The question was raised, how do you determine credit risk? The most common methods are credit reports, credit scores and credit references. None of which are a big help, really. The expectation of a Dunn and Bradstreet report is that you will get in a few pages all of the pertinent facts, statistics, biographies of the principals, payment trends, company history, net worth, legal filings and anything and everything about the company. Thus equipped one can make an educated prediction about the applicant’s ability to pay, a reasonable credit limit, and available capital and assets in the unlikely event of default. What you actually get is maybe verification that the company exists, it is a legal entity and that they may or may not be keeping current with their office supplier. You are being asked to qualify the customer for a $100,000 credit line and the D&B reports a high credit of $1,000 with printer or a trucker. Based on this, D&B gives the company a Paydex score of 75. Pull an Experian or Equifax report and perhaps you’ll learn how current they are with Chevron and Penny’s Department Store, not to mention any outstanding bank loans. It’s all good stuff, but does it really help you with that $100,000 decision?
References are valuable if they are a like business or at least similar credit lines. More importantly, if they are reliable and accurate. I recall a reference who stated the account’s high credit was $20,000 and paid as agreed. Sounds great until the reported terms were stated. They were C.O.D. It is always good to check references, despite their inadequacies. Sometimes, a customer will submit anything they have, hoping you won’t check. Since so many references are loath to say anything negative, they too often will not reveal slow pay trends. When in doubt it is always best to try to speak directly to the credit manager representing the applicant. That’s the only way to get the real “scoop”.
The most overlooked means to finding out the truth about a potential credit account is the personal visit. While sales reps are required to visit personally, at least the largest customers and to establish a personal relationship, credit departments are expected to determine risk based on incomplete credit reports and inaccurate reference data. A picture is worth a thousand words. A personal visit to a customer’s place of business is worth a thousand credit reports. You can simply learn so much. If nothing else, you can look the principal in the eye while he lies to you about what a good customer he is going to be. You may be able to get a tour of the business, see how efficiently it runs, who else is supplying goods, how busy the business is. Often you can ask questions that are not on you application. In short you can get a real feel of the operation which may either increase or decrease your comfort level. Just in meeting the principals and establish a rapport can give you an edge when it comes to collecting later. You have an “in” with the boss you can use to your advantage if an accounts payable clerk becomes obtuse.
If a company wants to look beyond simply trying to make “safe” credit decisions and instead, is motivated to expand its market, getting intimate with customers in credit matters enables the creditor to take on a higher level of risk. It allows for more comprehensive negotiations in matters of payment terms, limits, conditions, dispute resolution all sorts of areas ignored during a normal credit check. This is where Strategic Credit Management Solutions can help. We know how to build relationships, ask the tough questions, help you make profitable credit decisions. Just really what it’s all about. See our website at http://powerscredit.com/. Your comments are welcome. Email us at patrickpowers@sbcglobal.net.
Monday, April 27, 2009
Tuesday, April 21, 2009
Write It Off Already!
As I suspected the company I’ve been talking to is a high tech company marketing very sophisticated products, mostly to the military. However, only recently have they ventured into the private sector, marketing to businesses intending to be more environmentally efficient. This high tech company is still in the very embryonic stages of credit. This is mostly attributed to their “very conservative” CFO. I’m now envisioning a wiry old man straight out of a Dickens novel. As I said last week, they have a DSO of better than 75 days, but everyone I talked to agrees, they have had no write offs in a very long time. Further discussions with various employees from financial compliance directors, controllers and accounts receivable clerks revealed the primary reason they’ve not had any write offs has more to do with the fact that since they are not tolerated by the CFO, old uncollected balances do not get written off. There are balances going back to 2005 or more still on the books.
If this is true, that the CFO will not allow anything to be written off, he’s a little out of touch. He’s not read a financial management text or article in thirty years. He’s like a doctor who doesn’t keep up with today’s technology. He’s still using whiskey and biting on a bullet for anesthesia. Most modern financial scholars will tell you write offs are one, going to happen and two, they are often a barometer of a credit policy that is either too strict or too loose. If there are none, possibly, credit is hampering sales. A competitive business must be willing to take some risks or they might as well not bother trying to sell anything. It is interesting; this particular company has sales reps that are paid a commission when they make the sale, regardless if it gets paid. I can only imagine the raging arguments that must transpire between sales and whoever is responsible for approving, or in this case, disapproving credit.
