Topic: Credit / Working Capital Management

Subject: Effective Key Performance Indicators
Bob Shultz
Member: 2002
Submitted on 07-12-11 12:38 pm
Let's share ideas on effective KPI's to track the performance of a corporate credit collections department. Also what measurements are best for the quote to cash process across deparments? How can all stakeholders be held accountable for their impact on collection and dispute management results?
Greg Stoch
Member: 2013
Posts: 11

Subject: Re:Effective Key Performance Indicators

Submitted on 08-01-13 4:59 pm.
In my opinion, there is a balance that must occur between limiting Bad Debt losses by raising the threshold of entry, and the offsetting increased revenue that occurs due to a larger volume of customers that come in by lowering the threshold of entry.

If one has sufficient data during a period of changing credit policies, one can model a curve of net cash (revenue minus bad debt), and determine the optimum credit factors to maximize bottom line dollars for the company. This data would include info from the Sales team about sales close rates over a period of time (the "lost sales" factor), Bad Debt as a percent of revenue, and total gross revenue.

We performed this exercise at a prior company, and found value in lowering the threshold for some less risky customers, and raising it for some of the higher risk customers. Prior, we had been a two-tier company (Pass/Fail, either you pay deposits, or you don't). We modeled the optimum deposit level for each set of customer risk types.

Note that this will require good partnership between the Sales and Collections departments. Departmental goals need to be set up accordingly to avoid an "I don't care about that department because my metrics don't consider their needs" set of behaviors. No one gets everything he or she wants, but the company maximizes at the bottom line.