Credit Management As An Art Form

The owner of a large distribution company told me he believes that credit is more of an art than it is a science. You need to know the principals, he says, but credit is still more about people than numbers. Smart man. He is having a problem however. The sales department and the credit department are not getting along. Seems the sales department cannot get orders to their customers released fast enough and the credit department is reluctant to release orders that exceed the credit limit or to delinquent customers. This is a dilemma that’s been driving the company nuts for the last couple of years. I tell him, it’s an easy fix.

I had already met with the sales manager and later a couple from the credit department. The credit group has not had a manager of any ability in quite sometime and they are not being really managed by senior executives either. This leaves the credit group to wing it the best they can.

Oddly, no one is complaining about the collection levels, the delinquency levels, the bad debt, reserves or the DSO. They must be okay. I asked the credit group, why; if the revenue is flowing just fine thank you, why not just open the flood gates? They are not being blamed for anything other than holding up orders. So don’t hold up orders.

It is not that simple of course. Somewhere in what little training they’ve had, they were taught not to allow orders to delinquent customers and not to allow orders when the orders exceed the credit limit. Those are the rules. You can’t change the basic rules of credit. It’s the salesmen who are trying to bend or break the rules that are the problem.

As I’ve said before, credit is the conscience of the company and they just cannot allow run away sales. The sales reps are all on straight commission, regardless of payment by the customer, so naturally, the sale is more important than the payment. Too make matters worse, the sales reps are responsible for the initial collections. If a customer is past due, says the owner, the sales rep is not doing his job. Well, while sales reps sell refrigerators to Eskimos, it is a rare one that can collect.

As to those pesky credit limits, they are no guidelines. No one is doing a credit check, no one has any idea what the limits should be. They are set low so that the orders will come up on hold allowing for a review of the situation and causing an instant delay in the delivery.

This is where Strategic Credit Management Solutions can help turn things around. It’ll be a snap, but it’ll look like I’m performing magic. I’ll keep you posted.

Unclaimed credit dilemma

Thinking about Decembers past, I remember a CFO who made it his priority to reconcile and use up all “unapplied” credits. December is not a good collection month. There are fewer collection days in it and with the holidays and all nobody wants to pay anyway. So, why would anyone want to do something that would essentially increase the receivables? Getting rid of a credit can mean one of two things: either it gets applied to an outstanding balance, which nets to zero, or it is refunded back to the customer which only increases the total receivable amount on the books. While I’m not opposed to refunding something that is rightfully owed, making it a priority during the worst collection period of the month doesn’t make sense.

The term “unapplied credit” means credits that are not derived from actual credit memos. There can be credit memos that are not matched to the original invoice and sit on the customer’s account just like an invoice. Usually, the customer will do the math and include the credit memos along with the invoices when payment is made. However, mistakes happen and to get rid of the unapplied usually requires a fair amount of research.

Sometimes, for example, a customer will pay the credit memos, treating them just like invoices, ignoring the little dash signifying that it’s a credit memo. The result is after the payment application, the original credit memo and an equal unapplied credit appears on the account. Sometimes a customer will send a check paying another vendor’s bills. Before the error is caught, the check is cashed and the applicator can only enter the entire amounts as “unapplied.” It also happens that customers will pay invoices twice resulting in “unapplied” credit balances. In fact there are a numerous payment errors that will result in “unapplied” credits on customer’s accounts. In order to correct the errors, the collector must explain the error to the customer and then, work out a correction. The simplest solution is for the customer to make the adjustment and take the credits on the next payment. It is very likely that unapplied credits come and go during the natural cycle of account activity. For this reason, devoting an entire month to clearing them out seemed pointless, given there are more pressing issues to occupy the collector’s time.

I believe, the CFO thought unapplied credits could be dealt with in some kind of sweeping magic wand. It is possible he did not understand the process. Why should he? CFOs are accountants and financial managers, they know very little about the inner workings of credit departments. If they did, they wouldn’t act like the pointy haired character in Dilbert, and make ridiculous demands on the department. This is where Strategic Credit Management Solutions can help. We can advise CFOs when perhaps the credit manager cannot. We can help set realistic goals and targets that will actually increase your revenue and lower your delinquency. See our website at http://powerscredit.com/. Your comments are welcome. E-mail us at patrickpowers@sbcglobal.net.

Collectors "Super Sell"

I have written before that good collectors use similar tools and behaviors as sales reps and in fact, collectors must be better than sales reps in the art of “selling.” This is based on the fact that sales reps as a rule abhor the collection function. They don’t like collecting and they’re not going to do a good job doing something they do not like doing. It is also widely believed that the collection function will impair their relationship with the customer and thus interfere with their ability to sell.

It as occurred to me that there is another reason collectors must be better sales reps than sales reps. When you come right down to it, sales people are merely fulfilling a need. Customers want to buy. The role of the sales rep is to persuade the customer to buy what they want, what the need, from them. Collectors on the other hand must persuade customers to do something they do not want to do, pay. The level of difficulty is greater.

When the need is satisfied and the endorphin level has returned to normal, the customer is often left with the realization that the purchase was beyond their ability to pay. In fact if there is a “need” that must be satisfied it is the need to not pay. I have heard from customers who are upside down complain that it is not their fault; rather the blame should be on those who let them buy more than they could afford.

It now becomes the role of the collector to artfully persuade the customer, (now known as the debtor) to do something they do not want to do. They must be persuaded to give something up, crimp their life style, be uncomfortable, delay buying something else or put off paying another vendor. Rather than satisfying a need, the collector must instill a harsh sense of guilt and create an overwhelming sense of obligation. The “need” that must be satisfied now is the removal of guilt and obligation. Not as easy a task as going up to a good buddy and telling them what a great deal they have that will make them feel ecstatic. A collector must create a burden and then show the customer how to unload that burden.

This is why, so often, collectors become counselors for the debtor. The collector advises and guides the customer towards the correct path to monetary salvation. This is no role for a sales rep who more often plays the role of a seducer.

So, why is it companies have entry level personal, ill equipped for such delicate duties, do their collecting and why is it companies are so unwilling to pay for good collectors? The trick to increasing revenue in these hard times is to elevate the collection task and bring in more money. Strategic Credit Management Solutions can help you do that. We’ve been collecting for over thirty years and we are dedicated to making your collection staff super collectors. See our website at http://powerscredit.com/. Please email your comments to patrickpowers@sbcglobal.net.

Guerrilla Collections

I was trying to find out why a local developer had not paid for a special lumber order. I had left a number of messages without a call back. One day I decided to dedicate my life to getting a call back. I started calling about every hour. He was “in a meeting”. Later he was “out to lunch.” By early afternoon he was back in the meeting. I started calling every thirty minutes. By late in the day, I was calling every fifteen minutes. At about four, he called me back, finally. He was exasperated. He told me he had not paid because he discovered he could have bought the product more cheaply elsewhere. Now I had something to work with, a price dispute.

Another time, I was trying to reach the owner of a general contracting firm. Again, I had left a whole lot of messages with the receptionist without the courtesy of a reply. I thought it was very rude of him. So, the next time I called and the receptionist, who sounded sweet polite and had the demeanor of a restaurant hostess, I informed her that since she was the only employee answering the telephone, she alone represented the company and she therefore was solely responsible for getting me paid. She protested, but I was relentless. I told her I wanted an answer and since her boss was not talking to me, she would find out for me, or she could write me out a check. When she tried to remind me she was merely a receptionist, I reminded her that as far as I was concerned she was the only employee and that made her not only the receptionist, but the accounts payable clerk and the Chief Financial Officer as well. I made it clear that I was not expecting anyone else to call me back. The next time I called her, she was to tell me when I could pick up a check. By the end of the call, I think she was whimpering. Not a half hour went by before the owner was calling me. He wanted to complain about my intimidating manner and I wanted him to tell me about payment. He complained for awhile and then he gave me a payment commitment.

I was getting no where with a lumber company until I rang late one afternoon and a warehouse manager picked up the phone. I asked him straight out if his payroll checks were clearing. Then I told him how an involuntary bankruptcy worked and he’d be out of a job. Less than a hour later the owner of the company, calling from his mother’s house in Lake Arrowhead, was screaming at me. The nerve of me telling a low level clerk the things I’d said. And to prove me wrong, he was sending over a personal guarantee. When the corporation filed bankruptcy, I was the only creditor with a personal guarantee.

A friend of mine worked for a hospital in charge of medical supplies. He had failed to pay a supplier because he did not recognize the vendor. After an exchange of calls and letters, he finally received a notice that the vendor was sending over a representative to discuss the bill. Enclosed was a picture of the representative, so that he would be cleared at the front desk. The man in the picture looked so intimidating that my friend fired off a check.

Whenever Verizon wants money from me, I get a text message. Perhaps on all credit applications there should be a space for the guarantor’s cell phone number. That way they can be reached twenty four seven.

