The effectiveness in managing an organization rests on the commitment of those in management to always operate in the best interest of the organization, sometimes at the detriment of their own self interest. Within the last few months there as been a considerable amount written about lack of commitment in today’s professional services organization. I, myself, have presented a contribution as to the secrets of growing a professional services practice through committed players. Just yesterday, the Wall Street Journal published an article how a lower Manhattan firm has partners scampering to other firms because 2008 profits will be lower than expected.
Today’s professional practice has partners of various commitment levels to the overall profitability of the firm. Those on the lower end of the spectrum are the ‘bad apples’ to the firm and will pull the firm profitability down. Remember that doom and gloom disseminates much faster than excitement and fanfare. For those not committed to their firm, it is time to go searching for that pot of gold at the end of the rainbow. Firm profitability doesn’t start with the partner next door or the department head, it starts with you! You Ms. Partner must stop being involved in collections and become committed to the firm’s profitability through a strong positive cash flow.
As presented in my last contribution, a collections effort is essentially the remnants after the war has been fought or cleaning after the parade has past. Waiting until the work has been completed and billed will essentially close the doors to strong cash flow. Recall, that the collections process must be based on a policy. The collections policy must be a mirror image of the credit policy. Only then does the firm have a strong footing on which to reap a strong positive cash flow. Therefore the first step for the firm is building a credit policy.
The word ‘policy’ conjures up negative connotations of heavy bureaucracy and inflexibility. However, a well constructed policy provides tremendous value to the firm. The top four contributions a credit policy brings to the firm are: 1. It focuses everyone in the firm that client portfolio management is important and serious, 2. It ensures consistency among practice groups, 3. It establishes a consistent message sent to clients and prospects, 4. It reinforces the value of credit and collections to the firm. In building the credit policy, there are two main issues to be observed, the understanding of the firm’s culture with respect to risk and documenting how the firm will manage this risk as part of their client portfolio. The one main reference guide I would suggest to anyone seeking to build a credit policy is: How to Write a Credit Policy, by Cliff Miller. The publication is put out by the Credit Research Foundation. It is extremely well written and walks the reader through the process of creating a credit policy.
The first step in building the credit policy is to understand the credit department’s mission to the organization. This will establish where they fit in the hierarchy and their importance in the eyes of management and all partners. Keep in mind that the credit department and collections department, ideally, should be separate. The credit department’s mandate should be based on the issuance of credit based on the firm’s risk tolerance; this requires a very analytical skill set. While the collections function is more an assisting and encouraging role that works towards getting bills paid; people centric. Both of these functions are encompassed by the firm’s tolerance for risk. Over the coming contributions, the concept of risk management of the client portfolio will be interspersed with the building of the credit policy so as to provide a uniform progression toward a completed policy.
The first question the firm must answer is: What is the mission of the credit department? How this is answered will ultimately determine the firm’s cash flow. I feel the credit department must operate under the direction of the most senior of management, as this department has a tremendous impact on the firm’s cash flow. The mission statement may turn out to be the precursor the identification of the firm’s tolerance for risk. Keep in mind, that the mission statement may possibly be revised by the end of the credit policy. For once set, the credit policy will be the foundation of future cash flows. Here are some examples to seed thought:
The firm in Expansionary Growth Mode (risk seeking)
“It is our policy to provide credit to all potential applicants, regardless of payment experience. The credit department will attempt to screen out clients who obviously will become bad debts. We will attempt to build relationships with all our clients and effect collections without jeopardizing the client relationship.”
The firm who understands their affinity for risk
“The credit department is responsible for maintaining a high level of quality in the client portfolio in direct alignment with the firm’s risk profile. We will act to provide flexible mechanisms to protect the firm’s substantial investment in the client portfolio, while not negatively affecting client engagements.”
The conservative firm who has a strong market position
“The credit department is responsible for managing the firm’s investment in the client portfolio within the risk levels determined by executive management. It is our responsibility to assume no unwarranted risk. We will advise executive management of clients who become risk situations and will make efforts to limit the firm’s credit exposure in these areas.”
Once the firm has established the mission of the credit department, the foundation will be set. From there the firm will establish its commitment toward firm growth, longevity and cash flow. Firms must start with knowing what they want for the firm now and into the future.