Credit Scoring Modules: A Credit Manager's Best Friend
By Craig Combs
Craig Combs, Director of Financial Services, Dole Packaged Foods Company
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As credit manager, your greatest asset is the ability to determine risk. This means not just minimizing the credit risks for your company, but also supporting sales growth.How well, to what degree, and how fast you can perform the task of risk assessment of a new customer or an established account can have a huge impact not only on your company's bottom line, but also on sales growth, controlling credit costs, and your ability to collect accounts receivable. Over the past several years there have been significant changes in how credit data are obtained and mined by credit professionals. Each year, we are asked to make credit decisions faster, do more with less, keep bad debt to a minimum, and support sales growth. We need to be innovative to meet these challenges, while at the same time, protecting our greatest asset, the ability to determine risk. Faster, Better, More Quality Control
With this in mind, credit scoring modules can help. At Dole Packaged Foods, we have been using credit scoring modules for over 8 years. Since implementing scoring modules in our credit review process, we have noticed very positive results:
- Reduction in bad debt
- Credit reviews are completed faster
- Improved consistency with credit reviews and related analysis
- Improved predictability
Bad-debt expense has dropped by 50%. While not all of this decrease is solely due to our scoring module, we know that it has played a key role. Since we implemented a scoring module 8 years ago, 100% of our bad-debt expense was flagged as high-risk by the scoring system. As such, using scoring has helped improve our awareness of our high-risk accounts and reduced the "bad-debt surprises." The same holds true for low-risk accounts. The scoring system helps us better identify where we should focus our credit resources from a credit review standpoint, making us more efficient. More Efficient use of Credit Reporting Services
Another benefit of using scoring is that there is less of a reliance on credit reporting services. For example, over the past 8 years our credit reporting services budget has remained flat despite having sales growth of 90%. By using a credit scoring and relying on the information derived from the module we find less of a need to order a credit report on every customer under credit review. Expanding Credit's Influence on the Supplier Side as Well
And we use the same credit scoring module on the "other side" of our business -- our Strategic Sourcing Group has also used our credit scoring module on our current and potential vendors, demonstrating the flexibility of the model. The core of any credit scoring module is its ability to assess credit risk. Additional benefits include data integrity, consistency, reliability, and flexibility when credit checking a new or existing customer.
 According to our research at Dole, on average, it takes over 70 minutes to perform a standard credit check. Add financial statement analysis, and you might need an additional 70 minutes to analyze another 100 data elements. 
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Research on Credit Reviews
Typically, when a credit review -- with no financial statements -- is conducted, there are over 40 data points that a credit manager must take into consideration. As we know, this can be time consuming, shifting through these to try to come up with the following assessments.
- How is this account paying its vendors?
- What are the credit risks?
- What are the positives and negatives from the credit review?
- What size of credit line is needed?
- Are there any hidden risks?
According to our research at Dole, on average, it takes over 70 minutes to perform a standard credit check. Add financial statement analysis, and you might need an additional 70 minutes to analyze another 100 data elements. Approximately 80 percent of the time in a credit review is spent trying to determine what the information is telling you. The actual analysis takes less time. Additionally, the analysis can be impacted by the complexity of the related information and how well this information is organized and displayed. Have you noticed that when you are trying to decipher all of the data points in a credit review, you typically keep going back and forth through the paper work? At times, this can result in missing some key data and extending the time it takes for the credit analysis. Because of this, credit scoring streamlines and improves the credit review process in the following ways:
- Predictability/Consistency - a huge plus in using credit scoring modules
- Ease of use - it takes minutes to enter all the information
- Organizes all the data points into a single page summary
- Related analysis only takes minutes (if your module aligns the information)
- Provides for an improved audit trail
Knowing When Data is Missing
In order for a credit decision to be made, there is key information that is needed, without which it is very difficult to determine the credit risk, no matter how many years of experience you have. The benefit of scoring is that it makes it much easier to do the analysis, as well as identify when information is missing. A credit scoring module should be flexible and able to adjust to the following conditions:
- Business changes (both internally at your company and externally)
- A variety of sales channels
- Changing the module's weighting process (key with predictability)
Flexibility is Key
Your scoring system should be flexible when needed. At Dole Packaged Foods, we have at times tailored our scoring metrics to fit our different sales channels or to address a particular economic condition. Further, during the recent economic downturn, we adjusted our credit scoring module to reflect certain characteristics of the recession which we believed impact certain segments our customer base. For example, restaurant businesses and private equity firms were deemed as automatic watch accounts, regardless of their credit scores. In addition, from a financial ratio standpoint, we changed the weighting (importance) of certain ratios (mainly liquidity and debt ratios). The above also highlights how easy it can be to make a credit policy shift (following management approval) with credit scoring. Once your revised credit policy has been approved and communicated, you simply update the credit scoring module. After all, miscommunications do happen with credit policy changes, due to misunderstandings or someone forgetting about the change. As a matter of procedure, we have found it helpful to have a revision-naming convention with our scoring module. In addition, protect the worksheet where the module resides.
The most important thing to understand about using a credit scoring module is that they do not hide credit information, so it is much easier for you to identify credit risk, which helps reduce bad debts and related credit costs while improving predictability.Currently, there are several companies who market very good credit scoring modules. Depending on your company's needs and budget, many of these would make the perfect complement to your business. Searching for credit scoring modules on the Internet is a little tricky. If you search on "credit scoring" what will come up is a lot of consumer-related credit scoring, which is of little use. I suggest the fastest and easiest way to research credit scoring modules is on Credit Today's Online Resource Directory, which is actually one of the best websites to use when researching credit scoring modules. In Summary...
If you are in the market for a credit scoring module, the following features will be very beneficial:
- Consistency: A key component of any good scoring module
- Predictability: A key feature and will provide great benefits
- Adjustable: The module needs to be adjustable with the ability to change or evolve. One size does not fit all
- Is flexible: This will keep the credit scoring module also in sync with your business needs and credit policies
- Allows for the expertise of the Credit Professional to be included in the scoring process
Keep in mind that credit scoring will never replace you; it simply leverages your expertise. Craig Combs, is Director of Financial Services at Dole Packaged Foods Company, Thousand Oaks, CA. He can be reached at 800-227-4064 x 1 4749 # or via email at Craig.Combs@dole.com.
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