points ... yet it is those points, the big changes, which matter most because they take us into a different world..."

"IBM's motto was "Think!" but it failed to think seriously about the unthinkable .... Its forecasting process gave management the answers that management wanted. The company paid a heavy price. It has already (in 1993) laid off almost 200,000 people and its stock price is only 25% of what it was three years ago."

"It is difficult to plan and think ahead when change is at hand."

"The habit and the risk is to impose the rules from the old order (on the new situation)."

"Scenario planning does not offer the security blanket of a single forecast. What it does do is create plausible 'stories of the future'. These enable one to pick up the signals and search out the clues to the future."

"Scenarios are learning stories ... the process of working through them (and) experiencing them, is as important as the conclusions."


© Copyright 2000 R K Wells


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Last Updated:  February 01, 2020 18:29 -0000