Question

Your initial post should be at least 250 words.

Read the First Community Financial case on p. W-122 (Chapter 16 > OB Skills Workbook > Cases for Critical Thinking > First Community Financial) and respond to the following question:

CASE 16

First Community Financial Developed by Marcus Osborn, Kutak Rock LLP First Community Financial is a small business lender that specializes in asset-based lending and factoring for a primarily small-business clientele. First Community's business is generated by high-growth companies in diverse industries, whose capital needs will not be met by traditional banking institutions. First Community Financial will lend in amounts up to $1 million, so its focus is on small business. Since many of the loans that it administers are viewed by many banks as high-risk loans, it is important that the sales staff and loan processors have a solid working relationship. Since the loans and factoring deals that First Community finances are risky, the interest that it charges is at prime plus 6 percent and sometimes higher. First Community is a credible player in the market because of its history and the human resource policies of the company. The company invests in its employees and works to ensure that turnover is low. The goal of this strategy is to develop a consistent, professional team that has more expertise than its competitors. Whereas Jim Adamany, president and CEO, has a strong history in the industry and is a recognized expert in asset-based lending and factoring, First Community has one of the youngest staff and management teams in the finance industry. In the banking industry, promotions are slow in coming, because many banks employ conservative personnel programs. First Community, however, has recruited young, ambitious people who are specifically looking to grow with the company. As the company grows, so will the responsibility and rewards for these young executives. In his early thirties, for example, Matt Vincent is a vice president; at only twenty-eight, Brian Zcray is director of marketing. Since First Community has a diverse product line, it must compete in distinct markets. Its factoring products compete with small specialized factoring companies. Factoring is a way for businesses to improve their cash flow by selling their invoices at a discount. Factoring clients are traditionally the smallest clients finance companies must serve. Education about the nature of the product is crucial if the company is to be successful, since this is often a new approach to financing for many companies. First Community's sales staff is well trained in understanding its product lines and acts as the client's representative as they work through the approval process. To ensure that the loans or factoring deals fit within the risk profile of the company, First Community must ask many complex financial questions. Many small businesses are intimidated by credit officers, so First Community handles all of these inquiries through the business development officers. The business development officers, in turn, must understand the needs of their credit officers, who are attempting to minimize risk to the company while maintaining a friendly rapport with the client. By centralizing the client contract through educated sales representatives, First Community is able to ask the hard financial questions and still keep the clients interested in the process. A potential customer can be easily discouraged by a credit administrator's strong questioning about financial background. Utilizing the business development officers as an intermediary reduces the fear of many applicants about the credit approval process. Thus, a sales focus is maintained throughout the recruitment and loan application process. Internally at First Community Financial, one finds continual pressure between the business development staff and the credit committee. The business development staff is focused on bringing in new clients. Their compensation is in large part dependent on how many deals they can execute for the company. Like sales staff in any industry, they are aggressive and always look for new markets for business. The sales staff sells products from both the finance department and the factoring department, so they must interact with credit officers from each division. In each of these groups are credit administrators specifically responsible for ensuring that potential deals meet the lending criteria of the organization. While the business development officer's orientation is to bring in more and more deals, the credit administrator's primary goal is to limit bad loans. The pressure develops when business development officers bring in potential loans that are rejected by the credit administrators. Since the business development officers have some experience understanding the credit risks of their clients, they often understand the policy reasoning for denying or approving a loan. The business development officers have additional concerns that their loans that have potential to be financed are approved because many of the referral sources of the sales staff will only refer deals to companies that are lending. If First Community fails to help many of a bank's referral clients, that source of business may dry up, as bankers refer deals to other lending institutions. These structural differences are handled by focused attempts at improving communication. As noted, the First Community staff experiences an extremely low turnover rate. This allows for the development of a cohesive team. With a cohesive staff, the opportunity to maintain frank and open communication helps bridge the different orientations of the sales staff and the administration divisions. A simple philosophy that the opinions of all staff are to be respected is continually implemented. Since approving a loan is often a policy decision, the sales staff and the loan administrators can have an open forum to discuss whether a loan will be approved. CEO Jim Adamany approves all loans, but since he values the opinions of all of his staff, he provides them all an opportunity to communicate. Issues such as the loan history for an applicant's industry, current bank loan policies, and other factors can be openly discussed from multiple perspectives.

What coordinative mechanisms does First Community use to manage the potential conflict between its sales and finance/auditing functions?

Answer 1

There should be a team comprise with members having experience of atleast 10 years in the respective areas of sales and finance functions. The people should be drawn based on their cooperative nature and mastery over handling conflict having situations. Any loopholes like ego clashes, possible misappropriation of any statement or documents etc. will be managed properly.

This team should have a proper channel and procedure to get idea from any of the staff within stipulated time frame. They should be given full authority to inspect and cross verify any of the financial transactions and other communication with stakeholders of importance. In this way , there will be a conducive environment to get information , disclosure of mandatory public accounts and transparency in governance structure and mechanism of resolving conflicts.