ORGANIZATION MODELS FOR A COMPANY’S INTERNATIONAL CREDIT & COLLECTION PROCESS

THE CHALLENGE

The manner in which a USA based company’s credit & collection process is organized and managed for international sales will be different than its domestic credit & collection process. A company’s senior manager responsible for the account receivable (“A/R”) must have confidence the entire A/R portfolio is properly managed irrespective of its source. The addition of international sales can make this more challenging. This is because some or all of the following issues will impact A/R generated from international sales:

§ Availability & quality of information on customer’s financial condition,

§ Bankruptcy law differences,

§ Competitive differences,

§ Cultural differences,

§ Different types of payment terms and methods,

§ Foreign exchange,

§ Import and export rules and regulations,

§ Language differences,

§ Totential political, social and banking risk,

§ Potential lack of understanding how the credit & collection process operates outside of the USA,

§ Resources available to manage an international portfolio,

§ Time zone differences,

§ Typically longer order-to-payment cycle,

These and other international issues may occur whether A/R is generated from a company’s USA legal entities selling to customers outside of USA (indent) or from foreign legal entity sales. Poor management of these issues can lead to increased A/R risk and collection delays. Bottomline, a company’s entire A/R balance needs to be managed regardless of its source not simply the domestic A/R portfolio.

One approach to minimize international risk to the A/R portfolio is selling on cash in advance of shipment or via confirmed letter of credit. However, a competitive environment often makes this sales approach impractical or uncompetitive for many industries.

How a company organizes its overall credit & collection process will help minimize risk created by international sales. A credit & collection department needs to provide senior management responsible for the A/R asset with the following in a best-case scenario:

§ Reports on the value of A/R exposure generated from international sales,

§ The risk profile of the A/R generated from international sales,

§ Primary metrics (i.e. days sales outstanding, percent current, etc.) for the international A/R portfolio,

§ Assurances that credit policies and procedures are followed globally, whether these are locally approved policies or global credit & collection policies,

§ Documentation that reserves for doubtful accounts are accurate and consistent with corporate or local policy.

Most of this information is now more important for companies operating under Sarbanes-Oxley compliance.

ORGANIZATIONAL MODELS

There are several ways a credit & collection department can be organized to effectively manage an international A/R portfolio. Each has benefits and disadvantages. The goal is to manage the entire A/R investment, not simply the USA portfolio. Four organizational models to consider are:

§ Managing the international credit & collection process from the USA with no foreign-based support.

§ Managing the international credit & collection process from the USA with foreign-based support.

§ Managing the entire international credit & collection process in the foreign region. Limited support or direction from the USA.

§ Managing the international credit & collection process in the foreign region with overall leadership, guidance, and best practice support from the USA.

Managing exclusively from the USA is recommended only for small or infrequent international sales. All credit risk analysis and collection follow-up must be done from the USA. The advantage to this approach is cost and simplicity. Unless sales volume justifies foreign-based support, managing the international portfolio from the USA is a reasonable approach. A company’s existing credit & collection staff can handle the occasional international transaction using documentary collection or letters of credit payment terms.

A second approach is to use USA staff, but gain support from foreign-based individuals. In this organizational model the authority and decision making remains in the USA, but support, information gathering, and potential collection follow-up comes from the foreign-based professionals. A modification to this approach is to have the foreign support come from a designated sales agent.

Opposite to these organizational models is to delegate the entire process to designated individuals in the foreign location. Preferably this will be company foreign-based credit & collection staff. Little if no interaction will come from the USA except at a balance sheet consolidation level.

The final organizational approach is to have the international credit & collection process, including indent transactions if desired, managed from the foreign location, but with strong USA guidance under the management of a corporate credit manager or director. This approach, allows local expertise to be operationally involved, but under an overall global credit & collection process.

ADVANTAGES AND DISADVANTAGES

Managing foreign or indent generated A/R through a company’s USA credit & collection staff without foreign-based support requires the USA staff to manage the issues and associated risks highlighted earlier. Often a USA based staff will not have experience or expertise handling international credit & collection. A company should use this approach only if:

§ There are no local (foreign-based) staff available,

§ The size of the indent or foreign-based A/R is small in both number and total dollar amount.

