Four All-Purpose Rules for Credit Management

http://www.credittoday.net

Before becoming a regional credit manager for Karman Inc. (Denver, Colorado), Tyler C. Hooker served in the same capacity for a California-based metals company. During his five-year tenure there, he experienced zero write-offs and zero bad debt, while sales continued to increase every year. His keys to success? He identifies four:

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

1. Become intimately familiar with your company's industry and product lines. "Credit is credit, but it's very important that you understand your company's business and the products or services it sells," he says. "You may not necessarily need to know how the products are made or a lot of other technical details, but you do need to know how customers use them. If you don't, customers may be able to 'pull the wool over your eyes.'"

Example: If you call a delinquent customer about payment, and the customer claims that he is delaying payment because of problems with the products your company has shipped, you need a working knowledge of those products, how they function, how customers use them, and what kinds of potential problems can exist.

"When I begin work with a new company, I always take the time to visit the manufacturing area and the warehouse to begin to find out as much about the products as I can," he says.

2. Team up with Sales and Customer Service. "I've always worked hard to establish good relationships with these departments," he says. "In fact, I was operating under the team approach long before the term became a buzzword."

3. Collect under the "3P Principle." "Be pleasant, persuasive, and persistent," Hooker urges. Karman manufactures and sells western wear to companies of all sizes--from mom and pops to mega-retailers. While he utilizes all of the 3P's with customers of all sizes, which ones Hooker emphasizes depends on customer size.

It's important to be pleasant to all past-due customers, but it is extremely important with the mom and pops. "Smaller customers really appreciate the gentle approach," he notes. "Many of them, in fact, still want to do business on a handshake." So if problems occur, they feel a strong personal obligation to pay, but may not be able to do so immediately because of financial hardships. A gentle, pleasant, understanding approach is almost always appropriate under these circumstances.

You have to be equally persuasive with customers of all sizes--small to large. "You need to use your experience in collections to explain to customers that it will be in everyone's best interest if they arrange to make timely payments," he says.

Credit Management Portal
Unparalleled resources to help you with all aspects of the credit function: partnering with sales, reducing DSO, efficient ways to manage A/R, credit reporting resources, how today's credit leaders are solving problems, analyzing cash burn rates, the importance of working capital, best practices in all phases of the quote to cash process, from receipt of the the order through use credit applications and checking credit, through the collection process...
Check out Credit Today's Credit Management Portal

And you need to be persistent with all past dues until they are paid, but it is particularly important to prepare yourself to be this way with larger accounts, who may have a policy of delaying payments as a cash management strategy or, at the very least, have a lengthy and complex payment process that can delay your payments on a routine basis.

"I've found through the years that the squeaky wheel gets the grease," explains Hooker. "The more you persist, the better your chance of having your name make it to the top of the customer's payment pile." Robert R. Falconi, vice president and CFO for Planning Systems, Inc., an engineering firm (McLean, Virginia), is another articulate advocate of persistence in collections.

"I tell my staff to be persistent but polite," he says. "I tell them, 'Think of yourself as a small dog that has its teeth firmly around someone's ankle--don't break the skin, but don't let go until you get a check.'" Falconi cautions that obnoxious callers may get an individual bill paid, but could also be responsible for losing the account or for making future contact with a customer difficult.

Like Hooker's, Falconi's philosophy has made a big difference.

"Before I arrived at PSI, the company spent $31,000 in interest costs and lost money overall. Last year, the company earned $150,000 in interest income alone. More importantly, the company's bottom line is in the black. Our profits have never been this high and neither has our cash balance.

4. Take each account on its individual merits. When a customer is delinquent, try to be able to offer more than one option. (Hooker often thinks of himself as Monty Hall, giving customers the choice of what's behind "Door Number One, Door Number Two, or Door Number Three.")

Generally, suitable options exist behind the first two doors (payment plans, postdated checks, partial payments for past shipments as new shipments are paid in full, etc.). Door Number Three is usually adverse action (collection agency, small claims court, litigation).

"The more options you give a customer, the better able you are to get their attention in the first place and eventually to get paid," Hooker notes. "But I make it a point never to make a deal with a customer that hurts my company."

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.