September 14, 2023

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.

Relationships are at the crux of what it means to be human. But not everyone is skilled at building strong, authentic relationships. Credit professionals, however, have no choice but to become the best relationship managers in the financial world. No matter how long the relationship with a customer or how much product that customer buys from your company, each one should be treated as your number one customer and feel special.

Establishing strong connections with customers can strengthen your company’s reputation and enhance the customer’s experience. Happy customers are more likely to remain loyal, which is key in an increasingly competitive global market. Maintaining open and positive relationships also helps credit managers to better assess a customer's financial health and intentions. By understanding their customers' circumstances, credit managers can identify potential risks early and take proactive measures to mitigate them.

The basis for a positive creditor-customer relationship starts early on. In-person customer visits are one way to foster a sense of trust, said Wendy Mode, CCE, CICP, division credit manager at Delta Steel, Inc. (Cedar Hill, TX). “You want to engage on a personal level to a certain extent because it lets the customer know you truly care about them as a person versus only being there to get a check or for business and asking where the money is,” she said.

Taking initiative to get to know your customer through small talk and personal interests is one way to build a bond. Get to know about your customer's life and understand their expectations for business. Once a relationship is established, it will become easier to nurture the ongoing relationship.

“As you get to know people, you tend to become more candid and your initial guard may drop a little bit more and we start sharing personal aspects about ourselves, even in these B2B relationships,” said Alaina Worden, CCE, credit and collections manager at CECO, Inc. (Portland, OR). “I’ll keep track of those little tidbits of information, whether someone took their kids to soccer practice or is spending time with family. Once I talk to the person later, I can follow up and ask how their plans went and those relationships are a lot more organically driven when you’ve already gotten to know them.”

In addition to taking a personal approach to building relationships with your customer, it is important to emphasize what your company can offer from a professional standpoint. For example, if the customer cannot pay you a full amount at the time they need to, they will be more likely to have an open line of communication instead of avoiding your calls.

“The better relationship and better customer bond you build, the better chance you have of getting paid,” said Mode. “Know who your customer is and what you’re walking into. Your salesperson should also be able to fill you in on the personal things, such as are they someone who likes to talk sports or just strictly business.”

Take note of how your customers like to communicate. Do they like to be contacted often or only when needed? Do they prefer email or phone call? Jill Burns, regional credit analyst at ABC Supply Co. (Beloit, WI), said her customers are both internal and external. Even in times of disagreement, the relationship with the customer is not impacted in a negative way. “Even if it’s not positive news I’m relaying to the customer, I always try to keep a smile,” said Burns. “It comes across way more receptive and genuine to the customer, even if the information is something they may not want to hear. Within credit, you can relay information in a certain way to maintain the customer relationship. A phone call is more important than having that interaction through a letter, email or text message.”

A relationship that is off to a rocky start can be salvaged with some time and care, Worden explained. “Some relationships may need a bit more polishing to be able to grow and it won’t be as natural because there’s sand in the water,” she said. “It’s all about how to then turn that sand into pearls. Being empathetic to certain situations and finding where the disconnect is can help. Fix that strain by communicating, and ask for feedback from the customer. What can you do to be a better partner to your customers? How can you serve them better?”

Be sure to join the upcoming Credit Congress Spotlight Session Building Relationships with Customers on Thursday, Sept. 21. The new Credit Congress Spotlight Sessions are the perfect opportunity to savor a slice of the exceptional education that Credit Congress delivers annually. Credit Congress Spotlight Sessions feature some of the most insightful presentations from this year's Credit Congress event. You can register for the full series for $399 per person or join the Unlimited Webinar Program (BEST VALUE) for $1200 for your entire company to participate in all webinars for a full year.

The Financial Crimes Enforcement Network (FinCEN) and Internal Revenue Service (IRS) Criminal Investigation Department issued a notice of attention to a notable increase in state and federal payroll tax evasion and workers’ compensation insurance fraud in the residential and commercial real estate construction industries.

Both payroll tax evasion and workers’ compensation fraud are based on the use of shell companies; corporations without active business operations and forged documents. Each year across the U.S., state and federal tax authorities lose millions of dollars to these fraud schemes, typically committed through banks and check cashers.

FinCEN also warned financial institutions to pay attention to a range of red flags in order to detect and help prevent fraudulent transactions, including:

1. Newer, highly specialized construction firms with minimal internet presence.
2. A company’s bank account has minimal to nonexistent tax or payroll-related payments to the IRS, state and local tax authorities.
3. The company has a third-party payroll company despite a large volume of deposits from clients.
4. People with no prior experience in the construction industry opening accounts using a non-U.S. passport as identification.
5. The purpose of cash withdrawals from an account holder, negotiation of checks for cash, or check cashing activity is for payroll and the volume, amount, and frequency of transactions are uncharacteristic for a construction company with a small number of employees.

“Any type of fraud scheme committed on a construction project can cause various types of actions that invariably can cause project delays,” said Chris Ring of NACM’s Secured Transaction Services. “Payroll tax and workers’ compensation fraud may also get contractors thrown off the project, especially government projects.”

