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OPERATIONAL DECISION-MAKING PROBLEM: Accounting in ERP Systems
CREDIT MANAGEMENT

Out-of-date or inaccurate accounting data that result from unintegrated information
systems can cause problems when a company is making operational decisions, as
illustrated by the discussion of Fitter’s credit management challenges in Chapter 3. In this
section, we will look at industrial credit granting in general, and then we will examine the
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problems with Fitter’s credit-granting procedures in more detail.

Industrial Credit Management
Companies routinely sell to customers on credit; however, good financial management
requires that only so much credit be extended to a customer. At some point, the customer
must pay off some of the debt to justify the faith the seller has shown (and so the seller
can turn the accounts receivables into cash). Credit management requires a balance
between granting sufficient credit to support sales and ensuring the company does not lose
too much money by granting credit to customers who end up defaulting on their credit
obligations.
In practice, sellers manage this relationship by setting a limit on how much money a
customer can owe at any one time, and then monitoring that limit as new orders come in and
payments are received. For example, the seller might tell a buyer that her credit limit is
$10,000, which means that the most she can owe the seller is $10,000. If the buyer reaches
that amount, the seller will accept no further sales orders until she pays off some of her debt.
When making a sale on credit, the seller makes an entry on the books to increase the
accounts receivable and sales balances. Thus, when the buyer’s accounts receivable balance
on the seller’s books reaches $10,000, the buyer must make some payment.
Continuing the example, assume the buyer calls the seller to order $3,000’s worth of
goods. If the buyer’s accounts receivable balance is already $8,000, the seller should not
accept the $3,000 order because it would bring the accounts receivable balance to
$11,000, which exceeds the buyer’s credit limit. Instead of refusing the order, the seller’s
sales representative might suggest that the buyer reduce the size of the order, or ask her
to send in a payment before processing the order, thus reducing the buyer’s debt. Clearly,
to make this system work, a sales representative needs to have access to up-to-date
accounts receivable balances for all customers.
If Accounting keeps the books up to date and can provide the current accounts
receivable balance to Marketing and Sales when needed, then credit limits can be properly
managed. Marketing and Sales can compare the customer’s credit limit to an accurate
balance-owed amount (plus the order’s value) to make a decision. However, in an
unintegrated system, Accounting may not immediately record sales and/or payment
receipts as they occur. In that case, accounts receivable balances will not be current.
Furthermore, the sales representative may be working from an out-of-date credit-balance
printout. If the printout does not reflect recent payments, a customer may be improperly
denied credit. The customer would probably challenge the denial, which would trigger a
request for updated information in Accounting. The delay entailed in that research could
reduce customer satisfaction, and performing the research would consume valuable
employee time.

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