On the other had is a company I know very well has a sales manager who told me once that it doesn’t matter if an account is written off as long as it had a healthy profit margin. He encouraged write offs as a means to reducing the bad debt reserve. Yes, there are some major gaps in his financial education. The company defaulted on one of their loans because they did not have the cash. Small wonder, they were showing a profit margin of nearly 25% and a negative cash flow. Scary. Another company I know wrote off a balance as soon as it went “legal”. All history of the account was erased, so that they were free to extend credit to that same account again. Mind boggling.
This is where Strategic Credit Management Solutions can help. We’ve had over thirty years experiences and we’ve seen it all. There is a way to control your accounts receivable and credit policy so that you will not have too many or too few write offs. It is all part of being strategic.
Contact us at patrickpowers@sbcglobal.net and see our website http://powerscredit.com/. Your comments are welcome.
If this is true, that the CFO will not allow anything to be written off, he’s a little out of touch. He’s not read a financial management text or article in thirty years. He’s like a doctor who doesn’t keep up with today’s technology. He’s still using whiskey and biting on a bullet for anesthesia. Most modern financial scholars will tell you write offs are one, going to happen and two, they are often a barometer of a credit policy that is either too strict or too loose. If there are none, possibly, credit is hampering sales. A competitive business must be willing to take some risks or they might as well not bother trying to sell anything. It is interesting; this particular company has sales reps that are paid a commission when they make the sale, regardless if it gets paid. I can only imagine the raging arguments that must transpire between sales and whoever is responsible for approving, or in this case, disapproving credit.
On the other had is a company I know very well has a sales manager who told me once that it doesn’t matter if an account is written off as long as it had a healthy profit margin. He encouraged write offs as a means to reducing the bad debt reserve. Yes, there are some major gaps in his financial education. The company defaulted on one of their loans because they did not have the cash. Small wonder, they were showing a profit margin of nearly 25% and a negative cash flow. Scary. Another company I know wrote off a balance as soon as it went “legal”. All history of the account was erased, so that they were free to extend credit to that same account again. Mind boggling.
This is where Strategic Credit Management Solutions can help. We’ve had over thirty years experiences and we’ve seen it all. There is a way to control your accounts receivable and credit policy so that you will not have too many or too few write offs. It is all part of being strategic.
Contact us at patrickpowers@sbcglobal.net and see our website http://powerscredit.com/. Your comments are welcome.
Wednesday, April 15, 2009
Consult Before You Hire
Got a call from a company that has a problem. Their DSO is quickly approaching 75 days and their terms are net 30. There is a lot of that going around. Only 20% of the business is commercial, the rest are government accounts and contracts and they’re blaming the commercial side for the trend towards slow pay. One of their customers is GM. Yesterday’s no problem account is today’s write off. To make matters worse, they have a three person “A/R” department. I always worry when they don’t call it a credit department or even a collection department. Sure enough, the three people are responsible for everything: credit analysis, order entry, billing, cash application and last but not least, collections. The question then is, are the three responsible for the collection of a forty million dollar receivable accountants or credit specialists? Their current supervisor lauded one of the three for being amazingly accurate, but has some rough edges. I’ll bet. Take an accountant out of their element and make them do something that is completely contrary to their nature and yes, they will develop a few rough edges. I’m thinking the personality of a pit bull.
The current strategy is to throw more people at the problem. They don’t have an official credit manager now. The treasurer oversees the functions as well as a number of other financial areas. He just doesn’t have time to handle credit and it is getting out of hand. He’s also thinking of adding more collectors / order entry / billing clerk / cash applicators. In other words, he’s thinking one more person to do a little of everything should do the trick.