The point of all this is, as collectors, sometimes you have to go beyond the normal collection routine. Sometimes you have to take extraordinary means. Strategic Credit Management Solutions can help train your collectors to be more creative and more productive. See our website http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

Go to the Top

A sales rep told me that as a rule, collectors call the wrong people when asking for money. A routine collection call is usually made to the accounts payable clerk employed by the debtor company. This is okay, as far as it goes. An accounts payable clerk processes the billing. Therefore, if you want to know if your invoices are being processed, the payable clerk should be able to tell you. Much of the time learning that your invoices are in process is a good indication that they will be paid sometime in the future. If the company has a regular payment schedule for payment, a processed invoice will be paid according to the debtor’s processing schedule. So much collection activity is spent verifying a known and familiar process. This is not collections. It is only information gathering and unless the collectors are doing some major revenue forecasting, it is useless information except collectors are often asked by someone, when payment is expected from the customer.

A typical collection call is triggered when invoices are past due. Then the collector confirms that payment is in process and is told when the invoices will be paid. Or the collector is told that some or all of the invoices are not in process, for whatever reason, they are lost in the mail, sent to the wrong address, sent without postage or simply on the wrong payable desk. Upon learning of this dilemma, the collector dutifully resends the invoices and waits a sufficient time for them to get into the payable process.

Of course, there is also the possibility that the accounts payable clerk waits for the collector to call before finalizing the payment process.

In all of these situations, the collector is at the mercy of the accounts payable clerk. That is a lot of power given to a clerk; particularly when the clerk has no other authority but to process the invoices. All a payable clerk is supposed to do is receive the invoices, ascertain there is the required back up; signed delivery receipts, purchase orders and whatever additional documentation the debtor company requires from its vendors as a condition of payment.

Arguably, contacting the payables clerk as the first step in the collection process allows the debtor to delay payment. The debtor is always in control of the process and is setting the payment terms. At some point in time, when payment is not received, the collector calls the same clerk repeatedly, only to be told it is out of the payables hands and in the hands of someone authorized to issue payment. That’s when the collector moves up the next level.

So why not just start with that level?

Perhaps, every collection call should be directed to that person who signed the credit application and the corresponding personal guarantee. That person is on the hook. That is the person who agreed to the terms and conditions, promising to pay on time and make collection calls unnecessary. Call that person directly, he or she had the authority to sign the application and has the authority to sign checks. Everyone else is a gatekeeper, preventing you from getting a commitment. Let this person find out for you how the process is going and when payment will be made. It’ll save you a lot of steps, put you in control and since this person does not want to be put on the spot, may even begin to make payments on time.

Next time, I’ll discuss how to get the person on top to take your calls.

This is where Strategic Credit Management Solutions can help. We know the process and we can train your collectors to bring in the cash. See our website http://powerscredit.com/. Your comments are welcome. Send us an e-mail at patrickpowers@sbcglobal.net.

Do You Want Wally Cox or Phil Silvers Collecting Your Money?

Employers seeking credit managers frequently insist on two qualifications I don’t see too often on other job descriptions. One is “flexibility” and the other is “hands on.” These are in the job description now, because the last credit manager was neither hands on or flexible. I think I know why. The previous credit manager was an accountant. So many senior managers make the mistake that since credit is a function of accounting; you can make credit managers out of accountants. Wrong. Think about it, just how flexible do you want your accountants to be? It goes back to the old joke, when somebody asked the accountant how much is two plus two? The “flexible” accountant answered, “What do you want it to be?” This kind of flexible accountant became “Enron accounting”. As a rule, accountants are not flexible. Two plus two equals four, period. There is no gray area. People who take up accounting as a profession embrace the certainty of numbers. They are secure in the order and harmony of numbers adding up to what they are supposed to. Balancing is more than an objective, it is nirvana.

Therefore, when an accountant takes the reigns of credit manager, their first act is to establish the rules. Rules govern accounting, thus, rules will govern credit. They are very specific do and don’t lists and usually, they are written in stone. No gray areas allowed; accountants loathe gray. The second act of an accountant credit manager is to go about enforcing the rules. Thus starts the conflict between credit and everyone else in the company, sales, operations and ultimately senior management, who wishes the credit manager could be just a little more flexible.

The second “qualification” being hands on you would think would be no problem for an accountant. They seem to be very “hands on” when it comes to creating spread sheets, pro formas and financial statements. Why are they not “hands on” credit managers? Simply put, “hands on” means different things to different people. Like I said, an accountant considers being hands on doing spread sheets themselves and not having someone else do it. In fact, accountants, in order to satisfy their controlling needs, are very “hands on”. They usually make poor delegators. But, accountants tend to be very “hands off” when it comes to dealing with other people, particularly disagreeable customers and sales reps. For example, if the rules say a customer will be put on credit hold at sixty days, the account will be put on hold. The rule did not call for someone to call the customer and tell them. Accountants prefer to have someone else make that call and they usually tag the sales rep. Accountants are not people persons. They like and find comfort in numbers and charts and spread sheets. They are uncomfortable with people, particularly confrontational people.

That is why when I see the requirements, flexibility and hands on, I am convinced the problem is not with who has been hired, but who is doing the hiring. Accountants hire accountants. The problem is systemic. The company will always have the issue of stubborn “inflexible” credit managers, seemingly unable to get their hands around the problems of the customers and the sales reps as long as they have controllers managing credit managers.

This is where Strategic Credit Management Solutions can help. We know credit managers. We know what it means to be hands on and flexible. We can teach it or we can find you qualified individuals who are both. See our website, http://powerscredit.com/. You can reach us at patrickpowers@sbcglobal.net. Your comments are welcome.

The Case of the $60,000 Ambiguity

So it’s time to update your credit application because there’s been some significant changes in your company due to merger, acquisition, buy out, incorporation, relocation or just because it has been a long time and it needs to be done. With computers you can redesign, cut and paste, move things from one page to another elaborate, shorten, and add graphics borders boxes and tables. Whatever you do, be careful. Your credit application can be a land mine it you’re not careful. Here’s a true story to illustrate.

A wholesale distributor of automobile windshields was owed nearly $100,000 by a retail auto glass shop. Another $60,000 in interest (or finance charges) had accumulated over time. The wholesale distributor had closed, so the retailer had to find another supplier, and simply stopped paying. As that was not going to be a good defense, they claimed that they had paid everything and the wholesaler simply failed to post all of the payments. They were counting on the wholesaler’s history of poor documentation storage, but they were able to reconstruct the entire history of the account and account for every invoice, credit memo and dollars received. At the end of the day, the wholesaler proved its case and the judge awarded a favorable decision.

However, (yes, there is always a “however”) the defense attorney pointed out a discrepancy in the terms of sale on the credit application. There just so happened to be two sections on the credit application that described the interest rate and neither were identical. In one section the finance charges were described as 1 ½ % per month or 18% per annum and in another section the finance charge was only 1% per month.

Why were there two sections? Way back when the wholesaler was purchased by a national chain, the credit manager re-did the credit application, using a cut a paste method with the old form and incorporating the new and as the finance charge descriptions were in two different locations they were put on the new form, one on one page and the other on another. It was never proof read or was it noticed for years, until as it always happens, they were in court.

The judge did not have to struggle with the decision. The terms were ambiguous therefore, he disallowed any. $60,000 wiped out in a heart beat. The equivalent of the credit manager’s annual salary, lost because of a simple oversight.

It seems when times are busy, and they are always busy, no one has time to review the simple things. Yet, omission, such as this example, or others, such as terms on an invoice or purchase order, can cost you a fortune. This is where Strategic Credit Management Solutions can help. We know forms, terms and documents. We can review yours and make sure they are in order and free of omissions and or ambiguity. Spend a little, save a lot. See our website http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

Watch Out For Third Party Scams

The caller was full of righteous indignation. Finally it was his turn to be offensive. For the longest time we had been chasing after him for payment, finally, turning him over to a collection agency. I am frequently questioned as to my policy of not writing an account off to bad debt soon after turning a delinquent account over to a collection agency. This particular account, while in the hands of an agency now for several months, was still on the books and he was still receiving statements. That was the rub. The caller claimed to have paid the past due bill directly to the collection agency and to prove it; he was sending me the front and back of the cancelled check. Sure enough, he had paid the bill. The collection agency just did not inform us, or, more importantly, they did not send us our share.

It happens all of the time.

Another agency I encountered made it a practice to work a claim for several months and then inform us that it was going to be necessary to sue. They requested up front court costs of $750.00. Then, a few months later, after making a request for documents to support the claim, which invariably they would not receive, we would receive a notice that they were closing their books on the file, without filing suit or returning our $750.00.

Collection agencies get away with these practices because no one is watching them. Most companies, I believe, write the balance off their books within thirty days of assigning the claim. It is out of sight, out of mind. So many agencies are remiss in sending updates about the status of the claims and companies do not except much of a recovery. This allows the unscrupulous agency to collect money from a assignment and keep it.

