Credit & Collections Management
In This Section:
The Current Status of Chinese Credit Management
Who Is Committing Fraud in Canada?
The Current Status of Chinese Credit Management
Summarized from articles by William Bastiaan, CICE
Former Director Global Markets, ABC-Amega Inc.
Before we can describe the current status of credit management in China, we need to look at the cultural differences between China and the 'West', as these have a large impact on its development and immediate future in China.
Cultural Differences
That there are cultural differences between China and the West is clear. To better understand these differences and the role they play in transacting business, here is a brief 'West versus East' comparison.
- The West bases its view on economics; the East relates matters to sociology.
- The West bases developments on facts; the East focuses on people.
- The West has the tendency to judge and make decisions based on the future; the East gives greater consideration to the past.
- The West focuses on financial capability; the East focuses on security.
- The West generally exhibits dynamic behavior; the East tends to value static characteristics.
- In the West business decisions are based on available financial information and contracts; in the East these decisions rely more heavily on trusting a relationship.
The term often used to express the cultural differences that affect doing business in China is guanxi. Guanxi describes the interplay of a complex network of personal and social relationships. It can be understood in terms of it not being just what you know, but also whom you know. This is still a central concept in Chinese society. Doing business internationally, however, is very different. It needs to be less about trust and more about assessment and legally binding agreements.
Credit Practices
Credit management is still in its infancy in China. A lot has changed in the last few years, but Chinese credit practices are far removed from those in the US or many European countries.
A primary objective of the Chinese Government is to grow its national products and services. The Government recognizes that one obstacle to success is the high level of securitization involved in dealing with Chinese companies. This complicates free trade and makes it more expensive. Recognizing that making dealing with Chinese firms less complicated and expensive is the way for China to become a more significant part of a global business environment, the Government is encouraging Chinese companies to set up credit policies, implement credit procedures, and utilize credit systems to better manage the 'order-to-cash' process.
Challenges
Due to the size of the Chinese market and the large number of companies (especially Small and Medium Sized Enterprises [SMEs], which numbered an estimated 42 million in 2008), it will be some time before the level of credit management reaches that common in the West.
One of the biggest challenges in achieving significant improvement is reaching the managerial level. Organizational structures in China are predominately 'flat', and the number of 'middle' managers is relatively small. It is not uncommon to see organizations of approximately 100 employees managed by a single person, who is also the company president.
As a result, the decision to move closer to the credit management policies of the international business community and invest in credit implementation lies with just a single person in many cases. And, adopting these 'Western' methods and processes also often means they will have to invest in a financial system as well.
The size of the Chinese organization is the determinator in many cases. Large Chinese entities, comparable to the multinationals in the West, do have good credit management operations. Representatives of these companies are contributing to the development of credit management in China.
In general though, credit management education is lacking. While there is a growing number of students interested in the subject, most of them are looking for an internationally recognized diploma which, at this time, does not exist. There are some local sources for credit management education, but the teachers often lack practical experience. In fact, many have never actually worked in the field.
Credit Information
There still is a lack of reliable credit information in China, although the situation is improving. For the most part, business decisions are still based on a trusting relationship. The number of transactions on open account, however, is growing faster than business on secured terms.
China still has a ways to go in developing a culture of transparency. While information is available to many government departments, there is no clear supporting law or policy regulating public access. The fact that filed data is not necessarily trustworthy adds to the difficulty of depending on financial information to make business decisions.
In addition, there are issues like poor auditing structure, language, superficiality of local credit investigation services and such to deal with. Thus the quality, availability, and delivery of credit information still varies widely among geographic areas.
It is reasonable for a credit information provider to gather as much information as possible at the lowest possible cost. They need to make a decent profit when they sell this information to their clients. Keep in mind, however, that one of the most expensive sources of information in China is balance sheet data from a government department. The cost is usually far more than what would be paid in the West. Therefore, when the credit information firm can avoid buying this data by collecting it from other sources, correct or incorrect, it increases their margin considerably. This is a real concern. As a result it is extremely important to double check every report as to what source provided the balance sheet data, whether the provider mentions this or not.
The demand for reliable credit information is not yet as great within China as it is elsewhere. This is largely due to the cultural differences outlined earlier. Transacting business in China remains heavily related to personal relationships. Chinese companies are beginning to realize, however, that doing business in today's global economy carries more risk than in the past. As this realization takes hold, credit information and management practices will be increasingly welcome in China.
Comparison of Collections/Legal
In the West, there is a systematic, aggressive approach toward collections. When an account becomes delinquent, a Western business begins a predetermined routine for follow up designed to capture the past due payment.
