Credit Management and Leadership
Domain 4 - Credit Management and Leadership
Tests running the credit function: organization, authority, KPIs, process controls, and the leadership behaviors that balance sales growth with loss control.
Core rules
- Governance: board-approved credit policy, delegated approval matrix, documented exceptions, and segregation of duties between approval, billing, and cash application.
- KPIs: DSO, best possible DSO, CEI, percent current, bad-debt percentage, days beyond terms, and deduction resolution time. Report them monthly with trend and target.
- Collections is a process, not an escalation: segment by risk and value, automate reminders, and set contact cadence before the due date.
- Leadership: align sales incentives with cash collection, coach on negotiation, and escalate with data rather than anecdotes.
- Technology: ERP credit holds, automated scoring, and portal-based dispute resolution reduce cycle time; human review still owns overrides.
Worked example
Beginning AR $1,000,000; credit sales $4,000,000; ending AR $900,000; ending current AR $700,000. CEI = (beginning AR + credit sales − ending total AR) / (beginning AR + credit sales − ending current AR) × 100 = (1,000,000 + 4,000,000 − 900,000) / (1,000,000 + 4,000,000 − 700,000) × 100 = 4,100,000 / 4,300,000 × 100 = 95.3%. Reasoning: 95.3% of collectible receivables were collected in the period. A CEI below 80% suggests the team is collecting laggards while current accounts age; pair it with DSO to separate terms effects from collection effects.
Traps
- Managing DSO alone; early payers can mask large aged balances elsewhere.
- Approval authority that bypasses policy without a written exception.
- Eliminating credit holds to please sales, shifting risk into bad debt.