In tough times like these, it is more important than ever that credit departments work smart and efficiently. It may be necessary to look at current processes and make changes that will increase productivity. As sales decline, companies will need to squeeze every possible dollar from the accounts receivable. Additionally, companies are faced with an increase in customer defaults, robbing them of revenue opportunities. What follows are some common mistakes credit departments make believing them to be logical and therefore good policy, but in fact they do nothing to enhance collections.
1. Hiring the wrong people to do credit and collection work
I have made the point often in this blog, accountants are not necessarily collectors. Without proper training, either are customer service reps. Yet, companies invariably draft clerk level employees to make collection calls only to be disappointed in the results. It takes a certain personality to ask a perfect stranger for money. Good collectors are like sales reps. They should be competitive, persuasive and engaging. No less important, good collectors like the work.
2. Working the oldest first
A common collection strategy is to focus nearly all of the collection resources to the oldest balances. Throwing 100% of the collection resources at what is typically only 15% of the accounts receivable over 180 days past due, is not only over kill, but usually doomed to fail anyway. Balances sitting out there that old are fated for write off or suit as it is. The correct approach is to pursue balances that are headed for the past due columns and get them collected before they go too far.
3. Waiting too long to start collections
Many collectors give the customer the benefit of the doubt. Few will ask for money while the account is “current” even though the bills are now currently due. Compounding the problem is to procrastinate well into the 30 day past due column assuming that payment is forthcoming any day now. So, come 60 days past due it’s time to get serious. The problem with this thinking is the customers catch on. If you don’t call they won’t pay. So, if you wait 60 days to call you can’t expect payment any sooner.
4. Not enforcing finance charges
A company I know stopped charging finance charges because the customers did not like them. That’s the idea. If there is a penalty for paying late, there is an incentive to pay on time. Take away the incentive and there is nothing to encourage prompt pay. If you are not going to call until 60 days and you are not putting the account on hold and you are not charging the customer for being delinquent, you cannot expect payment any sooner.
5. Ignoring security devises for reasons of trust or fear of offending
While it is important to be able to trust your customers, you cannot over look ability. Stuff happens and sometimes the most trustworthy is simply unable to make it. If there is a way to secure a receivable, do it. You can still trust your customer, but you are protected should he fail. As for customers you take offense to your security requests, they should not be trusted in the first place. No one should be offended for being prudent.
6. Setting number of call requirements
The logic is: the more calls that are made the more money will be collected. There are all sorts of telephone tracking products on the market, usually for the benefit of telemarketers, that keep track of the number of calls collectors make in a day. I have seen managers utilize all kinds of spread sheets and call sheets to track calls. However, this policy misses the point. The objective of collection calls is to collect money, not simply to make a requisite number of calls. Rapid fire collection calls often ignore such factors as skipped invoices or disputed balances. And it certainly prevents any sort of relationship building that is often essential for effective collections. Collectors should be given monetary targets instead and let them figure out how to accomplish the task.
7. Refusing to do the customer’s “bookkeeping”
I hear this complaint all too frequently. Before the customer will pay he needs a detail of all previous cash applications, or copies of all delivery receipts or details about credit memos. Collectors complain these are only delay tactics. However, the customer just may need help understanding the balance and if he relies on you to provide it, all the better.
8. Putting customers on COD status rather than hold
Sales people never want to lose a sale, so when they finally admit there is a problem with a customer’s payment trend (or lack of) they will usually support putting the customer on C.O.D. While this appears to be a logical course, it does not do much toward collecting an old balance. As long as the customer can still buy your product, there is no motivation to pay down the delinquent portion. C.O.D. terms should be allowed only once an acceptable payment plan for the delinquency has been agreed to.
9. Applying COD money to oldest balance
This is often a seductive gimmick to reduce the past due amount a customer owes by applying C.O.D. payments against the oldest balance. It doesn’t change the over all balance, only the aging of it and only for the short term because the new amounts will age eventually. Should the customer stop buying and paying, you are left with an accounting nightmare. The customer will claim the new invoices are paid and you are left explaining to the court how the C. O. D. invoices are not actually C.O.D. and that you’ve put the money somewhere it did not belong.
