Managing Strategic Credit and Collection in the Industrial Environment Rodrigo Ortega Global Debt Collection & NPL Portfolio Summit Madrid, September 2016

Strategy & Execution: Conection is the Key Stragegy Execution Success!

Standard Credit and Collection Strategy in Industry Environment Risk Approach The Tools The Model

Credit Assessment Risk Approach And Its Impact To The Business Prevent Cash Disruption. Prevent from Growth. Credit decisions taken by finance. Conservative Team decision. Company more competitive. Better cash management. Moderate Exposed to cash disruption. Credit decisions taken by sales. Profitability consumed by interest. Aggressive

Standard Credit & Collection Model 1 – Customer Opportunity 2 – Credit Assessment 3 – Payment Terms Definition 4 – Sale 5 - Collection

Weaknesses of Standard Credit & Collection Model Based on single sale transaction. Oftenly after negotiation is done with customer. Not quickly to offer alternative solutions. It is Reactive Decisions disconected to the business strategy. Not based on net working capital structure strategy. Not Strategic Based mainly on technical analysis. Does not create conection with customer. “Feeling” and “subjectiveness “ is not considered. It is Cold Generates Internal Conflict between finance and sales department. Generates Internal Conflict

Steps for Strategic Credit and Collection 1 – Define the Business Plan. 2 - Target Customers Definition. 3 - Target Customers Overal Credit and Finance Assessment. 6 - Define a risk base DOA for non standard risky sales transactions. 5 - Tie Credit Assessment levels to target customers . 4 - Align target customers payment capacity to NWC plan. 7 - Define Key Customers to be visited by finance. 8 - Align salesman variable payment to past due levels. 9 - Involve salesman on collection process. DOA: Delegation of Authority

1 & 2 - Defining the business plan and target customers. What is the objective of the company? Revenue Growth? ROIC improvement? Cash Generation? 2 Define the sales volume needed for the company strategy and who the customers are. 3 Segregate the customers based on their segment, size and country. It will help on understanding their payment capacity, overal default risk, etc.

3 - Target customers overal credit and finance assessment. 1 For each segmentation of target customers, analyze its overal default level, capital structure, business structure, customer base, billing and collection features. 2 Based on the information obtained on item 1 above, understand the paymet terms which should be applied to each of the customer segment in order to make collection possible based on customers payment capacity.

4 - Align target customers payment capacity to NWC plan. 1 Calculate the Net Working Capital Impact on the business plan, sales volume, overal default risk level and payment terms obtainned on previous step. 2 Understand if the impact on the NWC ties to the company profitability and capital structure targets. If not, business should reassess the sales volume strategy and redefine the business plan. 3 Based on the overal customers default risk level and the assessed impact on the NWC, define the past due % risk apetite which the company is willing to assume to leverage sales growth. This will be used for setting up the credit approval DOA.

5 - Tie credit assessment levels to target customers . 1 For each of the customer segmentation, define the level of credit assessment necessary, the tools needed, periodicity of credit revision, etc. 2 This step is very important to align credit assessment process to the customer risk, leveraging efficiency, effectiveness and quickly responsiveness to the sales team.

6 - Define a strategic based DOA for credit Approval. 1 Based on the past due % risk the company defined on the business plan, define DOA levels in which the sales department could take credit decisions and which ones should be escalated for approval on superior management levels. 2 The DOA should be based on the outstanding amount for approved transactions which exceeds the credit available and capped with the existing past due % at the moment of the deal decision. 3 Finance should keep record of total exposed amounts approved.

DOA Example

7 - Define key customers to be visited by finance. 1 Based on the Business Plan, target customers definition and alignment with sales department, key customers should be defined for finance department to visit regularly, based on turnover, credit risk level, etc. 2 It is a very important step on the process to create connection between finance and customer, and assess the subjectiveness portion of the credit assessment process, anabling finance department to establish the feeling which is not found on the standard financial analysis.

8 - Align salesman variable payment to past due levels. 1 If salesman variable payment is based on commission for each sales transaction, tie commission payment to the collection moment. If variable payment is based on turnover targets, the past due level should be used to adjust the turnover to the collected levels. 2 Although it seems logical, many companies still do not use this process, and this creates most of the conflicts between finance and sales department, because both do not share the same objective.

9 - Involve salesman on collection process. 1 Different from what many people think, involving salesman on the collection process does not create a conflict with customers and avoids future sales. 2 Set up regular meetings between finance and sales department, to discuss past due levels and critical outstanding balances. This helps to create conection between finance and sales department and align collection strategy. In the industrial environment, where customer conection is very important, finance deparment has few impact on collection, other than calling and asking for payment. The conection between sales department and customer helps to understand the customer problems and help finance to apply the best collection negotiation.