At the very heart of credit transactions is honesty. Without it there can be no credit. When a seller extends credit to a buyer, there is the assumption that the buyer will repay the seller. It is the belief that the buyer will do what he promises to do because he is honest. Character is the first “C” of credit, the reliance of the buyer to repay, because he said he would.
Most debtors who default do so, not because they are dishonest, but because they are unable to repay the obligation. They intended to, they wish they could, but they just cannot. We presume, because we still have a certain amount of faith in the goodness of our fellow man that most people will pay if they are able and only a few actually intend from the very beginning to renege on their bills.
A function of credit management is reviewing and analyzing the data from credit applicants to determine their honesty. While there are precise mathematical formulas to asses a customer’s ability to pay, determining an abstract such as honesty, character and integrity is almost entirely subjective. It is important that all available information is reviewed before making a major decision.
An equipment company granted a credit sale in the amount of $80,000 basing the decision solely on the customer’s credit references. The references were bogus, the customer was fictitious and the equipment was last seen headed for Africa. The credit manager neglected to obtain a credit report from Dunn and Bradstreet or some other credit reporting agency which would have at least confirmed the legal status of the business.
So often the litmus test for honesty is a gut feeling. Asked why he continued to allow an auto glass distributor to charge even after already defaulting on nearly $300,000, a branch manager stated the owner of the businesses was a well known member of the local church. All the while he was illegally transferring title and assets to friends and family.
Sometimes collectors themselves get too close to the customer and are unable to make the right decision. A collector for a ready mix company started to ignore the growing delinquency of a particular customer because they had started dating. Clearly the customer was taking advantage of the collector.
Dishonesty is not limited to small or fly-by-night outfits. A national building material supplier chain routinely back charges its vendors for damaged goods in excess of its purchases. It is so institutional that managers are coached in ways to deduct a few dollars here and there from the vendors’ billing. It is not seen as fraud, but rather creative bookkeeping. If the vendors complain, they risk losing future purchase orders.
What happens when a company’s culture of dishonesty does not directly impact the credit trends? A national distributor of auto glass was recently indicted for insurance fraud, even though they never missed a payment to their suppliers. The strategy may be to monitor the customer closely, keep a tight reign on the credit line and level of delinquency and hope that when and if there are substantial penalties and the principals are jailed, the exposure will not be too great.
Thus, dishonesty is not necessarily a reason for denying credit. It is merely another factor that may or may not influence payment. Back in the early 1960s a lumber company in Los Angeles extended credit, without worry of not getting paid, to a family member of the notorious Dragna mobsters. When it came to running a legitimate business, the family kept their suppliers happy. They had enough headaches with their other, illegal endeavors.
In times like these, when nothing is black and white and everything is gray and nothing is certain, extending credit is more than a science. Perhaps, a lot of it is judgments based on experience. That’s where CreditPowers can help. If your credit department is having trouble making those tough decisions, contact us and we can walk you through the minefields and get you to where you want to be safely. Email your comments to patrickpowers@sbcglobal.net and watch for our website strategiccreditmanagementsolutions.com
Monday, November 24, 2008
Monday, November 17, 2008
Minimum vs. Great Expectations
Minimum expectations:
The collectors are charged with “cleaning up” the ninety days past due and older balances.
When the customers’ account reaches ninety days past due, the collectors make a demand for payment, suggesting that no more orders will be processed until payment is received. The customers, on cue, agree to send the ninety days past due balance. When the check arrives, the collector has done a good job.
Great Expectations:
The collectors are charged with reducing delinquency and increasing the level of over all collections. The initial collection calls are made soon after the account becomes past due. If, somehow an accounts slips over ninety days, a payment schedule is negotiated that will ensure payment of not only the most past due amounts, but other delinquent balances as well, payable over a reasonable amount of time; a schedule set not by the customer but by the creditor.
Minimum expectations:
When a customer sends in a credit application, an account is immediately established with terms that state C.O.D. This is to facilitate the customer’s first order while the application is “processed.” Usually, because the duration of such processing is indefinite, the account remains on C.O.D terms until the customer begins to complain. Then, a credit line, matching the initial order and with no correlation to the customer’s potential volume, may be granted.
