GETTING PAID
As the region's economies continue to slide, credit management is now a top mandate for CFOs
By Abe De Ramos and Steven Crane

Thirty-two floors below the bright sunlit office of Francis Lo is a tiny electronics shop with dusty shelves crammed with laptop computers, personal digital assistants and mobile phones. Every time a gadget leaves that shop, a fraction of the sale will one day figure in Lo's cashflow statement. That is, if the gadget ever leaves the shop. The director of finance at Intel Semiconductor Asia, which supplies the microprocessors that power those gizmos, is greeted by an overwhelming silence when he enters the store these days. And he expects quieter days ahead. In his own words: "Supply is simply greater than demand, and it could take a while before that shop can pay its vendor, who should then pay us back."

All across Asia, the cheerful ping of cash registers has never been so faint. As a result, CFOs are more concerned about credit risk than ever before. "Money is tighter, and it will be more difficult to chase it," says Rod Lee, CFO of Cisco Systems Asia Pacific, the Singapore-based regional headquarters of the US$22 billion-a-year networking equipment giant. The 42-year-old CFO is serious about getting paid. In the fiscal year ending July 2001, Cisco provided US$288 million for bad accounts, seven painful times the previous year's US$43 million.

With sales now coming in trickles, CFOs find themselves wearing their credit risk manager's hat more often. Asia has always been a high credit risk, with its bad mix of bogus financial reports, poor corporate governance and unstable politics. This was cheerfully overlooked during the boom years, but now credit management is something no CFO can take for granted. "The biggest asset on our balance sheet is receivables," says Paul Ringrose, CFO for Asia Pacific of Nasdaq-listed mobile phone distributor Brightpoint in Hong Kong. "Therefore receivables management has to be a prime focus for me," he says.

Enabling Receivables

It's a consciousness whose time has come. In a recent report called Profiting from a Recession, US advisory firm Booz-Allen & Hamilton says a downturn presents an opportunity to realign strategies so businesses can stay afloat, not only through but after a recession. Its main advice: accelerate credit collection. Hee-Sang Cho, CFO of E-Land International, a US$1.5 billion-a-year clothing manufacturer in Korea, agrees. "In this environment, you can generate more money on credit management than sales improvement," he says.

Time is of the essence, as Orient Overseas International (OOIL), the US$2.4 billion-a-year parent of Hong Kong cargo giant OOCL, has learned. Its credit terms are so clear that they are even printed in the company's annual report. Payments are due ten to 45 days upon the presentation of an invoice. Debtors "are requested to settle all outstanding balances before further credit is granted." But this clarity wasn't enough. In the first half of 2001, OOIL reported that it wrote off US$10 million "as a result of disputes on the recovery of certain cost items and the bankruptcy of one customer." Bitter about the experience, CFO Nicholas Sims says OOIL is now in the middle of a thorough review of its credit management processes and systems.

Sims has to do this with care - credit - policy adjustments always present a defining moment in customer-client relationships. "I'll expect a CFO to balance the risk together with building a business," says Lo. It's a delicate balance. On one hand, CFOs want to offer a certain amount of generosity in dealing with overdue accounts of key customers, winning over their loyalty. On the other, CFOs also want to be firm when dealing with subsequent contracts so that they pay within the desired days sales outstanding (DSO). A good DSO, the number of days between sending the invoice and receiving the payment, makes the most of working capital, the Swiss army knife of operations.

But before knocking on customers' doors, it is important for CFOs to keep a few perspectives in mind. First: credit management is a competitive tool. "If a company with good credit management capabilities can create goodwill by extending credit where others will not, they can increase market share and increase customer satisfaction," says Matthew Podrebarac, a Hong Kong-based partner specializing in financial performance at Accenture, the international consultancy. Second: "Credit is all about your future business," according to Matthew Hosford, senior manager for financial risk management at consultancy PricewaterhouseCoopers in Hong Kong.

The Price of Kindness

The bottom line is clear: improving relationships should be an underlying objective of credit management. Given the right system and backed by an organization with clear accountability, getting paid doesn't have to be a test of wills.

No math can calculate how much kindness a CFO must give, as it depends as much on financial standing and credit history as it does on subjective variables such as relationships and business value-added. But the basic solution is to extend payment terms. This is something Nancy Cheng, finance director at the Asian headquarters of the US entertainment giant Columbia TriStar in Hong Kong, has done now and then since the 1997 financial crisis.

Lately, Cheng and her team of three credit managers have been working out payment terms with advertising-starved broadcasters whose finances betray the canned laughter of Seinfeld, a defunct American sitcom that remains a Columbia TriStar hit. Some broadcasters have gone beyond the desirable 60-day DSO and Cheng had to either extend payment terms by another 60 days in most cases, or reduce the agreed price.

