How do you prevent bankruptcy through effective credit management?

Think not only of today, but also of tomorrow: how do you prevent bankruptcy through effective credit management?

Five key points you should pay attention to in times of crisis

The Corona Crisis requires organizations to make quick decisions to guarantee the continuity of their business. Cost savings often come first; a logical response. However, in times of crisis credit management is especially important. Invest in your customer relationships. We asked David Busby, an O2C expert from our partner TriFinance in the Netherlands, to give us the benefit of his expertise. Thanks to the many projects that TriFinance has carried out, they have gained a lot of experience with what should and should not be done in times of crisis. In this article, David shares their five main concerns.

These are crazy times. The Corona Virus is gripping the whole world. Politicians are doing their utmost to make the right choices and take measures to quell this pandemic as quickly as possible. It doesn’t matter which industry you work in, it affects all organizations. You can rightly speak of a global crisis and it is currently impossible to say what the outcome will be and when it will occur: in a month, or two, or longer.

The difficult circumstances and the associated uncertainty mean that many companies, each in their own way, are taking measures. Examples include cutting all unnecessary costs, saying goodbye to interim workers and not extending temporary contracts. In the present circumstances it is not a question of right or wrong. Every organization simply cannot escape taking appropriate measures.

Lowering costs to keep your head above water is the simplest decision. Think of applying for deferment of payment from your largest suppliers, deferral of repayment with your lender, taking a break in paying the rent or mortgage, spreading the holiday allowance over the coming months. These are all measures that keep outgoing money flows as limited as possible. Those who can do this should definitely consider it and above all do it.

There are other means to help get through this difficult period. At TriFinance, we have built up experience with organizations that were in crisis situations. For example, a few years ago we worked on behalf of a trustee to settle a bankruptcy. Below are the most critical priorities for attention: one of the most important learning points was how the outstanding accounts receivable portfolio could still be collected where possible in order to be able to repay creditors.

1. Put Credit Control high on the list of priorities.

Put Credit Control high on the list of priorities.

When things go well, the Credit Control department is a neglected child in many organizations. But it is precisely this department that can make the difference in uncertain times. Therefore, invest in tooling and possibilities to perform credit control work as thoroughly and efficiently as possible. Only focusing on the top 20% of the debtors who represent 80% of the outstanding balance can offer solace in the short term, but in the longer term is not enough. The 80% smaller customers, which together account for 20% of turnover, can still make the difference, especially during times of crisis. They also deserve attention and a constructive attitude in difficult times.

Investing in credit management software helps to automatically approach those 80% smaller customers and minimize manual tasks such as drawing up call lists, dunning overviews, appointment registers and Excel dashboards. Automation frees up time to weigh priorities better, keep people free to focus on the most important things and strengthen human contact and personal attention.

2. Not every customer is the same. Do not treat them equally.

Not every customer is the same

Segment your customers into A, B and C customers.

A customers are your key accounts and represent a large part of your turnover (the so-called 20% in numbers and 80% of the turnover). Be even more careful with these customers during difficult times. Discuss a payment arrangement together that will help both of you. If necessary, break the outstanding balance down so that they spread their payments and your organization can receive the income in instalments.

B customers are larger in number but represent a smaller part of the turnover (20% in numbers and 15% of the turnover). Monitor this group of customers closely using credit information from reliable sources of information. Try to reach concrete payment agreements with that group of customers as soon as possible and record these in writing. If necessary, offer them a payment arrangement that divides the principal into smaller portions, but limit it to two maximum three instalments. Have the Credit Control team monitor this very strictly.

C customers are the largest in number but represent the smallest part of the turnover (60% in numbers and 5% of the turnover). Automate this group to the maximum and send, more often than you are used to, automated reminders with copy invoices. Make sure that you are constantly on top of mind with that group and keep in mind that if you don’t do it, another supplier will. That group of customers looks less relevant with regard to cash and turnover. However, in the long term these are the most difficult debtors to collect later. In a time when every euro counts, keep a close eye on these customers.

3. Monitor daily and involve the business.

Monitor daily and involve the business

If you’re responsible for finance, it is of the utmost importance in crisis times to be aware of the most current cash situation: of the actions of the Credit Control department and of any difficulties encountered. This monitoring is also very important in order to manage the Operations and Sales departments directly. They also have a relationship with the customers and can therefore help secure income. Notify them if the Credit Control Department is experiencing difficulties collecting cash from a client.

4. Dispute management makes the difference.

dispute management

In difficult times, the number of justifications, excuses and disputes increases. One excuse that is always number 1: “I have not received your invoice”. When you send the invoice again, the agreed 30-day payment term will only start from then for your customer – or at least, that is what your customer says, even though you already sent the invoice 30 days before. So you could end up waiting 60 days for your payment.

Therefore, call debtors well before the due date with the question whether everything is in order and whether they have received the invoice. During that conversation you can immediately make payment arrangements or, if there is a hitch, immediately settle the dispute before the payment term has expired. This drastically reduces the DSO (Days Sales Outstanding) and offers the opportunity to better forecast cash.

Ensure an efficient and well-documented process for disputes. Here, too, the Operations and Sales departments are the key to success. Clearly agree who responds, when and how. Agree on deadlines – in days, not weeks or months – and monitor the progress of the dispute. This way you can address who does not keep the agreements made. Especially in times of crisis where Operations and Sales are likely to be less busy, it is important that they shift their focus to settling disputes and excelling in customer relationships and service. Make every effort to optimise the ‘Customer Journey’ in every respect.

5. Make sure that the Contract, Order and Project management is in order.

Make sure that the Contract, Order and Project management is in order

Not having the Contract, Order and Project Management in order is riskier in crisis times than usual. One of the companies whose bankruptcy we helped settle a few years ago still had invoices to collect. However, the management and directors were unaware of this. The invoices were in paper files, there were non-indexed documents on shared drives, and other invoices had gone unnoticed in Sales and Project Managers’ mailboxes. There was no structured method to view all contracts, orders and projects in one storage. Only after the bankruptcy was it discovered how much value was still in the organization, which might have saved it.

Be especially alert to values ​​in the organization that are hidden or apply that are ‘stuck’ in the company. Examples include work in progress that has not been invoiced, credit notes that have not been refunded, purchase discounts that have not been claimed or processed, etc. As soon as the first emergency measures take effect in crisis situations, initiate and organize internal actions on this theme. Capture the hidden value ​​in an unambiguous way in the existing CRM or ERP system. Determine whether the stuck or hidden values ​​can already be invoiced or collected today, which will lead to cash in the short term, and also, based on the results, devise a plan to structure and safeguard the whole process more completely. This could be, for example, a (different) central way of recording or writing clear work instructions to make maximum use of the CRM system.

Avoid the worst

Reflecting can be difficult, especially when a crisis demands your attention. There is also always a danger of being stuck in a tunnel vision. That prevents thinking out of the box. Based on our knowledge of credit management experience that we have acquired in various branches and business models, we can help you by looking and taking a critical look at your organization.
Take a critical look at the above five points and take action now. There are countless organizations that have emerged stronger from the previous crisis. They have invested time and money in improving their internal processes so that they are 100% ready to go back to it when the crisis is over. Organizations also went bankrupt during the same period because they only applied the handbrake.


Get in touch with TriFinance. We advise and provide insight into optimizing and digitizing Strategic Credit Management. The critical business process that matters even more than usual today.
TriFinance is a partner of Sidetrade (find out more here).

By David Busby, Expert Manager – Order-to-Cash (O2C), TriFinance