The document discusses methods for improving the performance of credit departments through establishing metrics and key performance indicators. It outlines several areas that can be measured, including the technical expertise of credit professionals, policies and procedures, factors that influence company cash flow, customer satisfaction, employee morale, evaluations, and overall performance measurements. Specific metrics are proposed, such as charge-offs, days sales outstanding, and collection effectiveness index. The conclusion emphasizes establishing a balanced approach to performance measurement to avoid extremes and maintaining human aspects of working with customers and employees.

1. October 15-17, 2014 - CreditScapeConference.com - #creditscape
Efficiency Models & Methods to Improve
Department Performance

2. Author/Instructor
DAVID L. OSBURN, MBA, CCRA
David Osburn is the founder of Osburn & Associates, LLC, a Las Vegas-based Business Training & Contract
CFO firm that specializes in providing seminars, webinars, and keynote speeches to Credit Managers, CPAs, bankers,
attorneys, and business owners. Topics include Negotiation Skills, Marketing, Management Issues, and
Banking/Finance/Credit.
David’s extensive professional background includes 14 years as both a Business Trainer and Contract CFO, 16
years as a Commercial Lender (banking), and 29 years as an Adjunct College Professor (both MBA and
undergraduate “on-line” and “ground-based” classes).
David has an MBA in Finance/Marketing from Utah State University and a BS degree in Finance from Brigham
Young University. He is also a graduate of the ABA National Commercial Lending School held at the University of
Oklahoma.
David also holds the professional designation of Certified Credit and Risk Analyst (CCRA) as granted by the
National Association of Credit Management (NACM). Additionally, he has a California Community Colleges
Instructor Credential.
Osburn & Associates, LLC
A Business Training & Contract CFO Firm
David L. Osburn, MBA, CCRA
Managing Member
7426 Alamo Summit Drive
Las Vegas, Nevada 89129
Direct: (702) 655-1187
E-Mail: dlosburn@cox.net
Web: dlosburn.com

3. Efficiency Models & Methods to Improve Department Performance
Focus: Performance “Metrics”
aka
“Measuring” Performance!

4. How Do You Measure Your Credit Department’s Performance?
I. Technical Expertise of “Individual” Credit Professional:
a) Credit Underwriting: Credit Report, Credit Score, Credit
Matrix, Key Ratios, Cash Flows,
Z-Score, Credit Memorandum, etc.
b) Collection Effectiveness: Results by the Numbers, Customer
Relationships, etc.
c) Other Related Disciplines:
1. Accounting (including Tax)
2. Economics
3. Finance (Including Financial Statement Analysis)
4. Banking
5. Business Law

5. I. Technical Expertise of “Individual” Credit Professional: Practical
(Continued): “Grade”
Rating 1-4 (4 high, 1 low)
a) Credit Underwriting:
b) Collection Effectiveness:
c) Other Related Disciplines:
Accounting (Including Tax)
Economics
Finance (Including Financial Statement Analysis)
Banking
Business Law
Composite Score:

6. I. Technical Expertise of “Individual” Credit Professional (Continued):
a) The Use of a “Competency” Exam that Covers all Direct
and “Other” Related Disciplines
Ex. 4 hour “Comprehensive” Exam
b) How Relevant is this type of Metric?
c) Could There Be Some “Embarrassing” Feedback from the
Exam?
d) If Administered, There Must be “Actual” Follow-Up,
Otherwise, No Real Improvement is Made!
1. Classes, seminars, webinars
2. OTJ training

7. II. Refining the Credit Department’s Policies and Procedures:
a) Existing Credit Policy:
1. Source? (Boiler Plate)
2. Age? (Stale Information)
3. Relevancy to Current Economy?
4. Relevancy to Industry?
5. Relevancy to Technology?