This practice is not limited to collection agencies either. Years ago I had a claim large enough to sue and the attorney we used was very diligent about getting a very good settlement which he kept. After months of trying to collect it from the customer, I was now faced with the task of collecting it from my own attorney. A threat to notify the bar was enough to get paid, but it was the idea that I had to go that far. Again, had the account be written off and forgotten, who’s to know?

That is why I believe you should treat legal items just like any other account. You’ve simply taken the next step. The time to write them off is when someone tells you the customer cannot be found or the courts have found not in your favor. And you need to watch your agencies and insist on frequent reports. Same goes for attorneys. Work with ones that do not intimidate you, have a good reputation and are forthcoming with the money they recover.

Strategic Credit Management Solutions can help you find reputable collection agencies. (We are not a collection agency). We can also help you find lawyers that will help you without helping themselves to your hard earned cash. See our website at http://powerscredit.com/. You can also e-mail us at patrickpowers@sbcglobal.net. Your comments are always welcome.

We Need to Negotiate

A necessary component of management is authority. Yet many companies are loath to give it to their credit manager. Most commonly, credit managers are restricted in the authority to put delinquent customers on hold. This is like disallowing sales reps the authority to quote prices. It effectively makes the credit manager impotent, relegating the position to some sort of advisor. Management, particularly sale management is convinced that any action by the credit department will permanently scare the customer away. What senior management misses is the need to allow credit people the authority to negotiate. If they do not give this tool to the collectors, they are left with a room full of clerks. Then to make matters worse, the collectors and credit managers are then blamed for the delinquency levels and the sluggish DSO.

Credit managers must have the authority to set terms and restrict credit sales, just like sales reps negotiate prices. A customer can choose to buy or reject a price and walk away. Customers who owe money are also given a choice. They can pay and continue to charge their purchases, or they can walk away. The fall back for the credit manager is to either file suit or turn the account over to a collection agency. Customers know this and they usually come to the table to work out a payment plan.

Without the authority, collectors are reduced to begging and if that doesn’t work eventually management will insist the past due customers be place on C.O.D. and when that doesn’t work then they finally consent to suing the bastard. See? Without the authority to negotiate, management misses out on a revenue possibility.

Credit managers are denied authority to negotiate because management fears they won’t negotiate. Strict and arbitrary credit managers operate on the belief that rules are rules and when a customer breaks a rule, that’s it, he is shut off. Period.
Here’s where Strategic Credit Management Solutions can help. We can help train your credit people to think like sales people and we can teach them viable negotiation techniques that will not only help them collect money, but also work with other departments in the company. See our website at http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

What the Ads Don't Tell You

This was taken from an actual ad on Career Builder:

Description
Accounting Options is currently assisting one of Orange County's largest growing distributors in their search for a experienced Credit Collections Analyst. In this position you will be required to perform the following functions:

• Collections on past due accounts
• Account analysis and reconciliation
• Work closely with sales department on client credit and order status.
• Work with internal departments to resolve disputed items or accounts.
• Analysis of aging report.
• Ensure that DSO goals are met.
  

Requirements

1+ years credit and collections experience
Accounts receivable experience
BS/BA in Accounting or related field a plus
Excellent written and oral skills
Ability to work in a fast paced department
Ability to communicate effectively with both external and internal clients

For immediate consideration, please e-mail your resume

As a public service, I will freely decode the hidden and insidious messages hidden in this typical want ad for an A/R Collections Clerk or as it is also called in my sample ad, a Credit Collections Analyst. It is a position in Irvine California paying $15.00 to $17.00 and hour. That’s $600 to $680 a week, $2,947 as month or $35,360 a year tops. In other words, it is entry level, for someone just starting out in the credit / collections profession.

Here are what the requirements really mean:

Collections on past due accounts
Note that the ad does not define past due accounts nor does it tell you the size of your past due portfolio and it fails to detail how you are to go about the task of collections. Will you be sending out a series of increasingly threatening letters? Will you be required to call a quota of accounts each day and will the required number of calls be attainable?

Account analysis and reconciliation
When this is the second most important function, it may mean the company is having problems with cash application and most of the customers’ accounts are a mess. Therefore, before you can make an intelligent collection call you will first be required to unravel all of the erroneous entries that have so distorted the true picture it may be impossible to collect the full balance.

Work closely with sales department on client credit and order status.
Since this is the third function in the hierarchy it indicates a hostile credit and sales environment. You will have aggressive and eager, commission sales reps making a lot more than your $15.00 an hour, who want their orders released right this moment and if they don’t get their way they won’t hesitate going over your head to the sales manager, who believes past due is no excuse to hold orders, particularly when the account is a mess because of the sorry state of cash application.

Work with internal departments to resolve disputed items or accounts.
This tells me that cash application is one of the “internal” departments that you’ll have to do battle with in order to get the accounts back in shape. Another internal department handles credit memos and adjustments and since it takes so long to get a credit issued the customers are withholding payments until they get the adjustments they need and that’s just another reason why the accounts are such a mess.

Analysis of aging report.
What kind of analysis is expected of a $15.00 an hour accounts receivable clerk? This is a code for being required to explain to the boss why all of the accounts on your aging have not paid yet.

Ensure that DSO goals are met.
This is great. For $15.00 an hour, you are supposed to ensure, that is guarantee, that what ever the DSO expectations are you will meet them. That means, you, a lowly entry level clerk are responsible for the total accounts receivable and sales of the company and that when applied to the formula they will be within the required days. Good luck with that.

When I see ads like this I wonder if there is a retention problem at the company. Clerks come in, beat their head against the wall, fight with sales reps and clerks in cash application or accounting all day, are berated for not meeting collection or DSO goals and after awhile say, forget this and leave.

This is where Strategic Credit Management Solutions can help. We know credit departments, their systems and procedures. Much of what seems beyond the control of an analyst are dysfunctional processes. We can help. We can analyze your current functions, see where the flaws are and make recommendations. We can help train the staff in effective revenue procedures and we will follow up later to see how you are doing. Our goal is to help you create competitive, productive departments in which the clerks are motivated and happy. See our website, http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net.

Your comments are welcome.

How to Extend Your Payables

I’m channeling Abbey Hoffman or Jerry Rubin and feeling a little subversive. I thought I’d turn the tables and describe how you can delay payments to your creditors based on what I know about credit management.

Negotiate longer terms. Everyone is doing it. The largest customers are demanding extended terms from their vendors, in lieu of getting bank loans. If your vendor has thirty day terms, ask for sixty or ninety day terms. Do not ask the credit department. Go directly to your sales rep or the sales manager. Tell them you’d do more business with them if you had a little longer to pay. Let them fight it out with the credit manager. There’s a good chance they’ll accept your conditions because companies are lusting for sales.

And here’s a little secret that will help you extend those terms even longer. Many computer generated aged trial balances are set up to age receivables on the basis of due dates. Therefore, your September purchases, if you were granted sixty day terms, would sit in the current column in October and November. They would show up as only thirty days past due in December and sixty days past due in January of next year. Now, if your vendor’s collection department is typical of a lot of companies, no one is going to look at your balance until January. So, here’s another tip:

Do not pay until you are called. This is the “if they want it they’ll ask for it theory.” Regardless of the established terms of sale, some companies are perfectly content with waiting for their money. Or at least they seem to be content, because they’re not insisting you pay promptly. So, you wait and under the above described scenario, your sixty day terms have turned into one hundred day terms. Not bad.

Do not pay finance charges. So you are past due, technically. If no one is calling you, are you really past due? Finance charges, interest, late fees, whatever the term, are usually assessed automatically at the end of the month. Ignore them. Don’t call up the credit department or the sales department and make a fuss about them. Just ignore them. As long as you are paying everything else and you are continuing to buy, after awhile, they’ll go away. If they don’t and somebody squawks, tell the pest you don’t pay finance charges and see what they do. No one sues or puts customers on hold for non-payment of finance charges. Only banks to that.

Make arbitrary deductions. Do not take a percentage that will look like a discount. Someone can figure that out quickly enough and challenge you. But if you were to just subtract an amount, particularly an amount that does not match anything on the invoice, there’s a good chance someone will eventually write it off as an adjustment. You might get a call, but when you do, simply say you paid what you were told to and suggest they take it up with the sales rep. The partial amount may stay on the books for awhile and it may even accrue finance charges, but ignore both of them. Someone will probably write up a claim and send it to the sales rep, who will ignore it. The longer it stays on the books, the harder it is to reconcile and resolve and eventually they’ll write it off. Again, it helps if you are buying a lot and paying for most of it timely enough. In this way, you’ve gotten yourself a pretty good discount.

Pay Some of the Invoices, but not all. This is not the same as taking arbitrary deductions; you can still do that as well, but rather skip a couple of invoices. This will test the collection department. They may figure out which ones you’ve missed and send you copies. Right away. Or, if the bank applies the cash, or cash is applied on a balance forward basis, or collectors only call on total amounts and not the specifics, it could take a long time before it’s recognized to be a missed invoice or two, or three.