10. C.O.D. Plus
In this plan, the customer continues to buy, much to the delight of sales and each time he does, he pays a little more toward the delinquent amount. The main flaw with this plan is that it gives the customer too much control. If he doesn’t buy, he doesn’t pay. How do you force someone to keep buying? Then there is the issue of trying to keep track of the payments. Who tells the customer how much to pay? He gets a bill of lading that tells him the C.O.D. amount. Do you tack on an extra amount? That gets messy. Better to have the customer sign a promissory note.
If your company has been allowing any or all of these processes, you could probably use CreditPowers to help you design new ones. Contact patrickpowers@sbcglobal.net for more information. Comments are welcome.
Monday, October 27, 2008
Monday, October 20, 2008
Forensic credit
A commercial loan officer for a leading commercial lending bank boasted back when banks were aggressively lending money, that he had recently signed a multi-million dollar operating credit line for an excavating company. I was a little surprised because banks as a rule, even then, were reluctant to lend to contractors. They generally have no assets other than equipment and I suspected the excavator’s was probably leased. The bank officer told me the contractor had a very large accounts receivable. “It’s secured.” The loan officer said confidently, “He said he has Stop Notices on all of it.”
The banker had been convinced that Stop Notices secured the receivable. I explained to him that in California, a Stop Notice was the first step that a contractor takes when payment is not forthcoming. It does not guarantee anything. For one, the notice only stops whatever money remains un-disbursed. Worse, if it was a public works project, the public agency is allowed to disburse as needed to complete the project regardless of any Stop Notices. In short, I told the banker, it was very possible, the excavator’s accounts receivable was an illusion.
The bank had done its homework and had sent in a team of auditors to review the excavator’s financials. Because the auditors knew more about accounting practices than they did about the realities of construction they were given a convincing spiel about Stop Notices that convinced them an everyone else that the receivable was secured.
I once explained to a team of bank auditors how the ready mix industry secured their accounts receivable with lien rights. The auditors believed that a lien was synonymous with second trust deeds. Allowing them to believe that resulted in a very favorable audit even though, filing liens was often a prelude to filing a suit to recover money and the outcome rarely resulted in full payment.
More recently, a team of auditors from one of the nation’s leading accounting firms was conducting a Sarbanes Oxley compliance test. They were looking at all of the company’s financial procedures and when they came to the accounts receivable they asked how they were reviewed. I explained the process which involved generating aged trial balances, identifying the delinquent accounts as well as accounts over credit limit and reviewing the collection progress with the collectors. It was a lengthy and involved process; too long for the auditor, who, distilled the entire process into “signing the aged trial balance.” Thus, the entire function of making sure the accounts receivable was being worked was reduced to a mandatory signature on the last blank page of a computer generated aging no one but the credit manager ever saw. It was a conclusion drawn from a lack of understanding the credit function and a desire to keep it simple.
In a time when more than ever stock holders and now the tax paying public are demanding accountability from major corporations and the leading accounting firms are expected to police businesses and restore confidence, there should be a higher level of commercial credit knowledge and not just accounting smarts. Perhaps there should be more “forensic credit” just as there is a need for forensic accounting.
That’s where CreditPowers can help. We know credit functions. We know when accounts receivables are secured by more than smoke and mirrors. We can do an assessment of the receivables and assist auditors in determining the strengths and weakness. We can provide a level of confidence and credibility that is so lacking.
For more information e-mail patrickpowers@sbcglobal.net
The banker had been convinced that Stop Notices secured the receivable. I explained to him that in California, a Stop Notice was the first step that a contractor takes when payment is not forthcoming. It does not guarantee anything. For one, the notice only stops whatever money remains un-disbursed. Worse, if it was a public works project, the public agency is allowed to disburse as needed to complete the project regardless of any Stop Notices. In short, I told the banker, it was very possible, the excavator’s accounts receivable was an illusion.
