Strengthened Credit Decisions/Improved Profitability
Enterprise – Computer Inventory Equipment Manufacturer
Background : Respected company with growing Domestic and International sales desiring to keep Credit and Collection Department overhead expenses reasonable (3 employees). Competition is forcing a need to extend more liberal credit terms to current and prospective customers worldwide.
Financial Facts : Annual Sales - $86 million. A/R Average - $13.2 million. A/R Turns – 6.5 times. Gross Margin – 50%. Dedicated Credit and Collection Department of 3 employees. Incremental Employee Cost per $8 million new sales: $42,000 (employees handle credit and collections).
Objective : Leverage small Credit and Collection Department resources through an affiliation with a large global Trade Credit Insurance Company, thereby keeping costs of Credit & Collections down in the midst of growing demand by customers for more liberal credit payment terms.
Solution : World Trade Consult, LLC structured a Multi-Buyer trade credit insurance protection program with a global, S&P ‘AA' rated trade credit insurance firm that supported the company's credit decision making without necessitating a substantial rise in internal costs and resources. The insurance company became the extension of the company's Credit and Collection Department, adding credit decision support and expertise as well as collections expertise and efficiency.
Outcome : Increased sales to current and new ‘credit' customers were recorded immediately when open account terms were extended. Customer ‘Buyer Limits' were pre-approved by the insurance company, giving comfort and security to the Credit & Collections staff that their A/R management and collections would exceed company performance goals. There was less friction between the company's Sales Department and Credit & Collections Department as a result. Sales increased by 23% with no losses. The inclusion of the trade credit insurance underwriting expertise dramatically minimized the company's losses to potential customers that were not creditworthy and would have caused losses. Named Insured Accounts with pre-approved limits increased from 55 to 278.
Review of Costs and Benefits
|Increased Sales/No Losses||$19,780,000|
|Gross Margin – New Sales||48%|
|Gross Profit on Increased Sales||$9,494,400|
|Insurance Premium and Other Additional Costs||$137,000|
|Net Return (Gross Margin – Insurance Premium Costs)||$9,357,400|
Instead of hiring 2 additional employees, this company affiliated with a major
global trade credit insurer with hundreds of employees experienced in credit
insurance underwriting, country risk issues and collections procedures.