Why accounting matters to credit managers

Credit is the lifeblood of every business. Its role in managing cash, identifying risks and evaluating potential for loss are only a snippet of the entire picture. But there’s another key function that cannot be overlooked: accounting. As credit is the lifeblood of a business, accounting is the language of a business.

Why it matters: Credit managers must understand basic accounting concepts to effectively communicate financial health and make informed decisions.

While accountants are known for operating in the realm of black and white, adhering to strict principles and standards, credit managers often find themselves navigating the complexities of the grey area, balancing risk and opportunity in credit decisions.

Despite these differences, it is imperative for both accountants and credit managers to understand each other’s roles, challenges and objectives.

Applying accounting principles in the credit department helps businesses predict future cash flows, monitor financial statements and protect against financial crises. Accounting’s process of recording and analyzing all financial transactions plays an important role in compliance with financial regulations as well. It is helpful for credit to understand:

• Accruals
• Reserves
• Month-end account reconciliations
• Audits

What they’re saying: “Knowing how bad debt and disputes are coded and accommodated in our financial results lays a foundation for how I attack the AR and work collections,” said Chris Cude, market credit manager at Ferguson Enterprises (Birmingham, AL). “I know that if a certain account goes bad, it will have a measurable impact on the business unit and drives the urgency in resolving as quickly as possible. So, accounting plays into both the credit analysis and collections management tasks of my day-to-day.”

Accounting processes typically overlap with credit tasks daily—and it is especially important for credit managers to understand the transactional impacts (i.e., impacts on the balance sheet for investment decisions and impacts on income statement for operating decisions.) A few more overlapping functions in credit and accounting include:

• Sales tax understanding and treasury functions
• Generating monthly accruals and reserves
• Budgeting and calculating ROI on non-standard terms
• Reconciliation and balancing of accounts

Accounting skills are important to succeed in the many roles of a credit manager. Being knowledgeable about accounting functions can also increase your value with your company. “When credit sells to a customer and the sales order is billed as a transaction, we all should be aware of what the balance sheet transactions are and the matching principle states the income statement transactions,” said George Schnupp, CCE, instructor of NACM’s Financial Statement Analysis 2: Credit and Risk Assessment. “This generates both the investment gross margin on the balance sheet and the operating gross margin on the income statement. These transactions also prove that sales and credit are on the same team!”

Just like any successful relationship, both sides need to learn from each other to coexist. The more knowledge credit and accounting gain from each other, the better overall company performance. For example, from a credit perspective, learning about accounting can improve your conversations with customers. “Being educated about accounting functions helps me explain some of the ‘whys’ to my internal associates when I’m trying to explain the reasoning for asking for certain things,” said Cude. “For the accounting side, when reviewing financial data for the business, having insight as to what may be happening to cause certain issues like an increase in AR or bad debt probably helps them with understanding the company better.”

Both credit and accounting are a function of the other. Working together as a team is important to ensure the company’s investment in AR is of the highest quality possible. In the daily accounting cycle, credit makes hundreds of operating decisions in processing sales orders and cash collections. “Accountants need to understand that credit is a relationship-based function with internal and external functional teams,” said JoAnn Malz, CCE, ICCE, NACM chair and director of credit and collections at The Imagine Group, LLC (Shakopee, MN). “There is, of course, a transactional component when it comes to cash application and account reconciliations. Credit is not just picking up the phone, sending an email asking for money or sending an invoice copy. Like accountants must adhere to GAAP or IFRS, credit teams have a multitude of UCC laws that we are required to work within.”

The bottom line: Accounting and credit management are interdependent, with the understanding of both being essential to effective business operations, risk mitigation, compliance with financial regulations and maintaining a healthy cash flow.

Registration is now open for NACM’s online accounting course. Reserve your spot now for Financial Statement Analysis 2 at Credit Congress!