§ A company has a USA based credit & collection professional fluent in international credit management.

In these situations a separate international credit management process is not justified. The key to making this organizational model work is training.

Managing the international A/R portfolio from the USA, but with local support is a reasonable next step. In this case the authority and decision making remains in the USA, but support, information gathering, and potential collection follow-up comes from the foreign-based individuals. It is not critical that the foreign-based professionals are part of the credit & collection department. They may be sales professionals, customer service professionals, or local administrative staff. The key to this approach is:

§ Clear understanding of expectations including a knowledge of policies and procedures,

§ Training,

§ Excellent 2-way communications,

§ Part of their job description and goals allocated to the credit & collection process.

This approach is well suited for consistent but smaller, or seasonal foreign sales. It is also appropriate for company’s that do not yet have significant international A/R, but is expected to grow.

There is one note of caution when considering this approach. Since the foreign-based staff is normally under the administrative & functional management of local general managers or sales management, senior credit management needs to confirm that there are no conflicts of interest when to making credit decisions. The goal is to effectively manage A/R exposures at the same time promote profitable sales. One must not be sacrificed to maximize the other.

As international A/R grows or is a significant percentage of a company’s overall A/R portfolio a foreign-based credit & collection staff becomes a necessity versus a “nice-to-have”. Organizationally, the management of a foreign-based credit & collection process can take two forms.

The first is to have the entire foreign-based credit & collection process operate independently of the USA. Little or no operational or functional guidance is provided from the USA. Operational guidance and leadership will come from local general management, country manager, or local financial leadership. Policies and procedures may be different from and independent of the USA.

Advantages with this form of organizational model are speed of response, allowing local staff to focus effort almost exclusively on local issues, and better understanding of the local market. However, this organizational alignment has its share of challenges. Examples of potential challenges are:

§ Process inconsistency across geographic areas,

§ Different ways of handling global customers who purchase across geographic areas,

§ Reporting differences below the consolidation level,

§ Difficulty calculating global risk and exposures for multinational customers,

§ Avoiding a “we don’t do things that way here” mentality.

This organizational model is only recommended when well-documented policies and procedures are in place, functional responsibilities are well understood, or the business / market / customer portfolios are very different. This is often the organizational model employed with arms length subsidiaries, holding company organizations or non-consolidated joint ventures.

The final approach is very similar to the organizational model just described. The difference is that functional management and leadership comes from the USA. Administrative management can remain in the foreign region, but overall process control is centralized at a USA level. Overall functional management normally comes from the head of the credit & collection process. This organizational model can be employed in any company with sufficient international business to justify a foreign-based credit staff.

In this alignment most, if not all, of the operational work takes place in the foreign region. This includes establishing credit limits, handling collections, initiating write-offs, generating reports, etc. However, the difference is that globally consistent policies, procedures and work processes apply and the overall process is managed functionally versus regionally. These policies and procedures can be “localized” to adapt to local laws and customs, but the fundamentals will be the same.

The value to this approach is that senior credit & collection or financial leadership can be assured consistency is used in the management and reporting of the total A/R portfolio. This also supports more efficient application of global best practices, improves global communications, and supports Sarbanes-Oxley.

IN CONCLUSION

No one model works in every company or industry. The organizational model employed may be a modification of the four and will most likely change over time. Making an organizational model work falls on the shoulders of the senior credit & collection manager or is some cases the senior finance manager. This individual must be sensitive to the needs and differences of the foreign regions, and provide overall leadership versus simply adding a layer of bureaucracy. This leadership includes:

§ Supporting the regions on resource requirement,

§ Keeping the foreign regions up to date on what’s going on within the function,

§ A sounding board and conduit for international credit concerns and issues,

§ Functional training as needed,

§ Guidance in the development of globally consistent best practices,

Managing A/R generated from indent or foreign-based sales can pose a challenge and expose a company to unnecessary risks if not properly managed. Therefore, the most important decision is the right organizational design for the credit & collection process. Whatever your company decides the ultimate goal is to maximize profitable sales while effectively managing the risk and liquidity of the A/R asset.

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