Lie. Leaving ethical debates aside for the moment, telling an inquisitive creditor that the check is in the mail when it is not, helps you buy time. How much depends on the frequency of the follow up by the collector. Another entire month could plausibly go by before someone calls you back to suggest the perhaps the check was not in fact in the mail. Possibly, you could gain another month by responding with another lie and replying that you will stop payment on the first check and re-issue. The only way to know is to try it once. It’s just a little white lie after all.

Deny the Balance. When someone finally gets around to calling you for money, your first response should be to simply say, “What bill?” Tell them you don’t have any invoices and you need copies and while they’re getting invoice copies, have them send you the proof of delivery as well. Or, ask for these after you’ve received the invoices and you’ll pick up another week or so. If your vendor has a modern system, you’ll have duplicates in short order, but if your vendor is not very sophisticated, if could take them several days to several weeks to put their hands on the documents.

By-Pass the Credit Department. Should you find yourself put on hold or C.O.D. by the credit department because of your supposed delinquent status, appeal to your sales rep, or the sales manager or better yet, the C.E.O. If it’s payment they want, commit to one. Don’t worry about how much of a payment or when you will actually send it. These people just want your business and they need something to tell the collectors when they also tell them to back off. This will buy you additional time, though it won’t make you any friends in the credit department.

FAX the Check but don’t actually mail one. This is meant to “prove” that you have either already mailed a check or that you intend to mail one that you have processes and signed. This works great if checks go to a separate location than where the collector is calling, say a lock box for example, or a corporate headquarters. Since the customer is always right, someone will have to search high and low to find the original check before getting back to you, asking for a replacement check, because they must have lost the first one.

These are only a few ways customers delay payment. Basically, they take advantage of the inefficiencies rampant in so many collection departments. A well run, well organized, well automated department responds to these issues quickly and makes it less likely for the customer to get away with these little tricks. Strategic Credit Management Solutions can help you build a well run collection department. We’ve been doing it for better than thirty years now. We’ve seen and heard all of the excuses and we know how to respond, proactively. See our website http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

An Ode To The Credit Manager

This past Labor Day recognized the American worker. Long over looked is the Credit Manager. So here is my tribute.

An Ode to the Credit Manager

Here’s to the lowly credit manager, a position that is rarely lauded
Though for all the work they do, they should be more often applauded.
It’s a job no one else wants to do
But they know how to do it better than you.
It’s not a job for the lazy
But after a while it’ll drive you crazy.

It’s a middle management position that carries a lot of responsibility
But when you come right down to it, success is an impossibility.
If you do collect all of the company’s money,
They wouldn’t need you any more, honey.
Instead they’ll drive you insane
Blaming you for all the balances that remain.

You are the Rodney Dangerfield of the management team
Getting no respect; to be heard you have to scream.
Senior management thinks you’re a clerk.
And the sales group thinks you’re a jerk.
While the customer is telling tall tales
That the check is really in the mail!

Still, you keep at it everyday, doing your best and making those calls
Listening to all of the complaints and breaking down all of the stalls
Because no matter what they say
The money you get goes into our pay.
You give the credit that’s due;
We’re depending on you!

Let Strategic Credit Management Solutions help you in finding the best ways to increase your cash flow, decrease your past due, lower your risk and increase your sales. See our website http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

Secure It Right, Totally!

To put it simply, extending credit to contractors is a major risk. They have no inventory to speak of. They have no money. All they have are the tools of their trade and the skills, arguably, to do their particular trade. In order to perform their trade they need building materials. A mason needs bricks and mortar. A carpenter needs lumber and nails. A glazier needs glass. Usually, the value of the materials far and away exceeds the contractor’s net worth. Therefore, in most states, the responsibility for paying for all these materials rests ultimately with the beneficiary of the materials; that is, the owner of the property in which the material is used.

In short, if you are building your dream house and you hire a contractor and pay him a lot of money to build it for you and somehow the lumber supplier does not get paid for the lumber, you, the home owner will have to pay for it…again. That is the essence of the Mechanics’ Lien Law. It enables building material suppliers to extend ridiculous amounts of credit to individuals who under normal circumstances would not qualify for the smallest loan.

In California, Nevada, Arizona and Washington, lien rights are the very foundation upon which credit extended to contractors are built. In addition to the normal credit functions of a credit department, processing credit applications, checking references, calling past due customers and posting the receipts, building material suppliers must also gather the particulars about the projects, send out preliminary notices, process waivers, apply the money to the specific projects, mail warnings of intent to lien and file the liens as well. Credit is based not so much on the credit worthiness of the customer, but rather the credit worthiness or the likelihood of repayment, of each and every single construction project. Invoicing must be job specific. A customer may have several job accounts simultaneously. It is quite the undertaking. Done right, a building material supplier can secure most of its account receivable. Done wrong, all the expense, manpower, trouble as well as the receivable can go down the drain.

If you are going to extend “job basis” credit, you might as well do it right. I have seen too many situations whereby a lot of money is spent processing and mailing preliminary notices, yet never a lien is filed. Sadly, this is not because all of the jobs are paying, but because somebody made the decision not to file the lien, or let the lien time pass and subsequently forfeited the money rightfully owed. I’ve seen suppliers sign away their rights by issuing the wrong waivers, signing off a joint check, filing liens in the wrong counties. There is any number of ways to sabotage what would otherwise be a safe and secure system.

This is where Strategic Credit Management Solutions can help. We’ve had over thirty years experience with building materials suppliers, general contractors and subcontractors. We are Lien Law experts. We can provide the systems, procedures and the training to establish and maintain proper lien rights. See our website, http://powerscredit.com/ or e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

A Change in the Law

Something that I have advocated for a long time has become law. Now a simple procedure, a courtesy letter really, will become an official document with official legal wording that is required to be recorded along with additional recording fees and mailing fees and the timing of the letter will be a core argument challenging the validity of future claims for years to come.

Whenever I have the opportunity to speak in seminars about the Mechanic’s lien law of California I would urge the students to send a letter to the owner and general contractor a letter warning them that a Mechanic’s lien is imminent unless payment is received post haste. Frequently, this warning alone results in payment making the lien filing unnecessary.

The letter is very simple. I’d identify the myself and that my company had supplied material at a specific location and that it was charged the account of the specified customer and that I’d sent a Preliminary Notice on a specific date and that if I did not receive payment within ten days I was going to file a Mechanic’s Lien on said property. I’d send the letter to the owner certified return receipt requested and I’d send a copy to the general contractor. Then I’d sit back and wait for the proverbial caca to hit the fan. Very often it did, because while I had not received payment from my customer / contractor, the general or the property owner already had sent payment to my customer / contractor. I was not usually privy to the yelling and screaming and admonitions and threats that went on between my customer who was supposed to pay for materials but didn’t and the owner or general contractor who assumed he would. However, very often, assuming there was money remaining to be paid, my customer was quick to make payment, albeit sheepishly.

This point was driven home after I had filed a $13,000 lien. Sometime afterwards a representative of the general contractor called me. He was furious, not because I had filed the lien; I had a deadline after all, but that I failed to notify him that I was going to. He had to find out about the lien from his client the property owner and he had no idea I had not received payment from my customer, his subcontractor. To make matters worse, had I notified him earlier, there was still money in the contract. At this late date the money had all been spent. What upset this representative was his belief that as a material supplier, entitled to lien, I could do so without consideration of the consequences and with a little more effort, I could have received payment much earlier. Now I was facing the likelihood of an expensive lawsuit.

One of the problems with this early warning notification is too often the lien claimant waits until the last minute to file the lien in the first place and does not have time to warn anyone. Now that it is law, a courtesy phone call will not be enough. When the law takes effect in January 2011, the lien claimant will be required to send to the owner of the property being improved a Notice of Mechanic’s Lien along with a copy of the intended lien sometime before the lien is filed. No more last minute e-mails or phone calls. Additionally, the notice must contain the following language:

NOTICE OF MECHANIC'S LIEN
ATTENTION!

Upon the recording of the enclosed MECHANIC'S LIEN with the county recorder's office of the county where the property is located, your property is subject to the filing of a legal action seeking a court-ordered foreclosure sale of the real property on which the lien has been recorded. That legal action must be filed with the court no later than 90 days after the date the mechanic's lien is recorded.

The party identified in the mechanic's lien may have provided labor or materials for improvements to your property and may not have been paid for these items. You are receiving this notice because it is a required step in filing a mechanic's lien foreclosure action against your property. The foreclosure action will seek a sale of your property in order to pay for unpaid labor, materials, or improvements provided to your property. This may affect your ability to borrow against, refinance, or sell the property until the mechanic's lien is released.


BECAUSE THE LIEN AFFECTS YOUR PROPERTY, YOU MAY WISH TO SPEAK WITH YOUR CONTRACTOR IMMEDIATELY, OR CONTACT AN ATTORNEY, OR FOR MORE INFORMATION ON MECHANIC'S LIENS GO TO THE CONTRACTORS' STATE LICENSE BOARD WEB SITE AT www.cslb.ca.gov.

