Context: Across industries, businesses set limits on the maximum amount of credit they are willing to extend to a customer—based on how likely that customer is to pay and how much risk the provider of goods or services is willing to accept. That raises the question of which function owns the responsibility of determining customer creditworthiness—and what part, if any, treasury plays, given its critical role in protecting cash, managing working capital and often setting broader risk policies. And treasury, of course, leads the management of counterparty credit risk from exposure to banks, derivative transactions and cash investments.
For customers, corporations differ in the type of ratings used to assess risk. “Some companies rely on ratings from Fitch and others to assess counterparty risk, while others use internal analysis,” said Britton Costa, head of healthcare and pharma at Fitch Ratings. “In sectors like real estate, it’s common for companies to quote the percentage of their rental income derived from tenants rated above some threshold,” as a way to track risk exposure. In life sciences, where revenue often depends on a small number of large customers such as government health systems and hospital networks, credit risk can take on added importance. “It’s more than just what’s going on with a customer’s business today,” said Andy Podolsky, who leads NeuGroup for Life Sciences Treasurers. “It’s also about the history of how consistently they pay you, what their cash flows are like and what that says about their future risk.” Companies structure responsibility for assessing customer risk and setting credit limits in many ways, from treasury-led models to shared services structures to highly automated, data-driven systems—a range that was reflected in responses to a recent question posted on NeuGroup’s members-only platform. Although the topic first surfaced in the life sciences group, it resonated broadly across the NeuGroup Network, prompting members from multiple peer groups to weigh in.
Member question: “Can you please confirm which department is responsible for providing customer credit ratings to your global teams? Is it accounting, treasury or a regional finance team?
- “If possible, I would also like to know if they are not used at all. Lastly, if a certain function is providing them, why was that particular function selected to do so?”
Treasury takes the lead at many companies. Several members said treasury owns customer credit ratings, either directly or by building the models that underpin decisions. In some cases, treasury assigns country-level credit risk scores using external data, such as country risk ratings published by Allianz Trade (formerly Euler Hermes) and applies internal judgment on top of them. - Peer answer 1: “The credit management team operates within the treasury function and is responsible for establishing and periodically reviewing customer credit limits. As part of this process, we assess customer credit ratings when available. While we are not obligated to share this information with the commercial teams, we are happy to provide insights upon request to explain how credit limits are determined. Also, the collections process is managed separately by the shared services team.
- “In some organizations, credit and collections are handled by a single team, but at our company, these responsibilities are intentionally divided to ensure focused expertise in each area.”
- Peer answer 2: “The credit and AR teams are part of treasury, and thus treasury/credit is the source for customer credit ratings. There are recurring credit reviews performed on each customer and this is the basis for a ‘modeled’ credit limit, which is the starting point in setting the respective credit limit, and then subjective considerations, such as input from sales and business unit groups, are also incorporated into the process.”
Order-to-cash and shared services ownership. Other members said credit ratings are handled within order-to-cash (OTC) organizations or shared services centers. Treasury often plays an oversight or exception-approval role, particularly when exposures are large.
- Peer answer 3: “Global Treasury Support assigns a country credit risk to our customers, which was historically grown. But in the past, we would apply all kinds of methodology to it and human assumptions. Now we typically apply 99% (+1% internal judgment) of publicly available country risk rating from Euler Hermes to this process.
- “As we are predominantly pharma and dealing mostly with government-related budgets to hospitals or country distributors, this is how we apply the risk.”
- Another member from the same company added: “Treasury is only involved in reviewing and approving credit limits for large customers. Customers that are operating in multiple markets are looked at from a group level and their exposure is combined for any review.”
- Peer answer 4: “OTC owns customer credit assessments, but treasury actually built the risk model based on customer ratings and country/regional risk metrics. Treasury is also part of the review/approve process within the global credit and collections policy.”
- Peer answer 5: “Our regional global shared services centers do customer credit analysis and set credit limits. Treasury usually only gets involved when there is a business request for an exception to the set credit limit. I think there’s no clear right answer for where it ‘should’ belong among the functions you mentioned.”
Automation, dashboards and alternative structures. A number of responses highlighted technology-enabled or alternative structures, including automation, dashboards and dedicated financing arms responsible for credit policy.
- Peer answer 6: “Credit risk manages this, however, 98% of credit ratings are auto generated/approved using a bespoke credit decision engine taking a feed from Moody’s (previously Dun & Bradstreet) and using our own data machine learning model. The ~2% is exceptions/rejections that are reviewed by our team (full-time/outsourced staff mix). The reason why is the credit risk team is part of the collections org.”
- Peer answer 7: “We have a centralized Power BI dashboard which takes in feeds in the form of customer revenue data and a Bloomberg API feed with public ratings and default risk. Multiple stakeholders use the dashboard for their own purposes; as for treasury, we use it to identify customers with high credit risk and take action if needed.”
- Peer answer 8: “We have a separate finance company where most customer loans and leases are held. That entity is responsible for setting and adjudicating credit policy. We fund them and manage cash transactions via central treasury services.”
- Peer answer 9: “Accounts receivable manages this, since ultimately the question comes down to whether we are able to collect from the customer.”
