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.
Tuesday, December 22, 2009
Thursday, December 3, 2009
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.
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.
Subscribe to:
Posts (Atom)