One example of how workers’ compensation fraud is committed is by a company that goes under a different name, making that name the responsible party if a worker is injured. If a hurt employee does not have workers’ compensation insurance, the responsibility falls on the owner. Liability flows uphill, explained Emory Potter, Esq., partner at Hays & Potter, LLP (Peachtree Corners, GA). “The owner always needs to get a declarations page from who they contracted with in order for the compensation to stop with that person,” Potter said. “Just because someone hands you a workers’ compensation declaration page doesn’t mean it’s still in effect. A lot of people get a policy of workers’ comp and cancel the policy due to the expenses.”

Every entity in the U.S. is required by law to have workers’ compensation insurance coverage, according to the Labor Standards Bureau. But one of the ways to get around the requirement is by attempting to say employees are independent contractors. This typically fails due to the statutory employee rule, which states the statutory employer must pay workers’ compensation benefits just as the direct employer and subcontractor must do. In some cases, a lawyer will have to be hired in order to defend these charges, which cause major problems on the project. The more often these fraud schemes pop up, the more problems they can cause for individual construction projects.

Recordkeeping is just as important as reporting flags. When filing a suspicious activity report (SAR), you are required to maintain a copy of the SAR and the original record of any supporting documents for a period of five years from the date of filing the SAR. FinCEN’s notice said SARs are crucial in identifying and preventing payroll tax and workers’ compensation fraud schemes.

“Make sure you have physical text pages that are real,” said Potter. “If someone falls off a roof, and you don’t have insurance for your company, your company can get sued. Workers’ compensation insurance protects your company.”

With Congress racing towards a government shutdown on Oct.1—an outcome that is looking more and more likely—let’s look at the three most recent shutdowns and what you can expect this time around.

What Is a Government Shutdown?

A government shutdown typically refers to a lapse in federal funding for discretionary programs. When Congress passes a law, it can either opt to provide dedicated, open-ended funding for a program (ie: Social Security and Medicare), or it sets an upper limit on how much money the program can receive and Congress must then pass a funding bill to actually fund to the program each year (ie: national parks, non-essential defense programs, and the census). The former is considered mandatory and is largely not affected by a shutdown, whereas the latter is considered discretionary and both operations and employees are furloughed during a shutdown.

2013 Shutdown

The first government shutdown since 1996, this shutdown focused on Republican attempts to repeal the Affordable Care Act, or Obamacare, as well as lock in lower government spending. Due to the length of time since the last shutdown, federal agencies were largely caught unprepared to manage the shutdown, which exacerbated the negative impacts.

The shutdown lasted for 16 days before Congress and President Obama reached a deal. Two main factors led to the end of the shutdown: growing public fatigue and opposition, as well as the U.S. coming within hours of reaching the debt ceiling, an outcome that Congress was unwilling to risk.

The main economic impacts of the 2013 shutdown were focused around the loss of tourism associated with national park closures, delays in processing SBA loans leading to lost deals and a significant hit to consumer confidence.

2018 Shutdown

This shutdown focused around immigration issues, as the Deferred Action for Childhood Arrivals (DACA) program was set to expire and Democrats refused to pass a funding bill that failed to extend.

The shutdown lasted only four days, as a deal was reached to restart negotiations between Democrats and Republicans on immigration issues. In this case, the political will to shut the government down was relatively low, which is why Congress was able to swiftly negotiate a deal. Due to the short duration, the economic impacts of the shutdown were minimal.

2018-19 Shutdown

The 2018-19 shutdown was the longest government shutdown in U.S. history, lasting 35 days. For many, this was considered a surprise shutdown, with Congress having largely reached a funding deal in early December only to have President Trump threaten to veto the deal, demanding funding for his proposed wall along the Mexican border. Democrats dug in, opposing funding for the wall, leading to a shutdown on Dec. 22.

Due to the length of the shutdown, the impacts began to stack up. During a shutdown, essential employees are required to continue working, which includes air traffic controllers, TSA agents and medical providers. However, none of them receive any pay until Congress reaches a deal and reopens the government. As the shutdown continued into the third pay period for many government workers, some stopped showing up to work, leading to airport closures and significant interruptions of everyday business. The mounting pressure eventually brought Congress and President Trump back to the table, reopening the government on Jan. 25.

What to Expect This Time

The potential shutdown on Oct. 1 is fueled by hardline conservatives in the House who are demanding severe government spending cuts. Meanwhile, many moderate Republicans quietly oppose the cuts and would support level funding. This already makes the situation quite unique compared to past shutdowns, where the parties have been unified and dug its heels into a specific position. Even more noteworthy is the position Speaker McCarthy is in, where the same hardline conservatives can potentially challenge his Speakership if he ignores their demands. Additionally, the shutdown this year might also include some mandatory programs like food stamps and the Federal Aviation Administration (FAA), as the deadline to renew these programs happens to coincide with the potential shutdown.

Together, these factors make this shutdown both highly unpredictable in length, as well as potentially more devastating to the economy. Many consumers will likely reduce their spending over the duration, and a loss of welfare benefits may further contract the economy. Additionally, unless Congress independently extends the FAA, air travel may be significantly affected. Lastly, as with other shutdowns, customer support functions of the government for troubleshooting issues with Social Security, the IRS and SBA loans will largely pause for the duration.

Congress still has a little more than two weeks to reach a deal, but right now, they don’t even know what they are negotiating over, so we recommend preparing for the worst.