The bank had done its homework and had sent in a team of auditors to review the excavator’s financials. Because the auditors knew more about accounting practices than they did about the realities of construction they were given a convincing spiel about Stop Notices that convinced them an everyone else that the receivable was secured.
I once explained to a team of bank auditors how the ready mix industry secured their accounts receivable with lien rights. The auditors believed that a lien was synonymous with second trust deeds. Allowing them to believe that resulted in a very favorable audit even though, filing liens was often a prelude to filing a suit to recover money and the outcome rarely resulted in full payment.
More recently, a team of auditors from one of the nation’s leading accounting firms was conducting a Sarbanes Oxley compliance test. They were looking at all of the company’s financial procedures and when they came to the accounts receivable they asked how they were reviewed. I explained the process which involved generating aged trial balances, identifying the delinquent accounts as well as accounts over credit limit and reviewing the collection progress with the collectors. It was a lengthy and involved process; too long for the auditor, who, distilled the entire process into “signing the aged trial balance.” Thus, the entire function of making sure the accounts receivable was being worked was reduced to a mandatory signature on the last blank page of a computer generated aging no one but the credit manager ever saw. It was a conclusion drawn from a lack of understanding the credit function and a desire to keep it simple.
In a time when more than ever stock holders and now the tax paying public are demanding accountability from major corporations and the leading accounting firms are expected to police businesses and restore confidence, there should be a higher level of commercial credit knowledge and not just accounting smarts. Perhaps there should be more “forensic credit” just as there is a need for forensic accounting.
That’s where CreditPowers can help. We know credit functions. We know when accounts receivables are secured by more than smoke and mirrors. We can do an assessment of the receivables and assist auditors in determining the strengths and weakness. We can provide a level of confidence and credibility that is so lacking.
For more information e-mail patrickpowers@sbcglobal.net
Tuesday, October 14, 2008
It's Time to Upgrade
At the core of the national economic collapse are bad credit decisions. Lenders extended credit to high risk borrowers and in many cases, people who were just down right crooked. Who is to blame? Banks have credit managers just like other companies. Did all the bank’s credit managers make the same bad mistakes? Or, as I suspect, were the aggressive loan officers and their senior managers over-riding their credit analyst’s decisions?
There has been a trend in the recent past to ignore risk in favor of the almighty sale. The sale must go through. Anything or anyone standing in the way is viewed as anti-sales. One company I know labeled any delay in allowing a credit sale as being bureaucratic, meaning, any thoughtful analysis of the facts and assessment of the risk was a waste of time. During the last couple of decades, companies have sought aggressive sales people to lead the charge and have at the same time, hired accounts receivable clerks to perform the credit analysis functions. The meeker the person the better. When a credit person raises any kind of concern that a pending sale is likely to default, it is seen as a crying wolf and it is over ridden. Credit managers are no match for the high paid, persuasive sales managers. Instead they are told to be “team players” and to be “creative” and to always figure out a way to approve the orders. Turning down a credit sale has become an anathema. No credit manager in his right mind would do it and hope to keep his job.
Now we’re paying the price. Companies, banks and lenders of any kind are learning that you cannot make money making bad loans. They do not generate revenue. It is better that the loans were never made. You can sell all of the goods and services you can, but if the customer does not pay for them, you lose. It sounds so basic, but that’s the fact banks in particular seem to have ignored.
Perhaps it is time to reconsider the credit manager’s role. Credit managers must warn sales of impending dangers and their concerns must be heeded. Obviously, the argument must be credible and backed with sufficient research. The intent should not be to find a reason to deny credit in every circumstance, but instead to find a means to at least dilute the risk and manage the sale in such a way the recovery is made more likely than not. This may take a different kind of credit manager. One who can stand up to a highly charged must-make-the-sale-no-matter-what type of sales person. Perhaps it is time to upgrade the position, so that the credit manager and the sales manager can go face to face as equals. Maybe then they’ll work as real partners and manage risk and avoid the hits.
