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Aug 01 2016
A Newbie's Look into Commercial Credit
Denise Durrant, Wheeler Machinery

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:

  1. Cash forecasting
  2. Protecting and managing the investment in the accounts receivable portfolio
  3. Timely conversion of receivables to cash
  4. Financial Analysis
  5. Handling of collateral that secures a customer's account
  6. Deposit of funds and relationships with banks
  7. Handling customer deductions
  8. Evaluation of economic trends on sales, receivables, and collections
  9. Investigating potential credit customers and granting credit lines

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.