Great Expectations:
When a customer sends in a credit application it is immediately processed and a credit line, corresponding to known factors, such as experience with other like vendors, or a credit report score, is established. The credit line is communicated with the customer and if it is not enough, more information is obtained. Additionally, the customer is informed of the condition and payment terms and the customer’s acceptance is recorded.
Minimum expectations:
Sales reps are considered by the credit department as villains, willing to sell “anyone” regardless of the risk or the ultimate cost to the company. They are seen as greedy, sloppy and unreliable. There is no negotiating with them. If there is a dispute, they can take it up with senior management. Sales views credit as arbitrary and inflexible intent on thawarting sales. Arbitration between the sales and credit departments becomes a regular and wearisome task of the CEO.
Great Expectations:
Sales and credit are a team, each appreciating the importance of the other. Credit has credibility with sales. If there is an account that is too risky to take on, sales will pass, but not before exploring every alternative approach. Credit extends the largest possible credit line making sales aware of the customer’s potential. They communicate well because they understand each other.
Minimum Expectations:
May be what you have with your present credit department. It may be this way, because these are the normal management expectations. This is how it has always been and you expect, sadly, that it will always be this way.
Great Expectations:
Is what you could have with CreditPowers. We know what makes a credit department function with better than expected results. Contact us at patrickpowers@sbcglobal.net.
Your comments are welcome.
The collectors are charged with “cleaning up” the ninety days past due and older balances.
When the customers’ account reaches ninety days past due, the collectors make a demand for payment, suggesting that no more orders will be processed until payment is received. The customers, on cue, agree to send the ninety days past due balance. When the check arrives, the collector has done a good job.
Great Expectations:
The collectors are charged with reducing delinquency and increasing the level of over all collections. The initial collection calls are made soon after the account becomes past due. If, somehow an accounts slips over ninety days, a payment schedule is negotiated that will ensure payment of not only the most past due amounts, but other delinquent balances as well, payable over a reasonable amount of time; a schedule set not by the customer but by the creditor.
Minimum expectations:
When a customer sends in a credit application, an account is immediately established with terms that state C.O.D. This is to facilitate the customer’s first order while the application is “processed.” Usually, because the duration of such processing is indefinite, the account remains on C.O.D terms until the customer begins to complain. Then, a credit line, matching the initial order and with no correlation to the customer’s potential volume, may be granted.
Great Expectations:
When a customer sends in a credit application it is immediately processed and a credit line, corresponding to known factors, such as experience with other like vendors, or a credit report score, is established. The credit line is communicated with the customer and if it is not enough, more information is obtained. Additionally, the customer is informed of the condition and payment terms and the customer’s acceptance is recorded.
Minimum expectations:
Sales reps are considered by the credit department as villains, willing to sell “anyone” regardless of the risk or the ultimate cost to the company. They are seen as greedy, sloppy and unreliable. There is no negotiating with them. If there is a dispute, they can take it up with senior management. Sales views credit as arbitrary and inflexible intent on thawarting sales. Arbitration between the sales and credit departments becomes a regular and wearisome task of the CEO.
Great Expectations:
Sales and credit are a team, each appreciating the importance of the other. Credit has credibility with sales. If there is an account that is too risky to take on, sales will pass, but not before exploring every alternative approach. Credit extends the largest possible credit line making sales aware of the customer’s potential. They communicate well because they understand each other.
Minimum Expectations:
May be what you have with your present credit department. It may be this way, because these are the normal management expectations. This is how it has always been and you expect, sadly, that it will always be this way.
Great Expectations:
Is what you could have with CreditPowers. We know what makes a credit department function with better than expected results. Contact us at patrickpowers@sbcglobal.net.
Your comments are welcome.