In a few cases, she had to settle for both. "Remember that as you are collecting," she says, "other vendors are, in all likelihood, collecting from them as well, so the key is not to drive them to the ground so that they run out of cash to keep the business going."

Cheng is glad she hasn't had to resort to tough action to influence a payment, thanks, largely, to Columbia's popular American products, from Jeopardy! to Charlie's Angels. Other companies aren't so fortunate. US chip giant Intel, for example, is seeing its market share being eaten away by Advanced Micro Devices (AMD) in various parts of the world. As a result, in Asia, CFO Lo has had to resort to painful measures to get paid.

The balance Lo tries to strike is three-pronged: enable clients to service their overdue accounts; keep their current balances current; and look after his market share, not only from AMD, but within Intel. So far, this seems to be working. His territory now accounts for 31 percent of total revenues, from 27 percent a year ago.

As CFO of a dollar-based business, Lo is used to extending payment terms. In fact, it became an art form in 1997 to 1998, when clients in Indonesia saw the value of the rupiah plunge by as much as 90 percent. Today, his response is not as straightforward. The glut in the industry has sent Lo and his sales and credit collection teams into the offices of his non-paying clients - most of which are multinational corporations and Asian original equipment manufacturers. Once there, they go over the client's financial statements, review their inventory, and sort out the cause of the non-payment.

Lo states the biggest reason: "Most of the time, they make the mistake of overstocking, thinking they could turn the inventory into cash, but for some reason couldn't. Other times, it's about shipment delays, which then delays their working capital flows."

Making Markets

Almost everyone in the sector, including Intel, is guilty of this miscalculation, and to stay in the good graces of customers, Lo reacts by absorbing some of the excess. "If there is no moving inventory, we will suggest to them not to take on further shipment," he says. That's easy enough. For those shipments the client is not able to sell, "we will allow them to return some of the inventory to Intel," he says.

To minimize the financial charge Intel has to take in the process, Lo finds other buyers for the same unwanted chips, at a bargain, of course. This isn't commercial suicide, far from it. Lo believes he is building Intel's reputation as a business partner, as opposed to mere supplier. Using its network of 10,000 suppliers and customers, Intel works to find new markets for its clients. "Intel doesn't necessarily have to take a financial charge for the inventory," says Lo. "If a customer in a certain country has difficulties to sell it through their own channel, we could find some other customer for them in other countries," he says.

Texas-based Compaq Computer, one of the world's largest makers of personal computers and servers, finds itself in a similar situation in Asia. Typically, Compaq Asia Pacific in Hong Kong collects payments with monthly statements followed by phone calls. Once an account has crept past its due date, Compaq's credit and collection team begins asking clients to justify the delinquency, and to propose a new payment schedule, before elevating the case to management.

"If there are issues of quality, either reduction in price or return of goods might settle the overdue payments," says Iymond Chang, Compaq's finance director in charge of credit, tax and audit for Greater China. A costly solution arises when a distributor is unable to sell Compaq products to end users, in which case Chang not only extends payment terms, but provides incentives as well. "Sometimes we have to give offers, like free scanners, to pull in the sales for the distributors, and therefore to pull in our receivables," he says.

Ringrose of Brightpoint Asia follows similar principles. He can't afford to let receivables ride. The margins in his business of phone distribution are so low that for every handset that goes unpaid, 20 have to be sold to generate profits sufficient enough to cover the loss. When disputes arise, he says, CFOs should isolate the items in question. "Avoid US$100 being held up over a US$5 issue. Get the US$95 first, and then deal with the US$5 as soon as possible," he suggests.

Ringrose has also resorted to bundling the receivables and selling them to financial market investors, a process called securitization. This financial product is also gaining popularity in Korea, and Cho of E-Land International is quick to take advantage of it. His cash-consciousness arises from the fact that he led E-Land's restructuring from near bankruptcy in 1998. One of his first moves was to establish a bad-accounts department, which included a group of collectors and lawyers dealing only with delinquent customers.

A less sophisticated method for collecting bills is the Asian custom of pulling strings, according to Lee of Cisco. "In Asia, the most efficient way we found to effect payments is using relationships," he says. "So if I know the president of a particular company, I would give him a call. Or we find someone within our organization to get the attention of whoever we need to tell our story to - we may use our customers, partners or employees to try to influence it."