The 'East' takes a more passive posture. Most Chinese are not comfortable addressing overdue accounts. As a result, businesses have no established policies or systems for dealing with delinquencies. Their tendency toward avoiding confrontation results in poor follow up, with an adverse effect on cash flow.
Using specialized (third party) collection companies is relatively new to the Chinese. This strategy is gaining popularity, however, since using a third party prevents the Chinese firm/person from losing face.
Once an account is placed with a third party, a Chinese entity might still intervene with the debtor. In the West, authority is clearly delegated to the third party who alone handles the settling of the claim.
Another difference relates to recovery rates. The West is used to making quick decisions and generally sees a reasonable recovery rate. In China, the decision making process is long, sometimes cumbersome, and the recovery rate is relatively low.
With regard to litigation, the Chinese law and court system is reasonably adequate. That does not mean, though, that taking the step towards litigation is easy. Chinese, in general, are afraid of law suits, as they don't fully understand the legal process.
In the West, an attorney is selected based on his or her specific skills. In the East, the selection is based on the relationship one has with an attorney, regardless of any specialized knowledge of the matter to be brought to court.
The 'in-house' process also differs. The West is about being practical and willing to settle. The East tends to be reluctant to make a decision, trusting the 'system' to solve issues, and thus is not looking for a settlement. The post-judgment remedy is relatively effective and arbitration is seen as a popular alternative dispute resolution mechanism. This is encouraging, but one should not forget that there is an overall lack of sufficient professional legal services, and local protectionism still exists.
Developments in Chinese Credit and Collections Management
More and more business people are learning that leaving uncollectables on their balance sheet does not help their company succeed, especially when demand is decreasing and cash is needed just to keep the company running.
Chinese multinational firms, which increasingly have investments overseas, do understand the need for cash and have adapted the credit and collection management styles of the West. Many have full-fledged credit departments often internationally staffed (especially in affiliates outside of China).
Those companies that have local affiliates/subsidiaries in China would do well to encourage their local staff to get some education in credit management. It will pay as the necessity of better assessing risks within China is increasing dramatically.
Conclusion
Companies in China are beginning to pick up on credit management principles, but with more focus on collection than on risk assessment. However, it still is not common for Chinese companies to gather information about their future business partner, buy credit reports, or create a customer credit file. A lot of time is still spent in the negotiation process and often a person's word is considered of more valuable than any official information.
Yet, step-by-step improvements are being made, and the Chinese government fully supports these changes.
William F.M.J. Bastiaan, CICE, was formerly Director Global Markets of ABC-Amega Inc. His article is based upon personal experience gained in dealing with Chinese entities - within and outside Chinese territory - for over 25 years. It also includes information from several market studies.
Since 1929, ABC-Amega has been providing flexible accounts receivable outsourcing solutions to some of the world's largest and fastest growing companies engaged in B2B commerce.
Who Is Committing Fraud in Canada?
Survey by KPMG
A recent survey conducted by KPMG called: Profile of a Canadian Fraudster, revealed some interesting demographics on who commits fraud in Canada.
The survey polled senior executives such as CFOs and Vice-Presidents from across Canada and covered a wide range of industries, including Financial Services, Energy and Natural Resources, Consumer Markets, and Industrial Markets. One quarter of respondents had revenues of over CAD$1 billion, with another quarter having less than CAD$100 million in revenues.
The report revealed that 69 percent of fraud cases were internal jobs, 20 percent external ones, and 11 percent involved both insiders and outsiders.
Findings of the survey were as follows:
- Sixty-two percent of frauds were carried out by individuals below the level of management, while 22 percent were carried out by senior management.
- Most commonly, the fraudster will have been working for the defrauded company between 3 and 5 years.
- Three quarters of the fraudsters were male.
- The education level of those committing fraud varied: 40 percent had no post-secondary education, 30 percent had some post secondary education, while 26 percent had either a university degree or a professional designation.
- Seventy-three percent of fraudsters acted alone and in a mere 7 percent of the cases more than 5 people were involved.
- The three main factors reported as leading to fraud were personal need (28 percent), opportunity (19 percent), and greed (14 percent).
- Interestingly, bad habits (alcohol, drug abuse, gambling) were a factor in only 11 percent of reported cases.
To detect and prevent fraud, KPMG recommends that companies should look at three things:
- An effective whistleblowing hotline
- A robust and properly implemented code of business conduct
- A consistently applied and thorough system to prescreen new hires
James Hunter, National Leader of KPMG’s Forensic Practice offers the following advice to companies on how to prevent such fraud: "The number one method to help bring fraud to light at an early stage is a robust upstream communication mechanism—in other words, an effective whistleblowing or ethics hotline. Nothing else is quite so powerful."
