Strategically Speaking

Tools of the trade – Building an effective program for AR based finance

  

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 Author: Pat True, RTrue@profitstars.com

I always enjoyed watching Norm Abram on The New Yankee Workshop.  While fascinated by Mr. Abram’s skill, I was even more awestruck by his collection of tools.  With those tools, he could probably build anything.  I would not have been surprised to tune in and find him building a submarine.  It just goes to show you that with the right tools and the right skill, you can accomplish almost anything.  The same can be said of many professions, including commercial lending.  Successful lending calls for the right skills and the right tools. 

In today’s credit market, many banks are re-evaluating the tools at their disposal and considering how to best monitor revolving credit transactions, especially when they are secured by accounts receivable.  As you consider your current systems and processes, you may look for the following features in order to manage risk most efficiently, and to help achieve the strongest possible service delivery to your clients:

Do your current processes monitor …?

• Dilution rates
• Debtor concentrations
• AR Turn rates
• Average invoice size and number of invoices per month
• Credit memo activity
• Payment compliance (assuming a lock box is involved)

Does your current system provide …?

• Efficient methods of obtaining invoice and credit memo data from the businesses accounting system reports
• Effective and efficient funding processes
• Clear methods of determining and communicating the collateral value of specific invoices as they age
• Effective and easy to read reports for both the bank and the business client
• Trend data and effective tools to access this data
• Bank relationship profitability tracking
• Exception management (red flag warnings such as invoice thresholds, invoice date alerts, etc.)
• Accounting reports to guide internal bank GL management

Other key tools for success might include –

• Sales tools such as cost justification models, business cash flow forecasting, bank pricing assistance
• The possibility of insuring accounts against debtor default, especially for larger transactions

Whether your approach is to structure a system from within or to acquire it from a third party, addressing these key issues can go a long way toward mitigating risk and assuring long term success for your portfolio.  What’s in your toolbox to ensure successful commercial lending?