Getting In Line

When exactly does a debt go bad? Most CFOs will say they start worrying about a payment, and classify it as delinquent, a day after it's due. They do, however, tolerate a maximum DSO. Ringrose will allow up to 50 days DSO for a 30-day term; Cheng of Columbia TriStar, 60. But as they sort out problems during this period, they start to apply the flipside of the balance they try to strike - imposing more rigorous credit standards on future orders to thwart a dangerous escalation of receivables.

Booz-Allen & Hamilton suggests charging customers for the capital they employ. "For example, customers who have a high cost of capital may be willing to pay a slight price premium for extended payment terms," according to Profiting From a Recession. "Conversely, companies with a low cost of capital might be amenable to paying more quickly if they get a small discount," says the report.

Sound ideas, but when you see Asia's biggest companies defaulting on their foreign debt obligations, firmer policies are justified. Cheng now demands deposits on orders of tapes for future broadcast. "We give them reasonable terms so they can keep their shops open, but we also want to make sure there are incentives for us to keep the relationship going," she says. Ringrose is not about to change his credit policy: cash-on-delivery for half his clients in China, and post-dated checks on delivery in the Philippines. Neither is Nasdaq-listed National Semiconductors in Singapore. It insists on letters of credit only for Asian clients, versus open account for US and European clients, says credit head Henry Tan.

Treating receivables like a bank loan, by charging interest on the overdue amount, can also prompt a payment. Depending on the financial strength of a client, Lo requires collateral and personal guarantees from shareholders of unlisted customers. "If we see that the customer is not paying us not because of something out of their control - or if the customer is turning into a habitual late payer - then we will consider charging interest," he says. Intel would also not hesitate resorting to holding the shipment of new orders until old payments have been settled. "For habitual delays in payment, we take the very firm action of putting them on credit hold, just to make sure that they respect our credit terms," says Lo.

Cisco already acts like a bank when it gives its customer credit lines, depending on their financial strength. A credit line is far simpler to implement, but determining the amount demands a systematic credit risk assessment. Cisco will take new orders but won't ship them if they would make the customer exceed its credit limit. If, for example, a customer orders US$300,000 worth of routers but is just US$50,000 shy of reaching its US$1 million credit limit, Lee would demand that the balance be reduced by at least US$250,000. "We will never expose ourselves beyond the credit limit that's been set," Lee says. "If we do take the order, it goes on immediate hold until they pay down the outstanding balance," he adds.

Consistent with this emphasis on discipline, Lee has in the past year been able to correct one habit detrimental to any vendor's working capital. Through a system called linear shipping, Cisco has ended what, in loose terms, has been a long standing connivance between commission-driven sales people and discount-loving customers. "Customers know that sales people have a quota to meet at the end of a quarter, so they wait until a week or two before the end of that period before they place their orders, knowing that the sales people would grant them extra discounts," says Lee. "That's just the nature of the beast, and it applies to just about any company that sells something," he says.

Lee says the problem is particularly acute in Asia. "We really drew the line - we had to say we will not do unnatural acts at the end of a quarter," Lee adds. Once he educated managers, the practice died away. That's because sales people needed to get approval from managers before they could give extra discounts. "We would just be firm and say no," he says. To be sure, Cisco could afford to do this because it holds more than two-thirds of the world market for Internet networking equipment like routers. But for Lee, the challenge is about changing the mindset of any sales force.

Insisting on linear shipping - so called because products are manufactured and shipped consistently during the whole period, not lumped towards the end - has worked for Cisco. Its DSO for fiscal year 2001, ending July, dropped to 31 days from 37 days a year ago. "Some things you might have shipped at the end of the quarter, you might now ship at the beginning of the last month," Lee says. "That gives you time to collect the money prior to the end of the quarter." This enhances cashflow, an item CFOs can brag about come earnings reporting season.

The success of achieving this balance of generosity and discipline ultimately depends on setting and enforcing credit policies and guidelines. In an organization with clear accountability this is a CFO's first line of defense against arrears. A CFO's involvement here is crucial. "The reasons for non-payment are something that should concern the highest levels of a company," says Tim Wildman of the Receivables Management Group of PricewaterhouseCoopers in the UK, "not merely because of the effect on the cashflow, but because without sound credit management you cannot run a sound business."

Intelligent Moves

It starts with how credit risk is analyzed. CFOs rely on credit information bureaus to begin the groundwork on credit analysis. As crises unfold, financial positions change easily, so the need for this kind of intelligence is even more important in bad times. But ordering financial and credit histories on clients isn't free or cheap - a typical report costs US$38 to US$93 from InfocreditD&B in Singapore, for example. Still, Matti Kivekas, financial controller at the Singapore office of Finnish paper products company UPM-Kymene, doubled last year's budget for information gathering to S$50,000 (US$27,000). "It's worth the expense," Kivekas says, "because if I don't have a warning system, how much will it cost me?"