Should the lien be filed, a copy of this notice and its proof of service affidavit must be filed along with it. Each additional page carries its own recording fees. If this procedure is not followed, your lien will be unenforceable. That’s right, in little more than a year from now, if you fail to send this notice, your lien rights go down the drain.

One of the real hardships with a law like this is that it affects companies who are already ill equipped or ignorant of the lien laws as they presently stand. I see companies who have their attorneys file liens for them and therefore, are hesitant to file liens in the first place. I see companies file Preliminary Notices routinely but fail to enforce them. I see companies prepare Preliminary Notices but fail to mail them properly. While there are several providers of Mechanic Lien Law seminars, it is very difficult to attend and for many, vacating an already lean credit department to participate is not always an option. This is where Strategic Credit Management Solutions can help. We know lien law. We’ve had over thirty years experience with it. Now is a good time to implement a procedure that will follow the law in 2011. Not only will it collect more money, it will secure your lien rights and it’ll be part of your routine. See our website at http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

When Health Care Doesn't Care

I hate sending claims to a collection agency. When I do assign a claim, I’ve worked the debt to death and I’m confident, no one will collect it, including some bad ass collector. Some balances however are almost too small to mess with for very long. Bad checks received for a C.O.D. sale for example, get a letter so I can claim treble damages, then maybe a phone call or two if the check amount is over $500. Then it’s off to the agency. Never will I send an amount that is disputed to an agency without first attempting to resolve the dispute. If we’re right and we’ve proven the righteousness of our cause but the customer still refuses to budge; it is no longer really a dispute. I am indignant, then, that an organization like Kaiser Permanente would send a crummy $200 disputed claim to a collection agency and ding my Mother’s credit rating.

What is so galling is that Kaiser sent this claim to a collection agency, not because whoever is responsible for collecting outstanding bills had already exhausted all in house attempts to collect it. It was sent to a collection agency because, there is a designated schedule. After a certain amount of time, unpaid balances are sent to a collection agency. That clears it off of the desk of some hapless billing clerk whose expertise for handling unpaid bills is nil. Because it does affect credit ratings, collection agency assignments should be considered beyond expediency. My Mother is not trying to avoid payment. She has made numerous attempts to resolve the issue. However, someone dropped the ball, failed to follow up, failed to take the next step, a step that would have resulted in payment a long time ago and instead, threw the claim at an agency.

I understand that Kaiser Permanente is not a credit granting institution and therefore would not employ traditional credit and collection personnel. Rather they have billing clerks, untrained in the art of negotiation, unskilled in dispute resolution, ignorant of tact. They have an insurmountable pile of bills on their collective desks that they try to get through as quickly as they can. They pass the buck until it goes to the collection agency and it comes back to haunt them only when the son of an abused by they the system Mother goes ballistic.

In a time when the discussion about national healthcare centers around the quality of that care and the fear a lot of people have is in the end it will resemble Kaiser Permanente, the hospital would be wise to shore up its public image. An easy start is to handle minor billing problems better than it does. This is where Strategic Credit Management Solutions can help. We know billing systems and we know how to communicate with the public and the consumers. We can teach those who need to know, how to follow up, how to communicate with the customers and now to resolve disputes. We’ve been doing it for over thirty years. Not only would it get the bills paid faster, it would make for a more satisfied customer. See our website http://powerscredit.com/.

Your comments are welcome. E-mail us at patrickpowers@sbcglobal.net.

The Ultimate Collection Letter

It’s summer, who wants to think? Sit back, relax with a cold one and I’ll tell you a little story.

Once upon a time, when Disco was dying and Grunge was still Seattle garage bands, I went to an all day seminar at the famous Biltmore Hotel in downtown Los Angeles. The topic: “The Ultimate Collection Letter”. In those days step one in the collection process was a friendly reminder letter. Step two was a follow up letter, usually beginning with a remark about not responding to letter number one. Step three was a letter that implied a threat of some sort. Finally, someone would actually pick up the phone and call. Obviously there was a demand for collection letter verbiage that would inspire an immediate check issuance by the reader.
The ballroom was packed with credit people hungry for knowledge on the subject. The speaker promised a revolutionary letter format; one that literally turned letter writing on its head. Yes, it was an upside down letter! The speaker was recommending that the letter head be on the bottom of the letter, the debtor’s name and address should be positioned on top and you immediately begin with the closing: pay or else. In other words, the letter should cut to the chase in the opening line. Collection letters, normally, started off with something like, “apparently our previous correspondence was been lost” or “our previous reminders have been ignored” or “surely you understand the importance of good credit”. Our speaker was suggesting that letters begin, “you owe $X, pay it now!” or something along those lines.

I took all of this information back to the office and without the benefit of a computer, typed about fifty of these sure fire, guaranteed to get the debtor to pay, upside down collection letters. At the time I was working for a lumber company that had home centers in several of the most uninhabitable locations in California, Arizona and Nevada. I chose as my initial sample, the mostly delinquent customers that had charged at the Parker Arizona store. The store manager was responsible for all credit and collection activity. My role was to train and introduce proper procedures. However, the manager had the final say, and since the store as well as most of Parker, serviced the local Colorado Indian Tribe, the manager willingly extended the local Indians the credit they needed to purchase building materials, cast iron skillets and Thunderbird wine despite the fact that there was no practical legal recourse should they default; which they did en masse.

I was hopeful that at least some of the debtors would respond with at least a token payment. I did not have high expectations; maybe ten percent would have a conscience and recognize their responsibilities as debtors. I typed and typed for days and sent all of the letters on the same day and sat back to await the checks.

Zip. Nada. Nothing. I did not even get any return to sender mail. It was as if all of the letters I mailed were dropped into one large incinerator.

The experience taught me a valuable lesson. Collection letters by and large are a waste of time. You want someone to pay you, call them up and ask them to. Most of the time they will; (though I cannot speak for the Colorado Indians).

Strategic Credit Management Solutions comes from experience. We can provide a total package of training techniques, including effective collection letters. See our website at http://powerscredit.com/. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

Top Ten Ways Strategic Credit Managment Can Increase Your Business

It is a myth that a credit department is a “sales prevention” department or a necessary expense rather than a revenue generator. A well oiled credit department, acting as a partner rather than a foe to sales can actually help increase sales. Here’s some ideas.

1. Extend credit to customers others have turned away
No, I’m not suggesting you throw caution to the wind and take on dangerously high risk and extend credit to anyone who wants it. That is a recipe for disaster. Rather, I am suggesting that you do a comprehensive credit analysis and know everything there is to know about the prospective customer. In short, know the risks and be prepared for them and be in a position to control the risk. For example, the inexperienced or rigid credit manager may deny a customer’s credit application on the basis of a history of slow pay. The customer is paying everyone one else sixty days slow, so credit denied and there go all of the potential sales. If you are strategic, you’ll address the slow payment trend directly with the customer and learn why payments are slow. There could a dozen reasons and not all of them the fault of the customer. Now, give the customer an opportunity to commit to you payment terms that are more to your liking and be prepared to follow up they day the customer fails to comply. The customer just may surprise you and you may lock up all of his business. The best way to control a customer is to create a dependency. If he can’t get credit elsewhere, he’ll give you all of this business.

2. Extend the maximum credit allowed, not just what the customer requested
I see this all of the time. Either the customer puts a conservative amount on that line on the application asking for an amount, or the sales rep, trying to get the account open with any line, submits one that is too low. Or, the amount on the application is simply the amount of the first order. The customer already has a supplier and wants to charge something his normally vendor cannot. The credit application is processed; things look good, very good in fact, so the conservative line is approved. However, if you are being strategic, you’ll determine what the maximum credit line could be, given the customer’s history and financials. Then, you’ll tell him, particularly if it is above his asking amount. Better yet, if the line is higher than his current vendor’s line, he’ll think you really want his business and he just may give you more of it.

3. Process credit applications faster than anyone else
Sometimes a customer needs your product yesterday. He realizes he doesn’t have an account with you so he either applies and hopes for the best, or he finds someone with whom he’s already set up and buys it there. If you are strategic, you’ll waste no time processing the credit application. In fact you’ll get started on it even if it’s not complete. You can fill in the blanks later. It should take less than an hour to get a sense of the customer’s credit worthiness; if it’s good, act like you want the business and accommodate. I’ve seen credit manager refuse to even consider a credit application until the one in hand is signed by an officer or owner. In a rush, do the analysis, make a decision and tell the customer, you are ready to go, just please fax over the signature page. Not only will the customer appreciate your extra effort, he’ll remember it when he needs to place another order. Not only that, you’ve made friends in the sales department and that can never hurt. Pre-qualify customers

4. Pre-qualify customers
Nothing aggravates a sales rep more than after working hard to finally get an order from a customer to have it denied for having poor credit. Being strategic is working with the sales group by having them submit their leads and doing a cursory credit check. Businesses with very good credit and very bad credit are easy to identify. So even a minimum credit check will tell you where the customer’s credit will fall. You can weed out the very bad high risk ones and notify sales not to waste their time and you can check the good ones and let sales know to go full steam ahead. As for the majority, if you are strategic, you’ll come up with the minimum line you could accept with what you know and tell the sales rep you’ve already approved the account. Again, not only are you a hero with sales, the customer will be flattered that he has an approved line before he even before asking for one. It might be the one thing that gets that first order.