He is also looking for a soothsayer to make the right call on customers who would be charging as much as a half million dollars. He alluded to a belief that credit people have their own “tricks” for making these kinds of decisions. I wanted to tell him I use a dart board. One side says “Yes” and the other side says “No” and I close my eyes and throw. I resisted, because it would have been mean spirited sarcasm. The real trick to extending credit is research and negotiation, but too often sales driven companies demand that the credit manager come to only one conclusion – yes - and then be willing to take the fall when the account defaults. It is never the fault of the customer for failing to pay; it is the fault of the collector for not being able to collect.
After spending about an hour with a couple of members of this company’s financial team, I am envisioning a small group of accounts receivable billing clerks who have been drafted into the role of credit and collection specialists. Zealous and desperate sales reps berate them into making hasty and possibly disastrous credit decisions. In addition to performing the billing tasks, they must handle all of the customer requests for invoice copies, proof of deliveries, credit ratings, price disputes, damage claims, apply cash and somehow they must make the necessary collection calls and follow up. They are a small group holed up in some corner of the office, probably without food and water, and if something doesn’t happen soon, they could get ugly.
This company would like to hire a full time credit manager, for as little as possible. However, the problem may require only a short term fix. Re-organize the department into clerical and collectors, establish the goals, train the group in how to be effective collectors, write up the policies and procedures and establish the guidelines for credit approval. Once this is done, it is just a matter of maintenance. Therefore, it might be more beneficial in the long run to contract with Strategic Credit Management Solutions to provide the quick fix and then find someone to maintain it, for the salary they want to pay.
We’re talking. I’ll keep you posted.
The current strategy is to throw more people at the problem. They don’t have an official credit manager now. The treasurer oversees the functions as well as a number of other financial areas. He just doesn’t have time to handle credit and it is getting out of hand. He’s also thinking of adding more collectors / order entry / billing clerk / cash applicators. In other words, he’s thinking one more person to do a little of everything should do the trick.
He is also looking for a soothsayer to make the right call on customers who would be charging as much as a half million dollars. He alluded to a belief that credit people have their own “tricks” for making these kinds of decisions. I wanted to tell him I use a dart board. One side says “Yes” and the other side says “No” and I close my eyes and throw. I resisted, because it would have been mean spirited sarcasm. The real trick to extending credit is research and negotiation, but too often sales driven companies demand that the credit manager come to only one conclusion – yes - and then be willing to take the fall when the account defaults. It is never the fault of the customer for failing to pay; it is the fault of the collector for not being able to collect.
After spending about an hour with a couple of members of this company’s financial team, I am envisioning a small group of accounts receivable billing clerks who have been drafted into the role of credit and collection specialists. Zealous and desperate sales reps berate them into making hasty and possibly disastrous credit decisions. In addition to performing the billing tasks, they must handle all of the customer requests for invoice copies, proof of deliveries, credit ratings, price disputes, damage claims, apply cash and somehow they must make the necessary collection calls and follow up. They are a small group holed up in some corner of the office, probably without food and water, and if something doesn’t happen soon, they could get ugly.
This company would like to hire a full time credit manager, for as little as possible. However, the problem may require only a short term fix. Re-organize the department into clerical and collectors, establish the goals, train the group in how to be effective collectors, write up the policies and procedures and establish the guidelines for credit approval. Once this is done, it is just a matter of maintenance. Therefore, it might be more beneficial in the long run to contract with Strategic Credit Management Solutions to provide the quick fix and then find someone to maintain it, for the salary they want to pay.
We’re talking. I’ll keep you posted.
Monday, April 6, 2009
Managing Credit Managers
Credit management requires that the manger both manage the receivables and manage a department. I have seen some good receivable managers who are unfortunately poor department managers. The results can be disastrous.
One manager simply divided the accounts and the duties among the three in the department. Each person then, was responsible for a portion of the receivables and everything that went along with it. Each processed their own area’s credit applications, set up their own accounts, dealt with their portion’s invoice and or proof of delivery retrieval, handled their area’s credit ratings, pending order releases and because this was a building material supplier, each was required to prepare the waivers and related forms that their customers required. Oh yes, they were also responsible for the collections. All it took to get the department on track was to bring in one clerical person to do all of the non-collection activity, thus allowing the collectors to spend the majority of their time collecting.
