Top Ten Credit Mistakes

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.