Should Credit and Collections Be One?

Deciding whether to separate or combine credit and collection functions requires careful evaluation. A recent eNews poll revealed that 34% of departments separate credit and collection functions while 66% mix the two.

The traditional responsibilities of a credit department include ongoing credit functions, collections and cash application. It can be difficult to effectively cover those three responsibilities if staff is limited and work volume is high. For example, 61% of credit departments have one to four team members in charge of managing collections, according to a joint survey between NACM and BlackLine. Nearly half of all businesses use collectors to apply payments at the end of each month, taking even more resources away from collections.

Ongoing labor challenges underscore the importance of making the right decision when it comes to dividing or combining credit and collections.

Mixed Credit and Collections

When employees are in charge of both credit and collections, it promotes accountability, said Maren Anderson, CBA, CICP, credit manager at Oregon Tool, Inc. (Milwaukie, OR). “If you’re reviewing and approving accounts and making a decision to grant open terms, you’re taking ownership of those accounts and part of that means also being responsible for collecting past dues.”

For Nancy Hall, CICP, credit analyst at Cliffs Steel Inc. (West Chester, OH), each team member is assigned customers to their portfolio to manage the risk and collections of their accounts. “It is our responsibility to manage our time and prioritize the workload on our portfolio for all collection efforts and risk of our assigned accounts,” she said. “We follow our credit policy and use the tools and process to manage our daily efforts. Our team has weekly meetings for discussion and month-end reporting. We always have support from other team members or management if needed.”

Separate Credit and Collections

Separating collections from credit, however, allows credit managers more time to focus on other tasks. Brian Diggs, director of credit at Power & Telephone Supply Company (Piperton, TN) says his team has five collectors that focus solely on collections but is hiring a new credit analyst where 40% of the work will be in collections. “Once the credit analyst is trained, I can focus on other areas of my team as I do the majority of the decision-making in the credit department,” Diggs shared.

When one team member focuses on one responsibility, they can become specialized in that area, which can improve efficiency, especially because credit and collections are very different. “Credit application processing is detail-oriented work and requires that gut instinct when something doesn’t seem right,” said one credit manager. “Whereas collectors, we call them AR specialists, are focused on collecting payments and forming relationships. It caters to different personalities as well.”

What Is Right for You?

Krystal Daugherty, CCE, order-to-cash manager at Acuren Inspection Inc. (La Porte, TX), is in charge of deciding whether or not to separate the credit and collection functions as her company prepares to stop outsourcing and bring those components in house.

“For the majority of my career, I’ve always done credit and collections together and it has its benefits of being responsible for credit risk mitigation and collections, but not everyone does it this way,” she said. “I want to know about the pros and cons of separating or combining the responsibilities so I can make decisions with my eyes wide open. We want to know the risk we’re taking. We don’t plan to implement it in the near future but if we do make a decision to do that, I will need to execute pretty quickly. I would like to understand whether the benefits of combining tasks outweigh the risks.”

Regardless of the chosen strategy, open communication and well-defined procedures are essential to ensure the success of either approach. Ultimately, the choice should align with the organization’s size, industry and risk tolerance, said Darrell Horton, ICCE, NACM immediate-past chair and director of revenue and credit at AGS LLC (Las Vegas, NV). “Larger companies have the resources and the need to have the positions separated, smaller companies may not have the resources. Both work, it is about capacity.”

Stronger managerial control is required when the functions are separate to make sure nothing slips through the cracks. Lynn Englund, senior credit development manager at Ingram Micro Inc. (Williamsville, NY), separates the credit analysts, referred to as credit development managers, from their collectors, referred to as credit asset managers or relationship managers. “We have a separate leadership team that manages each group so that we do our best to work together,” she said. “When there’s out-of-the-norm customer behavior, they will raise it up to the credit analysts, but I’d rather be told about a potential situation and find out that it’s not much of anything than not know about it until it becomes a huge problem. On the other hand, the collections team is missing the information from the credit review which the credit analyst has.”

If communication is already an issue within your department, combining credit and collections might be a better approach. “If the separate credit functions are not communicating well, even on a regular basis, it can lead to more problems in the long run,” Englund said. “They both have to communicate when reviewing accounts and be as proactive as possible but sometimes credit analysts and collectors don’t always agree.”

You also may enjoy NACM’s white paper on Guidelines for Assigning Collector Workload.