Monday, November 10, 2008
The Case of the Mysterious Overpayments
It was another Southern California fall day, hot with the Santa Ana winds sucking the life out of everything. I was watching the winds blow the leaves off my liquidambar on to my neighbor’s yard when the phone rang. He was the credit manager for an equipment company and he sounded perplexed. Most credit managers sound perplexed.
“We have this customer, a distributor of construction related tools and accessories.” He said. “They’re actually a very good customer in that they buy a lot and they pay on time.” I knew there was going to be a “but”. “But, when they pay, they either short pay or over pay the invoices. Actually, they’ve accumulated a large credit balance, because ever since March, they are over paying most invoices. Funny thing is they claim they’re paying the quoted prices.”
“Okay.” I said. “You have a customer paying you too much. What’s the problem?”
“The auditors can’t stand unapplied cash.” He said, “The controller is on my back to clean it up. This account is a real mess and I just don’t have the time to be worrying about a customer with a credit balance when I have a growing delinquency problem.” He was starting to sound like a kid who wasn’t getting his way.
“What happened in March?” I asked.
“That’s when they have their annual users’ conference, as they call it. Their buyers get with our sales group and negotiate the prices for the year.”
“Sounds like your prices went down, but they’re not going with the program. Tell them to update their program.” It seemed like the problem was solved and I could bill him for the call.
“I tried that. They’re not budging. They send us a purchase order and our order department confirms it and ships the order. I can’t help it if they want to pay too much.”
I told the credit manager I’d make some calls. It was the least I could do. I got on the horn with the payable manager for the construction tool company. I asked him to describe his system. He sounded proud of it.
“When we get a requisition we write up the purchase order. Then we check the computer and see what the price was last time we ordered and that’s what we put on the purchase order. Once we get the confirmation back and the delivery copy, I pay from the purchase order.”
“Did you get updated pricing from the user conference in March?” I asked, but I suspected the answer.
“Nope.” He said.
Of course not. Why should two departments within the same company communicate with each other?
It seemed the purchase order was the key, so I called the credit manager back and asked him to check on something and get back to me.
“Your hunch was right on the mark.” He told me, though he did not sound happy about it. “Our order takers confirm the product and the quantity. They don’t even look at the price because that’s already set up in the computer.”
So on one computer the price is adjusted to the new negotiated price. On another computer the price is never changed, unless the confirming Purchase Order comes back with a difference.
“Send them back their money and in the future, have your order takers correct the price on the P.O. and the problem should go away.” I instructed.
Deductions and discrepancies are often system problems. Figure out the system and you can stop the payment oddities. That’s where Credit Powers can help. We know all about deductions, discrepancies and short pays. We can help you find the problem and fix the system.
Contact us at patickpowers@sbcglobal.net.
Your comments are welcome.
“We have this customer, a distributor of construction related tools and accessories.” He said. “They’re actually a very good customer in that they buy a lot and they pay on time.” I knew there was going to be a “but”. “But, when they pay, they either short pay or over pay the invoices. Actually, they’ve accumulated a large credit balance, because ever since March, they are over paying most invoices. Funny thing is they claim they’re paying the quoted prices.”
“Okay.” I said. “You have a customer paying you too much. What’s the problem?”
“The auditors can’t stand unapplied cash.” He said, “The controller is on my back to clean it up. This account is a real mess and I just don’t have the time to be worrying about a customer with a credit balance when I have a growing delinquency problem.” He was starting to sound like a kid who wasn’t getting his way.
“What happened in March?” I asked.
“That’s when they have their annual users’ conference, as they call it. Their buyers get with our sales group and negotiate the prices for the year.”
“Sounds like your prices went down, but they’re not going with the program. Tell them to update their program.” It seemed like the problem was solved and I could bill him for the call.
“I tried that. They’re not budging. They send us a purchase order and our order department confirms it and ships the order. I can’t help it if they want to pay too much.”
I told the credit manager I’d make some calls. It was the least I could do. I got on the horn with the payable manager for the construction tool company. I asked him to describe his system. He sounded proud of it.
“When we get a requisition we write up the purchase order. Then we check the computer and see what the price was last time we ordered and that’s what we put on the purchase order. Once we get the confirmation back and the delivery copy, I pay from the purchase order.”
