A Creditworthy News clip Article – October 9, 2002
By Victor Sandy
Time and time again, credit managers deal with pressure from sales managers to approve new sales deals or expand on old ones. Often times, these types of opportunities are bypassed because there is just too much risk involved. Thus, credit managers possibly save their companies from large hits, but those in the sales department only acknowledge the loss of revenues, as well as new customers. As a result, credit managers are given a bad image, yet this does not have to be the case.
The use of credit insurance is traditionally thought of as a means to avoid a “catastrophic loss.” While this is true, credit insurance, also known as accounts receivable insurance, can help a business safely expand sales by extending credit to new customers and increasing credit to current ones. This aspect of credit insurance is usually overlooked and may provide credit managers with that extra comfort needed to approve these types of deals.
Lets consider a sales expansion scenario involving a steel scrap processor, where their “comfort” exposure is $750,000. If they were offered a deal for $1 million, they would obviously hesitate and may turn it down or put off the additional shipments because it exceeds their limit. Instead, what if they requested credit insurance and were approved for the full $1 million?
As a result of this, they would have an incremental sales opportunity of $250,000 (approved coverage of $1 million minus their established credit limit of $750,000). If this account turns 8 times per year, they will bring in $2 million of incremental annual revenue (sales opportunity of $250,000 times 8). At a gross margin of 10 percent, they would receive an incremental gross profit of $200,000 (incremental annual revenue of $2 million times gross margin of 10 percent). This additional gross profit works out to a return of over 200 percent of the program’s total annual cost of $75,000. Also note that this premium is the cost to insure the entire A/R portfolio, so not only does the company generate a net incremental profit of $125,000, they also have their portfolio insured at a net zero cost.
With the ability to take advantage of growth opportunities while hedging the risk, credit managers can feel more confident with expanding and developing additional business. They can stop worrying about how one bad decision could jeopardize the company’s financial position and even their job. The end result is credit managers become the “good guys” and are able to work more closely with the sales to boost production.