Belgian Institute for Credit Management
Professionalization and emancipation
Dieter Verbeek: What was the IvKM’s initial goal?
Ludo Theunissen: 'Our mission is to encourage the professionalization and emancipation of credit management within companies. These two issues remain highly relevant. Professionalization, since there are relatively few formal Credit Management training.
'Credit managers can learn a lot from each other. In terms of content, IvKM can inform its members about new techniques and everything that is going on in the market. It goes without saying that emancipation is an equally important objective, as many companies are insufficiently, if at all, aware of the need for sound credit management.
'This is my last year at Ghent university, but I will, in any case, continue with IvKm after this academic year. I will also remain active within FECMA, the Federation of European Credit Management Associations, since IvKm is also affiliated to this European umbrella organization. As a matter of fact, a couple of weeks ago, I was reappointed as its Vice-President in Budapest for the next two years.
Dirk van Bastelaere: How did you get involved in Credit Management?
Ludo Theunissen: 'I am a civil engineer by training, but I also studied management at the Vlerick Business School. As a result, I could choose either a technical or a financial course for my job. It turned out to be the financial option. In my first job, I worked for Volkswagen in Brazil for three years. I then started up a software and consultancy firm in Belgium, where I focused on developing financial models. In this period, I also started teaching at the IPO (Instituut voor Postuniversitair Onderwijs), a precursor of Antwerp University's management school. My focus was on financial and investment analysis back then.
'I subsequently worked as an independent consultant for a couple of years, before moving on to the Vlerick Business School, where I headed an Impulse Centre on Credit Management for seven years. For a limited group of large companies, we conducted comprehensive research into Credit Management. In this period, I also taught other subjects at Vlerick, and I also started working as a visiting professor at Ghent University teaching classes in Financial Analysis. When the Credit Management project at the Vlerick Business School was discontinued in 2005–2006, we kept surfing on this wave and with a group of people set up the non-profit organization Instituut voor Krediet Management (IvKM – Institute for Credit Management).'
Dirk van Bastelaere: But credit management wasn’t your secret passion, for all that?
Ludo Theunissen: 'To be honest, not really. I was aware of some essential basic techniques that are useful in credit management, but in the last 21 years I have discovered how comprehensive this domain is.'
Dirk van Bastelaere: And how comprehensive is it?
Ludo Theunissen: 'Incredibly so. As a credit manager, you in the first place need technical skills and knowledge. For a creditworthiness analysis, you must be able to assess your potential clients’ financial health. Basic financial-analysis techniques, with everything they involve, are an absolute requirement.
'Once a prospect has become a client, and the client a debtor, you have to organize the entire collection process. In order for this to run smoothly, you need strong administrative skills. As a credit manager, you must also have knowledge of the legal aspects, so as to be sure that you take the right legal steps and that you exploit all available options properly.
'Credit managers often have to lead a team and develop a strong client relationship. They come into direct contact with clients and must prevent the client relationship from being compromised, as this can generate potential friction with their colleagues in the sales department. Traditional conflicts are still very frequent in this area. Credit managers must de facto convince salespeople that Credit Management is sufficiently important for them to integrate it into their job.
'Finally, a credit manager also needs a good dose of creativity, both in the collection process and in the intake of clients to whom it will be difficult to grant credit on the basis of the initial evaluation. If such a client is hesitant about choosing your business, you will have to come up with creative solutions to convert this prospect into a client, be it with certain guarantees, but without taking any irresponsible risks.
Dieter Verbeek: How did IvKm evolve in its 12-year existence?
Ludo Theunissen: 'Well, during the first years we worked on awareness and expanded our member base. We thus gradually consolidated our position in the market. In the meantime, companies have become aware of the need for good working-capital management. Outstanding client loans obviously play an important part in this respect, and the 2008 financial crisis emphasized this aspect even more. However, there is something strange going on here: although companies are becoming increasingly aware of the importance of credit management, their willingness to invest adequately in this function has not evolved commensurately.'
Dieter Verbeek: How do you see the role of IvKM evolve?
Ludo Theunissen: 'This is only just the beginning. I can discern a dual trend. There are companies that already take a truly professional approach to credit management, and professionalization just continues there. Credit managers are getting better and better at their job. However, a large group of companies still has to start from scratch, and it feels a bit as if we are preaching the gospel there…'
Dirk van Bastelaere: Perhaps they aren’t aware that this function even exists?
Ludo Theunissen: 'That’s right, but fortunately most of our members are quite strong already, professionally speaking. This increases the demand for more advanced and specialized topics, which in turn makes it difficult for beginners to close the gap.'
Dirk van Bastelaere: What can IvKm mean to SMEs?
Ludo Theunissen: Well, to begin with, we can teach them a number of basic techniques. In addition, we can bring them into contact with each other. This generates added value for our current members, who can learn a lot from contacts with colleagues.
Dirk van Bastelaere: Aren’t SMEs that have no credit management at a disadvantage?