5. Negotiate terms
Rather than turn down a customer, negotiate the terms. Remember, Cash On Delivery is a term. If you are not comfortable with extending credit with a customer for the standard thirty days, negotiate something like ten day terms or payment upon receipt of the invoice and be prepared to follow up on those kinds of terms. They customer will appreciate your giving him credit and will give you more of his business. Sometimes, businesses, particularly new ones, just need a little time to pay for the orders. If you give them that time, they are not only building their own credit history, they’re cementing their relationship with you and will do the majority of their business with the company that helped them out.

6. Establish a relationship
The sales rep does it, why can’t the credit manager? Customers will pay those they like and they’ll avoid those they don’t. It’s human nature. You don’t need to be the debtor’s best friend, but you can be a friend. When the personnel of one business like the employees of their vendors, they’ll do more business with them. It does no good for the sales rep to have a good relationship with a principal of a business only to be told out there on the golf course that his accounts payable clerk is forever complaining about the credit department. Good will extends to all levels. I’ve seen businesses take their business elsewhere because they could not get along with a cantankerous collector.

7. Be a credit resource
Along with creating a relationship, you can be a credit resource for you customer. Offer to do credit checks on some of their customers. If they are contractors, let them know when jobs are complete so that can protect their interests just as you would. Inform them of the latest trends in the industry. You may also assist them with your expertise. Pass on your collection tips for example. Anything you can do to help your customer make smart decisions, keeps them from turning into a risk. If your customer does not have a sophisticated credit office, the resources you provide are extras they get by being a customer and if they value the help, they’ll keep on buying.

8. Be a third party collector
If your customer cannot pay because he’s not been paid, jump in and help him out. This works in construction. If my customer is a subcontractor dependent on the general to pay, I’ll call the general. Sometimes it’s enough to ignite payment and my customer was saved having to do something he’d rather not do. We become partners this way and I get a larger share of the business.

9. Aggressively assist in dispute resolution
Nothing sours a relationship like unresolved disputes. Often the dispute has nothing to do with credit. It’s pricing or something to do with shipping or production. But if all you do is sit back and wait for something to happen, you’ll have little more than an outstanding receivable and a frustrated customer. However, if you are on the forefront of fixing the problems, the customer will recognize your company as one that takes care of things. They’re more likely to do more business with you.

10. Don’t be Bureaucratic
All of these suggestions point to one theme. Avoid appearing to be an impersonal, uncaring rule driven bureaucrat. Customers want to do business with companies that attend to their needs with a personal touch. The fastest way to alienate a customer is by insisting that everything be done by your rules and policies. If you are strategic, you get what you need by making the customer believe he’s the only customer you have and you’ll do just about anything for him. If he thinks you are willing to bend the rules a little, because you think he’s special, he’ll give all the business he can rather than give it to someone who treats him like a number.

If your credit department needs to be more strategic in its practices and procedures, contact us at Strategic Credit Management Solutions at http://powerscredit.com/ or email us at patrickpowers@sbcglobal.net. Your comments are welcome.

Sales Reps Are not Collectors

An associate of mine recently took a credit manager’s position probably beneath his skill level and he is biding his time until something better comes along. Rather than utilize his experience and expertise, the company forces him to work within some very strict and inefficient policies and procedures. For example, towards the end of each day, sales reps enter orders for the following day. Often, the orders come up on credit hold, due to non payment. The sales force rants and raves, insisting that the orders be released but the credit manager’s hands are tied. The responsibility for calling the customers lies not with the credit department but with the sales reps. They did not make the calls, the customers did not pay, the account goes on hold and everybody starts screaming at the credit department.

I understand the logic. Companies that are sales driven do not want credit people calling customers, fearing they will irritate them. Rather, let the person who sold the product go after the money. If the sales rep wants a repeat sale, he’ll make sure the customer pays for the last order. While I have said before that the art of collections incorporate the same techniques as sales, it does not necessarily mean sales people are good collectors. They have other things to do, selling. Besides, the collections process is a full time job. Sales reps will always be measured on their total sales and never on their total collections. They may be dinged if a portion of their sales becomes delinquent or is written off later, but they will always try to stay ahead by making more sales, not by collecting more money.

By and large sales people do not want to ask the customer for money. They’ll procrastinate or make excuses for the customer and when they do call they go about it all wrong. The result: the customer has placed an order that credit will not release so a skirmish between sales and credit ensues.

My friend knows this system is wrong, inefficient and counter productive, but he is powerless to change it. The powers that be have spoken and rocking the boat is not an option. It is unfortunate. The company could use his talents to improve not only collections but the relationship between credit and sales as well. If allowed to, he could make things a whole lot better.

If management would let him, Strategic Credit Management Solutions could help. First, we could show management the error of their ways, convincingly and objectively. Second, we could provide some proven collection techniques and processes, help the credit manager implement them and soon, they’d have themselves an improved cash flow, a more streamlined order release system and a sales force free to do what they do best. See our website, http://powerscredit.com/, or e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.

Know When To Hold 'em

When should you put an account on hold?

Nothing seems to ignite the sale rep’s ire more than restricting orders to the customers. Yet at some point when the customer is not making payments it is time to say, “No more.” And I do not mean, putting the account on C.O.D. No more orders means no more orders, period.

I’ve seen on some company’s credit applications and invoices a statement along the lines of, failure to pay or extended delinquency may require the creditor to place the account on C.O.D. until it is brought current. I don’t believe the customer should be given this option automatically.

Presumably, continuous buyers need your products. A framing contractor is dependent on his lumber suppliers. Glaziers need glass. Concrete contractors need a steady supply of ready mix. When they fail to pay and their credit privilege is taken away but they are still allowed to purchase albeit with cash on delivery, they still do not have any incentive to pay down the past due amount. However, when you put them on hold and refuse to sell them anything, the debtor has to make some decisions. Yes, he could go somewhere else; however, he could always do that when placed on C.O.D. Or, he could work something out with the creditor. And that’s the whole idea behind putting the customer on hold.

Putting the customer on C.O.D. allows the customer to call the shots. He can continue to place orders and receive orders, but now he has to pay for them upon deliver, with the money he was going to use to pay down the account. That doesn’t get anybody anywhere does it? I’ve seen some credit managers then, apply the C.O.D. money, not to the intended cash sale, but to the oldest outstanding invoice. That’s about the dumbest thing anyone can do. It does nothing to decrease the over all indebtedness, though it may in the very short term decrease the delinquency. However, after awhile, you have the same balance as you started with, aged out as before only now it is made up of C.O.D. invoices. Try taking those before a judge as evidence of non payment. “Yes Your Honor, they are C.O.D. invoices, and yes we did get paid, but we applied the money somewhere else.”

I’ve seen schemes like “C.O.D. plus”. Here the customer is supposed to pay something over and above the amount of the C.O.D. invoice. While it may be previously established, usually, whoever is receiving the goods is going to pay only what it says on the invoices. When you try to increase the amount, you get into a real accounting nightmare. And, the customer still makes the decision when to order and when to buy and how much if anything he’ll pay toward the delinquency.

My advice is: put the account on hold. No more orders until there is either payment of the delinquent amount or a mutually acceptable payment schedule whereby payments are made separately and independent of any C.O.D. orders. Most of the time, the customers will go along with this kind of program, contrary to the beliefs of most sales reps.

They go along with it because; you are working with them to solve a temporary problem. You are not just shutting them off by making the do something they may not be able to do, pay on delivery. They may also go along with it when they are warned in advance. You let them know that you believed them when they made a promise to pay and you continued to release orders based on their promise. However, now that they’ve broken that promise, they are not credible and you must restrict further orders until they make amends. If the sales people have done their job and made the products indispensible, the customer will come to the table with a reasonable plan. If the customer isn’t interested, or unable to work out a payment plan then putting him on hold has frozen the balance. There’s no waiting for the C.O.D. checks to bounce.

There is no reason, therefore, to wait ninety days to finally stop the flow. As soon as a customer has broken his own commitment, lower the boom. They get the message. You are serious and you are not going to let them take advantage of you. Believe me, it works.

You need help in implementing good solid controls? You need some help training the collectors in what to say and when to say it? Contact us at Strategic Credit Management Solutions at http://powerscredit.com/. Or e-mail patrickpowers@sbcglobal.net.

Your comments are welcome.

