The success lies in motivation and internal relationship

Credit managers from all over Europe complain that the commercial scenario is marred by a late payment culture, defaults in credit facilities, bartering, and mismanagement of finance and cash flow. This scenario gets worse as one moves to the south of Europe. A current example is the Parmalat case of Italy, which is being compared to the collapse of the US energy giant Enron.

Long-standing worries about Parmalat's habit of tying up its steady cash flow in complex investments exploded on December 19, when it revealed a €4 billion hole in its accounts which the Italian Prime Minister, Silvio Berlusconi, called "almost incredible".

Newspaper Corriere della Sera said Parmalat's former chairman had told potential investors in the group that Parmalat had not bought back €2.9 billion of bonds, as detailed on its books. That would push total debt to almost €9 billion, up from the €6 billion on its September 30 balance sheet.

A published leaflet of the directorate-general for enterprise of the European Commission on late payment revealed that in Europe, one out of four insolvencies was due to late payment, leading to a loss of 450,000 jobs each year.

The payment delays in commercial transactions across the EU were quantified at €90 billion a year and they accounted for €10.8 billion in terms of lost interest. In addition, outstanding debts worth €23.6 billion were lost every year through insolvencies caused by late payment.

Interestingly, payment delays in the European Union vary considerably between the member states. The payment deadlines in the Scandinavian countries take an average of approximately 32 calendar days, whereas in Southern Europe they average 78 days, with Greece's average payment period reaching 94 days.

Besides cultural differences, the main cause of longer payment delays in the south of Europe is attributed to the practice of concluding trade agreements by word of mouth with no formality.

This slow payment and non-payment culture is seriously hindering the cash flow of many organisations leading to more distressed businesses and even bankruptcies.

This creates a ripple effect because "Businesses that are not paid on time may find it hard to pay on time themselves". Malta has suffered from such a 'domino' effect in the fast moving consumer goods sector following late payment and bankruptcies in the supermarket industry.

Being aware of this commercial scenario, every trade creditor should take a proactive approach in the market to help avoid any financial losses. One way of being pro-active is by motivating all the staff, especially the front line sales people, who are in direct contact with the clients, to give the necessary ongoing feedback to the credit department.

Some senior managers argue that the sales department should work independently from the credit department to ensure that one does not influence the other and thus they achieve their objectives without any bias.

Others argue that if the two departments work closer to each together, the organisation would suffer from loss in sales because there would be a high level of conservative sales decisions to whom the organisation should be selling.

However, close ties between the two departments are essential in today's market turbulence.

Synergy between the two departments is becoming of key importance. It has to be mutually understood that both departments are vital for the success of any business organisation.

The sales department triggers and makes the sale, and the credit department completes the process by agreeing competitive credit terms with the client, thus securing long-term customer-relationship, and realising payments and profits from the sales department's efforts.

Where internal conflicts between the Credit and the Sales departments exists, internal politics are inevitable and may take time to resolve.

However, if both departments understand each other's role and objectives, a more co-ordinated approach would be possible, and this co-operation is important to enhance the effectiveness and efficiency of the operational activities of both the credit and the sales department alike.

Very often, the decision about which supplier is awarded a purchase order is much about the relationship between the buyer and the salesperson rather than about the supplier's brand name, terms and conditions of the sale, and the quality of the supplier's product.

Therefore, besides meeting sales targets, the sales people could pose to be also beneficial to the credit manager both to understand better the needs of the clients, and to know the ongoing financial position of the clients.

Any early visible decline in the business of a client would be easily noted by the salesperson and this would be an opportune time for the credit manager to intervene on time.

Salespeople are therefore the proper intermediaries between the credit manager and the client, but they should not as a rule serve as mediators or much less as arbitrators in a credit dispute with the client. Hence, the role of salespeople and sales clerks should be given more wieght by the employers - recruiting the right people, and providing ongoing sales training should be seriously considered.

Co-operation between the two departments is not impossible to achieve if the right personnel are employed and professionally trained. Differences in opinion may only be about how a particular order or account should be handled, and very often both parties have their own good reasons for coming to their own particular conclusions.

The secret of better internal relationship, which should also motivate the employees to work for the common organisational goal, lies in developing and implementing an internal programme consisting of the following activities:

¤ Sales personnel should be provided with the necessary training to help them understand and appreciate the role of the credit department within the organisation, and the risks involved in granting credit and collecting debts.

¤ Encourage the salespersons to make use of the credit application form whenever they are asked for a trade credit facility both from their existing client base and from a new applicant. The credit application form should be the basis of the credit facility and should contain all the relevant information about the applicant, which is needed to assess the risks involved and the creditworthiness of the applicant, and to serve as a contractual basis between the creditor and the applicant.

¤ Provide the salespersons with credit information, including the credit limits set by the credit department and the late paying accounts, without violating confidentiality. This information should be given to highlight any defaulting clients and thus help to justify any actions taken against these debtors by the credit department.

¤ The credit manager should attend the sales meetings organised by the sales department. This should help the credit manager to understand better any emerging credit needs in the market, and thus enhance the co-operation between the two departments. Any trade-offs should be discussed between the two departments, leading to more balanced decisions with the primary aim being that of satisfying the needs of the customers profitably for the benefit of the organisation, and the long-term business relationship with the client.

¤ The credit department should respond promptly to all enquiries from the sales department, and the sales department should in turn accept any decisions taken in respect of any existing account or credit applicant.

Using the resources available within the organisation is the most effective and efficient way to act proactively against any wrongful trading which may exist in the market. Therefore, precautions should be constantly taken, and every trade credit facility should be assessed for its creditworthiness at the onset and monitored throughout accordingly to keep any negative financial surprises to a minimum, irrespective of the size of the organisations concerned.