This is where CreditPowers can help. We know how to work with sales and we know how to analyze credit. We can help develop the proper credit – sales relationship that will take you into the future.
For more information e-mail us at patrickpowers@sbcglobal.net.
There has been a trend in the recent past to ignore risk in favor of the almighty sale. The sale must go through. Anything or anyone standing in the way is viewed as anti-sales. One company I know labeled any delay in allowing a credit sale as being bureaucratic, meaning, any thoughtful analysis of the facts and assessment of the risk was a waste of time. During the last couple of decades, companies have sought aggressive sales people to lead the charge and have at the same time, hired accounts receivable clerks to perform the credit analysis functions. The meeker the person the better. When a credit person raises any kind of concern that a pending sale is likely to default, it is seen as a crying wolf and it is over ridden. Credit managers are no match for the high paid, persuasive sales managers. Instead they are told to be “team players” and to be “creative” and to always figure out a way to approve the orders. Turning down a credit sale has become an anathema. No credit manager in his right mind would do it and hope to keep his job.
Now we’re paying the price. Companies, banks and lenders of any kind are learning that you cannot make money making bad loans. They do not generate revenue. It is better that the loans were never made. You can sell all of the goods and services you can, but if the customer does not pay for them, you lose. It sounds so basic, but that’s the fact banks in particular seem to have ignored.
Perhaps it is time to reconsider the credit manager’s role. Credit managers must warn sales of impending dangers and their concerns must be heeded. Obviously, the argument must be credible and backed with sufficient research. The intent should not be to find a reason to deny credit in every circumstance, but instead to find a means to at least dilute the risk and manage the sale in such a way the recovery is made more likely than not. This may take a different kind of credit manager. One who can stand up to a highly charged must-make-the-sale-no-matter-what type of sales person. Perhaps it is time to upgrade the position, so that the credit manager and the sales manager can go face to face as equals. Maybe then they’ll work as real partners and manage risk and avoid the hits.
This is where CreditPowers can help. We know how to work with sales and we know how to analyze credit. We can help develop the proper credit – sales relationship that will take you into the future.
For more information e-mail us at patrickpowers@sbcglobal.net.
Monday, October 6, 2008
Credit Fitness Trainer
When I go to the gym, I work out on a few of those exercise machines hoping they will tone and firm. I can work the machines and I know how they function, but I don’t really know how to use them effectively. Do I use light weights or heavy ones? Do I do fifteen reps or a hundred? Do I do so many abdominal crunches I can’t move? That is why members hire a personnel trainer. He helps to guide you in ways to use the machines to get the best out of a work out.
CreditPowers works like a personal trainer for you credit department. Your collection group may know the basics, but do they know how to handle the unusual or the exceptional? They may be good collectors, but are they strategic? Are they making a real impact on the past due? Do they know how to work with a sales department looking any where and every where for a sale?
CreditPowers has over thirty years of credit experience in a wide range of environments, from the conservative to the aggressive. We offer an affordable program that begins with a performance evaluation of your current accounts receivable situation. We can make recommendations that will get your department on tract and we can train the staff on sure fire methods that will achieve results. Finally, we can be a resource for information and services to enhance performance.
For more information, e-mail us at patrickpowers@sbcglobal.net
CreditPowers works like a personal trainer for you credit department. Your collection group may know the basics, but do they know how to handle the unusual or the exceptional? They may be good collectors, but are they strategic? Are they making a real impact on the past due? Do they know how to work with a sales department looking any where and every where for a sale?
CreditPowers has over thirty years of credit experience in a wide range of environments, from the conservative to the aggressive. We offer an affordable program that begins with a performance evaluation of your current accounts receivable situation. We can make recommendations that will get your department on tract and we can train the staff on sure fire methods that will achieve results. Finally, we can be a resource for information and services to enhance performance.
For more information, e-mail us at patrickpowers@sbcglobal.net
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