Follow Up, Follow Up, Follow Up

An often overlooked component of collection calls is the follow up. It’s one thing to make the initial call, but if there is no timely follow up, the call was all for naught. A common complaint made by credit personnel is that they do not have time to make collection calls and the first thing that suffers is the follow up call. Let’s face it, people lie. They promise to send a check and well, they don’t. If you wait too long to get back to the debtor, you are in effect giving him a longer time to pay or worse, more opportunities to procrastinate. The best collectors follow up on the day the promised check was supposed to arrive but did not. When there is this kind of follow up, the debtor knows you are serious. What’s he going to say when you ask, “I didn’t get the check today. Did you mail it?” Whatever the excuse, debtors caught failing to abide by their own commitment usually make it up by sending the promised payment almost immediately. They want to restore their damaged credibility. They want to prove their honesty and reliability. It is counter productive therefore to wait another thirty days or more before responding to a broken promise.

Follow up requires that the collector be equipped with complete notes of all previous calls. When a customer says, “I didn’t say I’d send you a check.” With notes, you can reply with the date and time and his own words. “Look, you told me on the 8th you were sending a check that very afternoon.” It is important for collectors to be relentless so that the debtor will come to realize if he doesn’t do what he said he was going to do the collector is going to be all over him like bees on honey.

Unfortunately, it is the persistent collector who gets the most complaints. Customers feeling badgered because every time they lie to the collector they are called on it, will attempt to get the collector off their back by calling their sales rep and crying foul. The collector is painted as being “rude” simply for asking for payment. This is a blatant attempt to subvert the collection process. If the customer can get management to reign in the collector, he can continue to postpone payment. And since the customer is always right, he’ll get a sympathetic ear. This is why it is critical the management support the collection effort and not automatically side with the customer. An effective collection program is a team effort. All departments must be on board. I knew a lumber company that had as a motto, “We are the best in product and service, but we are bastards about payment.” The message was clear. Senior management expected payment from the customers and they would not tolerate customers who complained about being called for money. If you don’t like being called, pay the bill.

If the collection team does not have time to make all the necessary collection calls, particularly the follow up calls, something has to change. A common problem is the multitude of non-collection duties the collectors are expected to do. I visited a dairy distributor not too long ago that had their collectors apply cash as part of their daily duties. For every hour a collector is performing an accounting function like cash application, is another hour they are not collecting money. It may be money well spent to spin off clerical work to clerks and let the collectors collect.

This is where Strategic Credit Management Solutions can help. We can take a look at your current collection processes and we can help train the collectors to become better collectors. We can also look at what may getting in the way of the collection process and provide assistance. Sometimes a little reorganization can benefit everyone and increase revenue in the short term. See our website http://powerscredit.com/. You can contact us at patrickpowers@sbcglobal.net. Your comments are welcome.

Basic Collections continued

Just exactly what do you say when making a collection call?

I was told by my first supervisor to ask for a payment schedule. I called up the customer, introduced myself and mentioned the name of my company and I asked for a payment schedule for the past due amount. Without hesitation the fellow on the other end said, “You must be new.” I thought that was amazing. I was new; this was my very first collection call. I followed the script. I did not mumble, hesitate, sound nervous or in any way give him a clue that this was my very first collection call, but he knew.

He went on to tell me, “We pay sixty days slow. Always have, always will.” See, if I’d known that, if I’d been there awhile, I would not have called him for at least another month. However, I’d done my job. I ascertained that the customer’s payment schedule was next month. I duly wrote it in my notes. I had achieved success of sorts.

Of course a more seasoned collector would have perhaps challenged the remarks and would have countered, telling the customer sixty days was unacceptable and in order to continue supplying product, payment had to be made immediately. At the time, this tactic my have worked. My employer was the leading supplier of its products and if we didn’t sell it directly to the customer, we’d sell it to a distributor who would.

The first objective of a collection call is to obtain answers to the questions “How Much?” and “When?” How much is the customer going to pay and when is he going to pay it? It seems elementary, but I listened to a so called collector for a small lumber company in Barstow who called a customer for money, spent twenty minutes on the phone with the bookkeeper, discussed husband, family, work, the weather and just about everything else without ever getting around to asking for a payment.

I observed a collector for an equipment company that was known for her ability to make more collection calls than anyone else in the department. She wasted no time. She called the customer, told them who she was and who she worked for and asked, “Are you making a payment?” The answer was invariably “Yes” and she was on her way to another call. She ignored what may have been missing invoices hanging out there in the past due columns and she failed to get a definite commitment. Had the customer sent a check in for a dollar, they would be satisfying the collector’s inquiries.

All too frequently the response to the initial collection call is a denial that the customer owes anything at all, because, despite the claims of the U.S. Postal service to the contrary, the customer has not received any invoices. Be prepared to support your payment request with the list of the open invoices, their dates and amounts. Also, be prepared to transmit them immediately, electronically if possible, then, ask how soon following the receipt of said invoices in the amount of x can you expect payment. Be prepared as well to furnish delivery receipts, purchase order numbers and any other documents you may have to prove the legitimacy of your debt. Have these handy because if you have to go in search of them, you will lose your momentum and the customer has a further excuse to delay payment.

It is critical that you, the collector control the conversation, otherwise, the debtor will seek to either delay payment, or pay short. Too often collectors are satisfied with whatever the debtor tells them. For example, a customer owes balances in current, thirty days past due, sixty days past due and ninety days past due. You ask for payment and you are told they’ll send you the ninety day balance at the end of the month. This is where a seasoned collector begins to negotiate; otherwise, to acquiesce is to give the customer ninety day terms by default. You must challenge the customer. Pay the ninety day amount now, and get a commitment for the remaining balance within acceptable time. Persuade the customer to explain why the balance is so far behind. Determine what is going on with the business that he is unable to pay current. Convince him further deliveries may be restricted. In other words negotiate, negotiate, and negotiate. That is the difference between the newbie and the experienced collector.

This is where Strategic Credit Management Solutions can help. We know how to collect and we are able to train your collection group to be to notch collectors. Good collectors bring in the money, not just payment schedules. See our website at http://powerscredit.com/. You may contact us at patrickpowers@sbcglobal.net. Your comments are welcome.

The First Collection Call

When should you make the first collection call?

Most collectors seem to think the correct answer has to do with some period of time after a bill is due. Few have the inclination or the time to make a collection call before an invoice’s due date. However, the best time to make the first collection call is during the pre-approval customer interview.

What is a pre-approval customer interview?

An often forgotten objective of the credit application process is to determine the payment probability of the customer. It is not just a question of will the customer pay; it’s also a matter of when the customer is likely to pay. In other words, what are the current payment trends of the customer? Does he pay promptly within terms? Or does he habitually pay his vendors 60 days slow? References should indicate the payment trend. It is not enough to merely note the payment trend on the notes of a credit application. It is important, particularly when the payment trend is contrary to the company terms to do something about it.

There seems to be trend among credit manager to handle the credit approval process themselves. While someone may generate a credit report and contact the references and get their input, the credit manager makes the final decision, establishes a credit line approving or rejecting the applicant. Then a clerk will set up the account in the system. Unfortunately, no one looks at the application again and no one anticipates the payment probability so that no one responds again to the customer until it goes past due.

Before the customer owes any money, but is motivated to purchase, is a golden opportunity to nail down a payment commitment. It is also the best time to negotiate a more acceptable payment trend from an applicant with a proven history of slow pay. Again, because there is often too little time in a day, this is a step that is ignored, but one that nevertheless could not only free up valuable collection time later, it could substantially improve cash flow.

After obtaining all of the data on a customer, the credit manager should give the customer a call, first to introduce himself and secondly to inquire as to the customer’s usual payment procedure. One need not mention the terms of sale at this point. The intent is to see whether or not the customer intends to pay by your rules or his. Obviously the customer will put his best foot forward. For example, he may tell you that he pays, “upon receipt of an invoice.” Excellent. He’s just committed to paying, before the due date. If this were a high risk customer, it would be in your best interest to have him keep to his word. You’ve made the first collection inquiry. Now, you can schedule a follow up call a few days after the invoice is to be mailed to confirm that payment, per his procedure, is in process.

Sometimes a customer will actually admit to a pay schedule of sixty days or more. This is actually not that uncommon. If your terms are strictly thirty day terms, now is a good time to emphasize the point and insist that if you are to extend credit, you must have an agreement to pay according to your terms of sale. If the customer wants your products, he will agree. Once again, you have your first collection call results. You will not need to call at some point past the due date to remind the customer that he was supposed to pay earlier. Now, your second call, some time around the due date, or shortly afterwards, is a reminder of his commitment to you. This should result in a payment.

Not for reasons of time alone, the credit manager, once arriving at a decision, perhaps should assign the collector who will be ultimately responsible for the account the task of making the introductory call to the customer. This allows the collector to become familiar with the customer, knowledgeable of the payment methods, and provided with an idea of how the customer responds to collection calls and it is an opportunity to offer assistance down the road. In this way a relationship can be developed that will result in prompt payment.

This is just one example of how Strategic Credit Management Solutions helps your business. We can examine your current credit and collection procedures, make recommendations, train the staff and provide follow up periodically. Contact us at patrickpowers@sbcglobal.net or see our website http://powerscredit.com/. Your comments are welcome.