“Did you get updated pricing from the user conference in March?” I asked, but I suspected the answer.
“Nope.” He said.
Of course not. Why should two departments within the same company communicate with each other?
It seemed the purchase order was the key, so I called the credit manager back and asked him to check on something and get back to me.
“Your hunch was right on the mark.” He told me, though he did not sound happy about it. “Our order takers confirm the product and the quantity. They don’t even look at the price because that’s already set up in the computer.”
So on one computer the price is adjusted to the new negotiated price. On another computer the price is never changed, unless the confirming Purchase Order comes back with a difference.
“Send them back their money and in the future, have your order takers correct the price on the P.O. and the problem should go away.” I instructed.
Deductions and discrepancies are often system problems. Figure out the system and you can stop the payment oddities. That’s where Credit Powers can help. We know all about deductions, discrepancies and short pays. We can help you find the problem and fix the system.
Contact us at patickpowers@sbcglobal.net.
Your comments are welcome.
Monday, November 3, 2008
Firing Up Collections
Recently, I was asked for ideas on incentives for a collection group. Apparently, the level of past due accounts was increasing and the company’s management was recognizing that money may help stimulate collections. I have seen bonus programs work before. A lumber company I know has a program whereby once a specific collection level is reached; the collectors are given a bonus for exceeding the minimum level. Since the collectors’ base pay is relatively low, the bonus is a critical piece of their compensation and indeed they are a motivated group.
Money is not always the only motivator. I once had a “Check of the Month” program. Each month I made a copy of a check that was received in the course of the previous month. It did not have to be the largest check, just one with the best collection story behind it. It may have been payment for a very past due and resistant account. It may have been the result of the resolution of a very complex dispute. Or, the collection circumstances made a good story. I had the check framed and presented to the collector responsible for its collection and it was displayed in their cubicle for the month. Every one of the collectors on my team was thrilled when they were presented with the framed check and they all worked hard to get one.
More recently, we had lunch brought in at the first part of a new month when our targets were met by the end of the previous month. The entire group worked very hard to hit those targets. As the group got closer to the targets and the end of the month drew near, the staff worked harder to make sure we succeeded.
Mostly, the chief incentive is recognition. If senior management recognizes that the collection effort is effective, that the team is making a difference and is making a contribution to the company, they will be motivated to work hard. All too often credit and collection departments are treated like a necessary evil and a drain on company resources. The credit department is one department the company would rather just do without. So any time it is recognized, the department is stimulated.
If you need some help motivating your credit department, contact CreditPowers today. We can provide an effective incentive program that the department will support and provide you with increased revenue as a result. We welcome your coments.
Contact us at patrickpowers@sbcglobal.net.
Money is not always the only motivator. I once had a “Check of the Month” program. Each month I made a copy of a check that was received in the course of the previous month. It did not have to be the largest check, just one with the best collection story behind it. It may have been payment for a very past due and resistant account. It may have been the result of the resolution of a very complex dispute. Or, the collection circumstances made a good story. I had the check framed and presented to the collector responsible for its collection and it was displayed in their cubicle for the month. Every one of the collectors on my team was thrilled when they were presented with the framed check and they all worked hard to get one.
More recently, we had lunch brought in at the first part of a new month when our targets were met by the end of the previous month. The entire group worked very hard to hit those targets. As the group got closer to the targets and the end of the month drew near, the staff worked harder to make sure we succeeded.
Mostly, the chief incentive is recognition. If senior management recognizes that the collection effort is effective, that the team is making a difference and is making a contribution to the company, they will be motivated to work hard. All too often credit and collection departments are treated like a necessary evil and a drain on company resources. The credit department is one department the company would rather just do without. So any time it is recognized, the department is stimulated.
If you need some help motivating your credit department, contact CreditPowers today. We can provide an effective incentive program that the department will support and provide you with increased revenue as a result. We welcome your coments.
Contact us at patrickpowers@sbcglobal.net.
Subscribe to:
Posts (Atom)
