In Focus Risk


Proactive versus reactive credit management


The attitude of a business to its credit professionals and credit management in general may have a significant impact upon outcomes


Professor Salima Paul Plymouth Business School, University of Plymouth salima.paul @plymouth.ac.uk


This article is part of a follow-up project that examines whether there is a relationship between proactive or reactive credit management, and a company’s performance. The project looks at different credit


processes and practices, and examines how these can be used strategically to gain competitive advantage. Specifically, it covers several aspects of


credit management, including credit policies, credit terms, credit lines, the position and perceptions of the credit function, negotiations and relationships with customers and suppliers, sector characteristics, and late payment. The data analysed so far classifies


companies into two main categories: those that manage the credit function proactively and those that react to events. Furthermore, we find that the former category can be broadly divided into those that use trade credit aggressively as a competitive tool (45%) and others that use it in a collaborative way (36%). Our results show that, in general, the


former tend to be larger and market- dominant companies which ensure customers pay on time, but which pay late themselves and “from preference… always ‘borrow’ through trade credit rather than pay interest on bank credit”. This approach seems to be designed to seize what may be an unfair advantage. The latter, however, work more towards


building customer relationships, tend to accept a relatively higher number of late payments to secure more long-term projects, and are “forever reviewing terms and


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different ‘tactics’ with different customers… we may accommodate customers who have a temporary cashflow problem… but do not hesitate to put others on stop.” Our preliminary results show clearly that,


In addition, some report that credit decisions are generally taken by the sales team, as this is the main point of contact with customers, while the credit staff have more of a back-office role and get involved mainly at the collection stage


where credit management is prominent in the corporate structure – meaning its reporting position is relatively high up in the chain of command – the company tends to adopt a proactive approach. As for companies with a reactive approach


to credit management, however, their decisions are shaped by competition and customer demand, and they do whatever it takes to gain business, including selling to risky customers. By the nature of their business, many in


this category tend to have high volumes of customers, but do not have a close rapport with them: “Because of the volume of customers, it is almost impossible to get to know them properly.” In addition, some report that credit


conditions of credit to accommodate customers”. They go to great lengths to understand their customers’ needs and use cost-benefit analysis for most credit decisions; they tend to be reflexive and engage with the needs of the credit department and the business as a whole; and they constantly review cashflow, pricing policies, and transaction costs. The remaining companies (19%) tend to


vary their behaviour depending on specific customers and so exercise a great deal of discretion in making credit decisions: “We use


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decisions are generally taken by the sales team, as this is the main point of contact with customers, while the credit staff have more of a back-office role and get involved mainly at the collection stage. In many such companies, one can sense


a tension between the sales and the credit teams. Due to the non-integration of the credit function, the sales team and the credit team have differing and competing priorities – risk minimisation versus sales maximisation. In comparison, the credit function within these firms tends to have weaker position in their organisational structures.


November 2017


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