Interdepartmental Relationships

Most credit departments confer with many departments during the credit process. The credit department is multi-functional, interacting with many business functions, departments or units. An informal organization structure exists, allowing the credit department to perform its strategic business role.

During the credit process, credit confers with the sales department, the order entry department, the production department, the shipping department, the accounting department and the customer service department. Clearly, the credit department works with more departments than ever before, creating a broader role for themselves within the business organization.

In some cases, the credit function has been merged with customer service, sales and marketing or purchasing. There has been a trend among larger companies to change the name of the Credit Department to Customer Financial Services to reflect its broader role and responsibilities. Regardless of what the credit department is called, its broader role provides it with the opportunity to provide value added services to both internal business groups and to customers.

The Credit/Sales Relationship

Establishing a viable credit-sales relationship is one of the most important tasks of the credit manager. Credit policy must be clearly defined to reduce misunderstandings between the sales department and the credit department. Participation in sales meetings is essential to clarifying the role and responsibility of credit, especially in dealings with the customer. As already discussed, the major goal of every credit department is to help move products or sell services—make the sale—with the reasonable assurance of payment. Additionally, there should be a clear delineation of responsibility for resolving customer disputes and unauthorized deductions.

One of the major contributions of the credit department to the sales function is to work with customers and sales representatives and to find ways to approve orders. For example, a credit manager may be able to suggest a financing method not previously considered by the customer or may be helpful in locating sources of capital for a customer.

Finally, what may be called a marketing risk should be distinguished from a credit risk. For example, to achieve adequate geographic distribution in marketing a name-brand product, it may be necessary to sell to a company that may not be creditworthy. Marginal accounts or accounts with poor payment history, inadequate working capital or a deteriorating financial condition are taken on for strategic reasons and should be identified as such when receivables investment is being analyzed. The credit department must communicate the risks to sales and management while guarding the confidentiality of the customer. This aspect of confidentiality extends to credit information that may be obtained in connection with industry credit group meetings.

The Credit/Purchasing Relationship

Purchasing departments often check the financial condition of new supply sources through the credit department to assure that the vendor or subcontractor will be able to deliver goods or services as agreed. Besides inquiring into the backgrounds of potential suppliers, the credit department can also analyze a supplier’s financial condition. At times, the credit department is called upon to collect or adjust debit memorandums issued to cover claims for defective material or to settle other chargebacks. The credit department can assist in negotiating with suppliers. For example, it can arrange for other types of security, such as letters of credit, UCC-1 filings and liens. The credit department may also see to it that setoff rights are retained when its company both sells to and buys from another concern. Under most state laws, a creditor has the right to offset mutual debts it owes against the debtor’s liability to it.

The Credit/Manufacturing Relationship

When overproduction leads to excess inventory, it may be necessary to dispose of the goods through sales to accounts that are not ordinarily creditworthy. Just as with marketing risk sales, these production risk sales should be followed closely by the credit department to minimize collection costs and bad debts.

Sometimes orders are put into production subject to confirmation by the credit department before shipment. An approval subject to confirmation usually means that the customer is being asked to do something before goods are released, such as pay an overdue balance, reduce an outstanding balance to an acceptable level or submit an interim or annual financial statement. This allows the goods to be manufactured for delivery on time to the buyer. While most of these conditional approvals result in the release of goods when they are ready, they do represent a production risk.

In periods of shortages, a customer may order goods well in excess of actual requirements in the hope that the amount allowed will be near to the quantity actually required. The credit department can be instrumental in spotting orders that are out of proportion to the relative size of the customer. A credit manager can usually recognize this practice and prevent the marketing and manufacturing departments from being misled into believing that growing sales has made additional production facilities necessary.

The Credit/lnformation Systems Relationship

If a company decides to implement a new business or technology process, computer system or package, the first goal of the credit department should be to get as involved as possible in the decision making and planning process. The credit department can present valuable data about the credit process. Applying technology to the credit process requires a detailed examination of what information is necessary and what is not. A technique called process mapping, or breaking down key processes into primary activities, including actions, decision points and information/transportation flows is critical to implementing new technology. Technology can improve the flow of information, speed decision making and standardize the credit process which will ultimately increase efficiencies and reduce costs.

Electronic Data Interchange (EDI) is the movement of data electronically from one computer to another in a structured, processable format. EDI has the potential to revolutionize the management of information and cash flow. The information needed in a typical business transaction might include items such as a request for a quote, a purchase order, a purchase order acknowledgment, shipping documents, an invoice, a payment advice and a freight bill. Most of these items are currently exchanged via the mail system. EDI converts these documents to electronic messages routed directly between the parties, either in a standard, widely accepted format or in a proprietary, mutually agreed upon format.

Credit Department Relationships with Other Departments

Determining the status of a customer’s account often requires close cooperation with the accounting department. The credit department frequently accounts for payments received and for collateral taken in settlement of customer accounts, credit adjustments and corrections of sales.

Federal and State laws as well as the proper use of legal documents play a critical role in business and require the credit department to interact extensively with the legal department or counsel. The credit department also plays a key role in bankruptcy proceedings, including service on Creditors’ Committees.

In cases when a customer has difficulty with one of the company’s products, it may be necessary for the credit department to consult with engineering or manufacturing groups about corrections or replacements to be made before payment of the account can be collected. The traffic department or shipping department may wish to determine the financial responsibility of carriers and may require assistance in the collection of claims for shortages or damages.

A close relationship must also exist with the personnel department. The credit manager should take an active role in creating job descriptions for credit personnel. Recommended salary ranges must be sufficient and competitive. Training programs should be coordinated with the personnel department.

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