“Beyond the Fundamentals: Anatomy of The Perfect Credit Department”

1. “Beyond the Fundamentals: Anatomy of The Perfect Credit Department” ICTF April 7, 2014 Pamela Krank President The Credit Department Inc. (TCD) Pkrank@tcd.com

2. Agenda • Characteristics of “Perfect” Credit Departments • Efficiencies vs Effectiveness • Process/Technology/Resource Maximization • Strategies for Moving toward Perfection: • AR Valuation • Bad debt Analysis

3. The Credit Department, Inc (TCD) Background • Manage global trade credit for 52 mid-market companies all over the world • 70,000+ bill-to customers • 150,000+ open invoices daily • Consulted in nearly 500 global companies’ Credit Departments

4. “A Perfect Credit Department”

5. A Generalization: Smaller vs Larger Credit Departments • Smaller Credit Departments (less than 10 members) tend to be more efficient and less effective • Larger Credit Departments (10+ members) are usually more effective but less efficient

6. Top Consulting Observations on Credit Departments • Insufficient focus on managing top risks • High cost per credit analysis, collection account, deduction management • Work arbitrarily assigned • No retrospection on missed opportunities • Write-offs common practice • Poor/incomplete use of internal data • Lack of sophisticated tools/technologies • Inconsistent decision-making • Policies/procedures not followed/enforced

7. How do we get our Credit Departments more effective while meeting our CFO’s lower cost goals?

8. Profile of Perfect/Ideal Credit Departments • One Standard Process flow • Credit Scorecards Utilized • Credit Committee Formed • Maximize Automation/Paperless • Department of Specialists • Best-in-Class results • Efficient cost structure • No surprises

9. Process Flow • Credit Policy directs each process • Only those who add value are a part of the process. • Credit resources are defined by impact of risk on the receivables portfolio • Collection activity is driven by default risk and cash flow priorities • Value in diagramming processes

10. Credit Scorecards Basic score/SMALL LINES • Yes/no Standard score/MEDIUM LINES • <$250k Comprehensive score • >$250k WITH FINANCIALS

11. Credit Committees • Representatives from Credit, Finance, Sales, Marketing, Executive • Build consensus on credit policy and updates • Meet regularly to deal with sales forecasts vs existing credit limitations • Deal with inter-company process issues • Create a path for approving lines beyond credit recommendations aka, business decisions.

12. Technology Expectations • Automate routine processes (letters, scheduling, statements, small lines) • Allow the system to determine daily work queues, not individuals • Expect analysts to spend time working risks alerted by the system • Code every past due item with status, review dates • Focus is on reporting risks and customer information to top management

13. Staff Resource Utilization

14. Lack of upper management support Existing team members unable to identify process change needs/implement scorecards Insufficient budget for technology Change reluctance by employees Limited resources Obstacles to a “Perfect” Credit Department

15. “No Surprise” Reporting Example

16. No Surprise Tool: Valuation of the Receivable Asset • Assign risk probability to every credit customer • Compare probability of default to exposure • Assign statuses to every past due item with historical probability • Calculate the risk

17. Existing Exposure ExampleBased on Risk Probability Total Aging: $16,610,000: Customer A/R Totals in these categories from scorecards: • Very high VH (20%+): $500,000 • High H (10%+): $760,000 • Medium high MH (5-10%): $1,250,000

18. A/R Asset ValuationRisk of Credit Default • Very high VH (20%+): $500,000 * .20 = $100,000 • High H (10%+): $760,000 * .10 = $76,000 • Medium high MH (5-10%): $1,250,000 *.05 = $62,500 Total reserve (part 1) based on Customer Risk of default in Credit process: $238,500 Value so far: $16,610,000-$238,500 =$16,371,500

19. Delinquent Account Status Reserve Example Total Probable Status Bad debt =$469,700

20. A/R Total Valuation Report Example • $16,610,000 gross value • ($238,500) Default Risk Probability • ($469,700) Account Status Default probability Total Net Value of the Asset: $15,901,800

21. Bad debt Analysis Example

22. Conclusion • Perfect Credit Departments are both effective and efficient • We need to ensure our process, technology, and people resources match the needs of the asset • There are changes and enhancements we can all make to strive toward perfection in Credit. • Surprises ruin perfection….our job is to prevent them from happening

23. Thank you! Pam Krank The Credit Department Inc (TCD) pkrank@tcd.com 800-451-0164 X 203 www.tcd.com