8. II. Refining the Credit Department’s Policies and Procedures (Continued):
Practical
“Grade”
Rating 1-4 (4 high, 1 low)
a) Existing Credit Policy:
1. Source? (Boiler Plate)
2. Age? (Stale Information)
3. Relevancy to Current Economy?
4. Relevancy to Industry?
5. Relevancy to Technology?
Composite Score:
b) Should you Revise or Completely Re-Write
Policy?

9. III. Increasing the Company’s Cash Flow:
a) Traditional Cash Flow Analysis:
EBITDA $1,200M
Less: Debt Ser. (P&I) 500M
Margin $700M
DCR 2.4X
(EBITDA = Net Profit + Interest Expense + Taxes + Depreciation + Amortization)
Note: Most commercial underwriters require a minimum DCR of 1.25X.
b) The Credit Professional’s Direct Influence on the Company’s
Cash Flow
Earnings or “E” Factor!!

10. III. Increasing the Company’s Cash Flow (Continued):
a) How Does the Credit Professional Affect the Company’s “E”
Factor?
“Effective Underwriting, Monitoring, and Collecting”
b) But How Do We Actually “Measure” the Credit Professional’s
Effectiveness in Promoting Positive Company Earnings?
Can we tie this into our department bonus program?

11. III. Increasing the Company’s Cash Flow (Continued):
“Quantitative Measurements”:
a) Charge-Offs (What Level?)
b) Days Sales Outstanding (DSO)
Ending Total Receivables x Number of Days in Period Analyzed
Credit Sales for Period Analyzed

12. III. Increasing the Company’s Cash Flow (Continued):
c) Collection Effectiveness Index (CEI)
Beginning Receivables + (Credit Sales/N*) – Ending Total Receivables
Beginning Receivables + (Credit Sales/N*) – Ending Current Receivables
X 100
*N = Number of Months or Days
Note: The Closer to 100 Percent, the More Effective the Collection Effort.
It is a Measure of the Quality of Collection of Receivables, Not of Time.
d) Cash Conversion Cycle:
Inventory Turnover + A/R Turnover – A/P Turnover

13. IV. Increasing Customer Satisfaction:
Practical
“Grade”
Rating 1-4 (4 high, 1 low)
a) Customer Surveys: “External” Customers
b) Customer Surveys: “Internal” Customers
Ex. Sales Team
Composite Score:

14. V. Improving Employee Morale:
Practical
“Grade”
Rating 1-4 (4 high, 1 low)
Where is our Employee Morale Today?
What Can We Do To Improve Our Employee Morale?
a) Change Department Culture (Hard But Can Be Done!)
b) Change Team “Mix” (Duties, Personalities)
c) Change Our Role from “Manager” to “Leader” or “Coach”

15. VI. Effective “Evaluations”:
a) Individual:
1. Do We Even Conduct Evaluations?
If so, how often?
2. Are they Effective Uplifting Experiences or Are
They A Formality with Little or No Purpose?
3. How to Improve Evaluations:
- More Frequent Ex. Quarterly
- Less Formal Ex. Short, To the Point
- More “Business Modeling” vs. “Business Plan”

16. VI. Effective “Evaluations” (Continued):
b) Team:
How Would You Conduct a “Team” Evaluation?
1. Team “Council” Meeting Instead of Boring Staff Meeting
2. Create Atmosphere Where “True” Opinions Are Voiced
and Heard
Ex. Hold Meeting “Off-Campus”
3. Be Prepared for Some Honest “Criticism” or Feedback

17. VII. Conclusion:
a) Measuring Performance is Important but All Measurements
Should Be “Balanced” i.e. Avoid Extremes!
b) Remember You are Dealing with “Real” Human Beings
(Customers, Employees, Management)
c) Perfection is “Relative” i.e. Strive for Efficiency and
Effectiveness In Measuring Performance But Do Not
Take Extreme Measures or You Will Drive Your Employees
and Yourself “Crazy”!!
d) Take Time To Celebrate Your Team’s Successes (and Your
Own Successes)