Ludo Theunissen: 'They not only experience direct disadvantages because they invest far too much in working capital, but it also makes them more vulnerable. If a major incident occurs somewhere, these SMEs are vulnerable and they can quickly evolve from being a healthy company to a risky enterprise. Few people are aware of this. Credit management is often regarded as insignificant and marginal: ‘Credit management, that’s occupational therapy for our accountant.’ Many companies think: ‘We are making and selling fantastical things’, but the financial vulnerability they thus generate constitutes a major risk.'
Dieter Verbeek: Let’s come back to your academic work: are there any credit-management problems that are high on the research agenda today?
Ludo Theunissen: 'The basic text that is still generally used is some 20 years old already. It analyses motives and reasons why a company should grant its clients any payment delays at all. Traditionally, a number of reasons are put forward, which are then grouped into four or five different domains. This research is still being fine-tuned today.
'This text is complemented by studies on the impact of working capital in general, and of credit management in particular, on a company’s financial health and financial situation. There exists a basic text for this topic, too, a study conducted here in Antwerp by Marc de Loof of Antwerp University. It is still cited quite often in many studies, proving that there is indeed a clear link between credit management and a company’s overall profitability. These are areas of research that receive a lot of attention.
‘These research domains attract quite some attention. At Ghent University, Klaas Mulier has expanded them with a combination of customer credit and vendor credit.
Ludo Theunissen: 'Another interesting topic, but one that is much harder to investigate, is research into possible restrictions on excessive payment terms. The EU has issued a relevant Directive in which all countries are still required to transpose into local legislation, but it remains difficult to make this Directive enforceable. Our 30-day payment term is considered normal and acceptable, but the freedom of contract between parties makes it possible to raise this term to 60 days, or even more if there is no apparent abuse. We have found that this is an area where excesses between large clients and smaller suppliers persist. It is difficult to act against this.'
Dieter Verbeek: Can academic research, which is often lagging behind somewhat, keep up with rapidly changing practice?
Ludo Theunissen: 'Credit management and rate-credit theories are not exactly the most popular topics in the academic world. They are closely connected to practice, but research into these topics is quite difficult and frequently subject to local circumstances, as you are dependent on local legislation in all kinds of areas. This makes it harder to get these topics introduced into renowned international publications. An interesting study on a dataset of Belgian enterprises may be very valuable as such, but you won’t get it published in an American journal.'
Dirk van Bastelaere: Is it necessary to conduct fundamental academic research on credit in order to better understand current practice?
Ludo Theunissen: Yes, as a matter of fact, it is. Some studies have been carried out by people who are to a certain extent dissociated from practice, but this does not prevent ideas, research techniques and results from having an inspiring effect, for example with the government or the European Commission. Indeed, in order to find out how to proceed in the future, the European Commission has outsourced its research to academic groups. In addition, research can be important for local authorities. Professional service providers who have their own research section can also seek inspiration in academic research and develop solutions for assisting credit-management practice.
Dieter Verbeek: You also try to boost the image and reputation of the credit-management function through initiatives such as the Credit Manager of the Year and the Credit Managers’ Index.
Ludo Theunissen: 'The Credit Managers’ Index is an initiative by the NACM, the American Credit Management Association. This monthly indicator was created in 2002 and is based on a survey conducted among one thousand credit managers. At one point we decided to launch a similar European index in the UK, the Netherlands, Belgium, and Germany. However, both the UK and the Netherlands have discontinued this survey in the meantime, due to too low a response rate. In Belgium, it’s not easy to obtain a sufficient response rate either, but until further notice IvKM will continue drawing up and publishing the index, hoping to strengthen the credit managers’ commitment in this way.'
Dirk van Bastelaere: What exactly does the index measure?
Ludo Theunissen: 'The index measures the evolution witnessed by credit managers in the past quarter compared to the previous one. We measure change, making a distinction between unfavorable and favorable factors. Examples of unfavorable factors are the evolution of DSO, the number of disputes, the number of clients in arrears and the collection efforts. Favorable factors include the evolution of turnover, the order book, and related parameters.
'What we have observed quarter after quarter over the past two years is that the favorable factors are systematically moving in the right direction, whereas the unfavorable factors, which are related directly to the credit manager’s job, very often show negative developments.
'There are fewer bankruptcies, while DSO presents a diverse picture. However, it is notable that credit managers’ collection efforts systematically evolve in a negative direction. As a result, they have to invest more of their time and efforts in the collection process, and for more companies, than in the previous period.'
Dirk van Bastelaere: Are the reasons for late payments clearly mapped out?
Ludo Theunissen: 'We make a distinction between three groups. The first group is disputed, whether or not justified. This group should be treated separately and requires follow-up by the credit manager. For the two other groups, you should make a distinction between clients that cannot pay and clients that don't want to pay. For credit collectors, it is important to find out rapidly to which of these two groups the client belongs, in view of their follow-up and their collection efforts. If the client fails to pay on time because of financial problems, the creativity of credit people will prove crucial. At such a moment, you must be able to decide how strictly you want to deal with this client. Very diverse motives can play a role here. For a good client who has always paid on time but who has a temporary financial hitch, as is confirmed from conversations and their financial information, there is no reason not to be flexible.'