Think Out of the Box

Remember paradigms? Some years ago, everyone was talking about being in a paradigm, a box of normalcy and if businesses were going to change for the better, they had to think outside of it. In recent weeks I’ve had two situations that reminded me of the paradoxical paradigm. The first, a salesman I know was preparing to visit a customer who owes $600,000. The objective of the visit is to figure out how to keep the company afloat so that in time it will be in a position to repay its debt. The salesman told me, “Two years ago we would’ve sued the bastard and gotten a judgment.” Back then the chances for recovery of a judgment were a lot higher. Now, not so much. The salesmen recognized that he and his company had to be creative in its approach to collecting money. He had learned the lesson of being stuck inside an outdated, ineffective paradigm.

The second situation has to do with the homeowners association I mentioned a few blogs back. They were threatening to assess the homeowners who were paying their dues on time to make up for the loss of revenue caused by the failure of other homeowners to pay their dues. When times are good, the association experiences about a 1% delinquency rate. Now it is running an alarming 10%. I volunteered to help the association collect from the delinquent homeowners. Well, it’s not that easy. The homeowners association has its rules – its very own rigid paradigm. The current practice when a homeowner is delinquent is to send him a letter. Another letter goes out after 60 days past due. Then a third letter is sent from the association’s lawyer threatening a lien. My approach was to make a phone call perhaps between the second letter and the lawyer’s. As a collector, I’ve discarded letters for the most part, finding a direct voice to voice approach to be much more effective. Ah, but the association as its rules, outline in the CC&Rs. There the procedure is set in stone, much like the Ten Commandments etched in granite. And as effective has my approach may be, it cannot be done. Amazingly, the association would rather have less revenue and risk the ire of the homeowners, than consider a change in its collection practices.

Companies who can change in tough times, survive the tough times. Those who don’t change don’t survive. Don’t get stuck in a paradigm dogma. Let Strategic Credit Management Solutions review the trends, offer some solutions, train the staff and set you on the right course. It’s what we do. See our website www.powerscredit. You can e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome

R U UP 2 Par?

All you CFOs, CEOs, Owners of business, Presidents, Controllers, out there, do you know how well your credit, collections, accounts receivable department is doing? How do you measure productivity and efficiency? A common method is Days Sales Outstanding, (DSO), this is a formula that measure the average time an invoice is on the books before it is paid. Lenders like this formula because it gives them idea of how well the receivable is turning. The smaller the number the more frequent the turnover and thus, the better the chances the borrower will be able to make payments on the loan. However, what is in your opinion a good number? I recently spoke with a company that was not too concerned with its current 75 day DSO. Other companies I know would be enraged with that kind of a number, so what should it be?

How about collection percentage? I don’t see many companies measure how much of the receivable is collected from beginning of the month until the end. I knew a lumber company that demanded a collection percentage of 80% or better. A ready mix company I know seemed perfectly content with 60%. A glass company I worked with condones less than 50%. What should yours be? Is anyone measuring? If not, why not?

The percentage of the receivable that is past due is another sign post. How much is too much? I’ve seen companies with over 20% of their receivables over 90 days past due. Is that a lot? What do you think it should be?

When should the first collection call be made? The day an invoice goes past due, or 90 days? What do you expect? If your terms are 30 days from invoice, should someone be calling on day thirty one, or is ok to wait until day 61 or even 91?

When should a customer’s credit be held for non-payment? Credit and sales people argue about this all of the time, but what is the opinion of you senior executives? I’ve seen customer get away without paying COD invoices for up to four or five months. When does your patience finally run out? Do you put them on hold or always go straight to COD?

How strictly should credit limits be enforced? How meaningful are they? How does your credit department calculate credit limits? How do the enforce them?

Do you use collection agencies exclusively, or attorneys, or both? How do you choose one over the other? How do you choose an agency or a law firm?

When should you write off an uncollectable account to bad debt? Here, the range is all over the map. I’ve seen accounts written off as soon as a lien is filed or thirty days after it is turned over to an agency. Others will keep an account on the books if there is the slightest possibility for some kind of recovery. What is the standard?

How many collectors should you have? I’ve seen four person groups for a six million dollar A/R and I’ve seen one or two person departments handling twenty million dollar receivables. How many is enough?

Who supervises cash application? Who should supervise cash application? Credit or Controller?

For you with multiple branches, should you have a credit person at each one, or does centralization work for you?

When do you file a UCC? Do you always obtain a security agreement? Do you insist on financial statements? Do you rely on them? Do you believe in them?

Do you always get a signed credit application? Do you do anything with it when you do? What credit reporting agency do you use? Do you clear references? How long does the process take? How long should it take? What are you looking for from a reference?

Do you take only checks for payment? Do you accept credit cards, wires, joint checks, checks by FAX? Do you have payment on line? How do you handle invoice copies? Online or mailed / fax hard copy?

What is the limit your credit manager can adjust as a credit without documentation? How many levels of management is in place to make a decision about a credit of under $1,000?

These are issues your credit group handles every day, if you cannot help them, who can?
If you need help answering these questions, Strategic Credit Management Solutions can help you. We can review your situation, make recommendations, implement solutions, train you group, and we’ll provide follow up as necessary. It doesn’t take long in most cases either. A couple of days to a couple of weeks and we can get you where you want to be going. Contact us a patrickpowers@sbcglobal.net and check out our website at http://powerscredit.com/. Your comments are welcome.

The Home Depot Scandal

Nothing is more of a nuisance than deductions. When the two most important jobs in a credit office are collections and credit approval, dealing with those pesky deductions can drive a credit manager crazy. It’s usually a little more than the small insignificant amounts that the cash application clerk merely adjusts off rather than start the entire credit memo process that are the most maddening. There is always a customer or two who not only scrutinize every bill for mistakes, but they make their own calculations as to what the bill should be in their minds. But sometimes, deductions are just wrong and should be challenged, particularly when they start to add up to big money.

We had entered into a sale agreement with The Home Depot, the largest building material retailer in the country. Given their clout and their sales potential, the sales group had already agreed to a series of sales discounts, payment discounts, new store discounts and other price concessions. However, we did not agree to their “Return To Vendor” (RTV) policy. If product was delivered damaged, it was exchanged, upon notification and billed at a no charge. The RTV policy as it was defined in The Home Depot’s own purchase order agreement stipulated that should a vendor’s product be found defective by the end user, it could be returned to the store and The Home Depot would create a deduction. Since our company was selling glass for frames or French Doors, it was assumed if it was good enough to sell and it had not been returned or claimed as damaged at the time of delivery, no RTV back-charge was applicable. It is important to note, that The Home Depot, agreed in writing to our exclusion of the RTV policy.

Not long after the vendor agreement was signed and orders were being delivered and payments were made, the deductions began. Twenty dollars here, fifty dollars there, sometimes less, sometimes more. Given that The Home Depot was on track to spend over a million dollars and the volume of invoices was, well, voluminous. The account manager at the time was up to his eye balls on other collection matters and so, he dismissed the deductions as insignificant and authorized their being credited without review. However, the deductions not only continued, they seemed to be growing at an alarming rate.

I started reviewing the payments and the remittance. The deductions were labeled as RTV damage claims and they never referenced an invoice, sales order, date of delivery or anything that would help trace the problem back to an original order. In fact, the only reference was to a The Home Depot store number. So, I started to track on a spread sheet the stores making the RTV claims. I was startled by what I discovered. Some of the stores were claiming as damaged amounts that far and away exceeded their actual purchases. A stores that had purchased only a few hundred dollars in picture frame glass were back charging us thousands of dollars! In less than a year’s time, the stores combined total RTV back charges amounted to over $100,000.

Since RTV deductions were invalid according to the vendor agreement, we could reject the deduction and make a demand from The Home Depot to reverse the claim and pay the deducted amount. This we could do after submitting their forms and following their procedure and waiting and waiting and waiting for the payment. This we did, but for me the issue was the fraudulent nature of the claims. At the store level, some clerk, was making entries on their system that over stated the damages. In fact the damages were non-existent. They were false, plain and simply. Yet some clerk could make the entry and short us whatever dollar figure they chose. It was not unlike taking money right out of our cash registers.

My complaints to the Atlanta office about the practice seem to fall on deaf ears. So, I began to reject orders placed by the most grievously offending stores. This got the attention of the store managers. When I explained to them that taking falsely stated deductions was similar to my issuing invoices for product they never bought, it went right over the head. They were only doing what they were told. I could only conclude that stealing from the vendors was an institutional The Home Depot policy. I notified the Atlanta office that I was prepared to contact 60 Minutes, or Dateline, or any other news organization that might be interested in knowing that The Home Depot was committing fraud on a wide spread basis. Soon I was meeting with some of their purchasing and payable personnel and soon after that I received a check for nearly all of the $100,000.

Need help in identifying legitimate deductions from the not so legitimate? Need a program to resolve deductions and prevent them from taking up more of your precious time? Contact us at http://powerscredit.com/ and let Strategic Credit Management Solutions assist you. We’ve taken on the big guys. Your comments are welcome. E-mail us at patrickpowers@sbcglobal.net