Many CFOs believe credit bureau information should only be a first step. Jenny Chua, financial controller at the Singapore office of smart card services provider Gemplus Technologies, works with her company's risk and credit management team to supplement these reports with media monitoring, internal treasury studies and as many personal meets as necessary with the company's many clients in the region. Based on the overall picture, Chua tailors account terms to the individual customer's cashflow situation. "Ultimately, there is a limit to the credit risk we'll support, but having a personal relationship makes collection much easier," she says.

Lee of Cisco has an unusual trick: he compares notes with other vendors, even competitors. "There are a lot of stuff you can pick up from the street," he says. "We talk to Hewlett-Packard, Sun Microsystems, our credit counterparts in those companies, and gather whatever information is necessary." E-Land's Cho hits the streets as well. His business exposes him to single-proprietor ventures, so an intimate knowledge of the client is vital. To get up close to his clients, the Korean CFO hires an investigation agency, powered by middle-aged women who find out personal details such as how many times his distributors and franchisees have divorced, how much money they have lost in gambling (a national pastime), and how often they have moved house.

For Intel's Lo, client investigation is more formal - and it also starts from day one. Just like a venture capitalist, he instructs his credit team to review the business model of new clients. "We will look at whether a customer has a strong customer base, whether the channel they are selling to overlaps with our existing distributors', how often they turn inventory, and most of all, their own terms of selling," he says.

Warning Signals

Once credit risk is determined, the next step is to constantly monitor it. Today, that's easier than it once was for companies with a strong commitment to IT investment. With the help of enterprise planning software, vigilant CFOs can now monitor the movement of a customer's inventory, even in real time. For example, Cho runs an "expanded intranet" where data is shared by the company's finance department, its sales staff and its franchisees and distributors. So far, 70 percent of E-land's 3,200 sales channels are connected. Cho targets 100 percent by the first half of 2002, and he is prepared to give them a further discount to cover the cost of maintaining the system.

The information shared is inventory by item. This is possible because all point-of-sale facilities are linked with the computer systems. "We know when they make a sale of any item, so we know how our sales are going," Cho says. As such, Cho has an eye on how much money to collect, and exactly when, from any given client. "This gives us the position where, if we see that a customer has more inventory than he can move, our controllers can communicate with him," says Cho. Thanks to Korea's advanced telecommunications facilities, the system is powerful enough that sales people on the road can access this information on their Palm Pilots.

The importance of being up-to-date with a customer's level of inventory can't be overstated. By the end of the year, 100 percent of orders from Intel worldwide should be done through its website. Each client owns a unique account number and profile, where invoices are posted. This gives Lo and his team a warning signal when a customer is facing distress. "We monitor the inventory flow of our clients on a very timely basis," he says, "so if we see that a customer is carrying more inventory than it can absorb, we might suggest reducing the intake of further shipment until they are able to clean those up."

An IT-backed account information platform can also do wonders with the collection process. For Lee of Cisco, which runs an Internet-based system similar to Intel's, it gets rid of phone calls and hearing classic tricks of delaying payments such as: "I didn't buy that much." "We know what they owe us, and they know it," he says. "This simple thing of each other's knowing facilitates a lot of transactions," he says.

Having the right information gives CFOs time to act accordingly, including deployment of sales and credit and collection staff. Lo of Intel emphasizes the independence of sales and credit functions to prevent conflicts of interest - he does not send sales people, who are eager to close a deal, to collect payments. For Cisco in Asia, which took over credit and collection from headquarters in California nine months ago, sales people take accountability for their customers' payment behavior.

"A salesperson is responsible for what happens with his clients, good or bad," says Lee. "If you can't collect from your client, it will impact your commission. We have the power to go back to anyone's commission and reduce it if we're unable to collect from a customer." The same holds true for Compaq Greater China. "We put in place policies to give extra incentive to our sales people in the collection process, and remove these as long as the account becomes long outstanding," says Chang.

All these are taxing procedures at a time when sales are most needed, but they should pay off in the future. "The ability to apply strong credit management capabilities can allow a company to serve a broader range of customers than competitors during tough economic cycles without suffering significant exposure to bad debt," says Podrebarac of Accenture. Adds Wildman of PricewaterhouseCoopers: "Credit is a vehicle for sales, sales are a vehicle for profit, and the end product is cash. No business can afford to forget this."

There's no question to the fact: cash is the lifeblood of business, especially in a downturn. Accelerating cashflows through effective credit management is one gift a CFO can give his shareholders, not to mention his CEO.

Abe De Ramos is a senior writer and Steven Crane is an executive editor at CFO Asia