Another credit manager supervised three others. While they had designated duties: one applied cash, one did clerical, and another did collections, the credit manager had to control and closely supervise all functions. Therefore, the clerical person spent a great deal of time preparing credit ratings and processing credit applications. Then, before a rating could be sent on to the requesting party, or before an account could be set up, the manager had to review the clerical person’s work. However, as the work load increased along with the number of customers and the growing receivables, the credit manager rarely had any time for reviewing. The ratings and applications became tall towers of accumulated paper and the clerical function was largely wasted.
Too often, improper credit management is the fault of whoever is assigned to supervise the credit manager. Typically, this is a task that falls on the shoulders of the company controller. While a controller’s knowledge of accounting principals may be extensive, their knowledge of credit is miniscule. I once knew a controller who frequently complained that the credit / collectors were on the telephone too much.
Poor management of the credit department can start at the highest level. The owner of a small lumber company issued a list of customers the credit department was not allowed to call, fearing these customers would abandon the company if they were asked to pay their bills. Later he demanded to know who was responsible for the company’s delinquency. The credit manager handed back the list of customer he had been given by the owner.
Credit departments require efficient management just like any other department. Unfortunately, companies tend to either miss-manage or avoid the department all together because they simply don’t know how. Collectors must have goals, targets and priorities, or they will get burdened down with inconsequential matters. Labor resources must be properly allocated in order to be efficient and productive. Bench marks and a system of rewards should be set in place, in order to keep motivation up. This is where Strategic Credit Management Solutions can help. We’ve been doing it for thirty years. Contact us at http://powerscredit.com/or email us at patrickpowers@sbcglobal.net.
Your comments are welcome
One manager simply divided the accounts and the duties among the three in the department. Each person then, was responsible for a portion of the receivables and everything that went along with it. Each processed their own area’s credit applications, set up their own accounts, dealt with their portion’s invoice and or proof of delivery retrieval, handled their area’s credit ratings, pending order releases and because this was a building material supplier, each was required to prepare the waivers and related forms that their customers required. Oh yes, they were also responsible for the collections. All it took to get the department on track was to bring in one clerical person to do all of the non-collection activity, thus allowing the collectors to spend the majority of their time collecting.
Another credit manager supervised three others. While they had designated duties: one applied cash, one did clerical, and another did collections, the credit manager had to control and closely supervise all functions. Therefore, the clerical person spent a great deal of time preparing credit ratings and processing credit applications. Then, before a rating could be sent on to the requesting party, or before an account could be set up, the manager had to review the clerical person’s work. However, as the work load increased along with the number of customers and the growing receivables, the credit manager rarely had any time for reviewing. The ratings and applications became tall towers of accumulated paper and the clerical function was largely wasted.
Too often, improper credit management is the fault of whoever is assigned to supervise the credit manager. Typically, this is a task that falls on the shoulders of the company controller. While a controller’s knowledge of accounting principals may be extensive, their knowledge of credit is miniscule. I once knew a controller who frequently complained that the credit / collectors were on the telephone too much.
Poor management of the credit department can start at the highest level. The owner of a small lumber company issued a list of customers the credit department was not allowed to call, fearing these customers would abandon the company if they were asked to pay their bills. Later he demanded to know who was responsible for the company’s delinquency. The credit manager handed back the list of customer he had been given by the owner.
Credit departments require efficient management just like any other department. Unfortunately, companies tend to either miss-manage or avoid the department all together because they simply don’t know how. Collectors must have goals, targets and priorities, or they will get burdened down with inconsequential matters. Labor resources must be properly allocated in order to be efficient and productive. Bench marks and a system of rewards should be set in place, in order to keep motivation up. This is where Strategic Credit Management Solutions can help. We’ve been doing it for thirty years. Contact us at http://powerscredit.com/or email us at patrickpowers@sbcglobal.net.
Your comments are welcome
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