Credit Expo where TriFinance was also present.
Dieter Verbeek: What is the biggest challenge facing today’s credit manager?
Ludo Theunissen: 'The challenges remain the same. One thing all credit managers continue grappling with is the emancipation of the function, so as to ensure that everyone within the organization is moving in the same direction.
'Another important factor, especially within SMEs, are the power imbalances between clients and suppliers, which persist despite the efforts that have been made towards eliminating them.
For example, there are companies that systematically claim they settle their invoices within 120 days. During the first contact, they say: ‘Our payment terms? 120 days’. In principle, the legislation allows for recourse to the courts of law in such cases. But although you’ll almost certainly win your case, you will have worked yourself out of the market at the same time…
'Nevertheless, this awareness has increased within a number of large organizations, while it is also in line with the idea of corporate social responsibility. Some organizations are making good use of this, saying they insist on paying all their suppliers on time, especially SMEs.'
Dirk van Bastelaere: What are the main characteristics of mature credit management?
Ludo Theunissen: 'Clear credit-management guidelines and procedures that are communicated to everyone within the organization. But, first and foremost, the credit manager should be given an important role in strategic decisions. He should be present at sales meetings. He should be consulted about new markets, projects or products. In some large organizations, this is already the case. At the end of the day, the credit manager is someone who is in direct touch with the market and the clients, and who is also aware of the financial evolutions. He thus keeps a finger on the pulse of what is happening in this market.'
Dieter Verbeek: What is the role of top management in all this?
Ludo Theunissen: 'The top management team must ensure that the credit manager can fully assume this role and see to it that the sometimes rocky relationship between sales and credit management should remain balanced. People sometimes wonder whether credit management is a financial or commercial function. In some organizations, Credit is part of Sales, but ideally one should have a role directly under the CEO, without being dependent on any of the others.'
Dieter Verbeek: What challenges do credit-management departments face?
Ludo Theunissen: 'Radical technological changes are imminent. Relationships with clients are becoming completely digital. This offers several advantages: invoicing discussions or disputes can be reduced significantly, while digital invoices are delivered directly to the right destination. This also means that within your own organization you must ensure that invoices are in order and fully meet the client’s expectations. As a result, the number of problems and disputes with clients will decrease dramatically. This also means that the processes themselves will change and be automated.
'I think that some of the steps of the creditworthiness assessment will also be further automated. The process of granting small loans to less important clients or to clients clearly showing a healthy financial situation will be largely automated, requiring only an assessment by an experienced credit controller.
'The same will apply in part to the collection process, where automation is becoming increasingly sophisticated. This has also become evident in the Innovation Award, which we issued at Credit Expo 2018 for the first time. Certain systems make it possible to individualize messages to clients via text messages, e-mails, letters, etc. and to adapt them to the client’s sector, communication style, and specific situation.
'As the tasks performed by credit managers are becoming increasingly automated, their role will change fundamentally. It will even become more demanding: the credit manager will predominantly have to deal with the difficult cases, as well as with the process management.'
Dirk van Bastelaere: Can you leave the automation of creditworthiness assessments up to algorithms? There has been quite some criticism of this idea because algorithms are also likely to reflect existing prejudices.
Ludo Theunissen: 'We cannot avoid this. It remains a system that has certainly proved its usefulness, even up to today, especially in organizations that have to grant many loans and analyze large numbers of clients. Certainly in the banking sector, but also in large companies, there are standard processes for setting credit limits. Human intervention will be required only if there are signals indicating that extra analyses or assessments are needed, while small loans will be granted automatically. If a client requesting a 10,000 euro loan has a reserve of 200,000 euros, there is no reason to devote extra time and attention to this. However, it would be another story if this client applied for a 200,000 euro loan...'
Dieter Verbeek: Is there no risk to turnover if you leave credit rating entirely up to technology? Negotiations between sales, finance and risk analysis continue even today. Can technology solve this?
Ludo Theunissen: If the process can be fully standardized and the proposal is acceptable to all parties, there is no need for additional interventions. There must be transparency in the technology and in the methods used. And this is often an obstacle, in the sense that the link between input and output becomes untraceable in artificial intelligence and in expert systems. Manual processes have always needed the credit people, who can rely on their experience and who have an overview of all the figures they have taken into account. In this way, there remains a clear link between input and output. If you don’t know what the basis of a particular decision or figure is, it is often difficult to grasp why it doesn’t match your own perception of the situation.'
Dieter Verbeek: You already mentioned this just now. This will cause the role of the credit manager to change. Which specific competencies will he need so that he can stay on?
Ludo Theunissen: I think that he should first of all be able to oversee and manage this highly complex process. His role as a negotiator will also become increasingly important, and hence he will continue playing an important part in the contacts and the cooperation with both his clients and, internally, his sales department.'