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Aug 01 2016 A Newbie's Look into Commercial Credit |
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During my 15 year accounting career, I've been tasked with collecting accounts receivable. It wasn't until last
year that I gained a broader understanding of how that task can affect the
entire company as a whole. During the last year, while working as an Account
Coordinator for Wheeler Machinery Company, I've had the opportunity to
experience and learn what it means to "protect the company's accounts
receivable investment." I'm not sure where I heard or read that for the
first time, but it helped me to gain a new appreciation and understanding of
the complex and ranging responsibilities of a company's credit department and
its employees. The credit department is tasked with multiple
responsibilities. Every credit department is structured to meet the needs of
the their particular company; but, the majority of credit departments are
responsible for the following tasks:
As I mentioned earlier, the second task listed above is the one that caught my interest and affected me personally. That is a huge task which in and of itself can make or break a company. But, I have chosen to focus on one small portion of how the credit department protects their company's receivables. I am talking about fraud. Both credit card fraud and business credit fraud.
Companies are losing more and more profit every year to
fraud. During 2014, annual fraud costs reached $32 billion dollars. This was a
38% increase over 2013. Because of this, both private companies and public
officials are seeking ways for more secure payments. And, in addition, fraud
prevention is getting more and more expensive every year. During 2014, fraud
prevention cost $3.08 for every dollar lost to fraud, up from $2.79 during
2013. This cost alone explains why fraud can be so detrimental to
businesses. It is imperative for credit employees to be aware of the
most frequently used fraud schemes so that they can be recognized as early as
possible and shut down. This protects the company from additional financial
loss through credit risk. I believe that most credit employees are familiar
with the same-name scam, i.e., there is a reputable business with an excellent
credit rating named "Detroit Distributing." So, the fraudster applies for
credit as "Detroit Distribution" with an address in the same city as Detroit
Distributing. When questioned about the different addresses, the fraudster
tells the credit representative that the company is opening a branch in a new
location. They will continue to lead you to believe that they are associated
with or part of the valid company with excellent credit. The bust-out scam is a very popular cash on delivery scam
that wreaks havoc on businesses without the resources, or commitment, to be
able to shut it down. Usually a company is contacted by someone with an offer
to purchase large quantities of merchandise. The goods are delivered and paid
for by check. When the check is returned for insufficient funds, the customer
apologizes for the "mistake" and issues you another check. By this time, a
second truckload of goods is usually on its way to the customer. By the time
the second check is returned insufficient funds, the stolen goods have been
sold and the company has disappeared. Other fraud warnings can be unsolicited orders,
unverifiable references, increased orders, unusual product mixes,
misrepresentations, undisclosed ownership changes, hidden ownership, financial
statement irregularities and many, many others. In conclusion, fraud has and will continue to affect businesses through credit fraud, credit card fraud, and any other type of fraud that the con artist can imagine. This battle with thieves is real and will continue contributing to declining profit margins until all credit professionals are aware, educated, and vested in the protection of their company's accounts receivable investment.
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