Determining initial creditworthiness is the first and most important step in credit management. Continuing to assess creditworthiness over time is the second. But how do you best determine how much time to spend determining and assessing with each individual customer? Hal Wineland, CCE, general credit manager for Pendleton Woolen Mills (Portland, OR), does it by dividing accounts into three general groupings:

1. Small Customers. Basic to all customers are complete and comprehensive credit applications and third-party credit reports. "I also rely heavily on the salespeople to provide me with as much information as they have on their customers," he says.

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

   In most cases, Wineland is able to extend credit to small customers based on the rating information he receives from third-party credit reporting services. "This process is relatively quick, which allows us to get back to the customers quickly and not risk losing sales in the interim," he notes. "At this level, there's rarely a need to spend a lot of time analyzing financial data."

2. Large Customers. For larger customers, Wineland seeks financial information, both from the customers and from third-party credit reporting services. Here, he focuses on
   • Working with the very best third-party services, which tend to provide the most comprehensive, accurate and up-to-date financial information.

   • Seeking audited financial statements from the customers whenever possible. "These are obviously preferable to unaudited statements," he notes.

   He then conducts ratio analyses and compares the results with industry averages as well as averages for Pendleton's other customers.

3. Marginal Large Customers. If Wineland is unable to get as much financial information as he needs from a large customer, or if the information he has causes him some concern, he takes things a step further, with a series of phone calls and/or an actual site visit.

   • Phone Calls. Wineland cites an example of how telephone work can protect the company's interests. Given the reputation Pendleton has in the marketplace, it is very careful to sell only to reputable, high-quality merchants. As a way to purchase such high-quality products, though, some discounters (unable to purchase directly from companies like Pendleton) try to purchase through third parties. These companies are called "diverters," because they purchase directly from manufacturers and then divert the product to their customers (certain discount retailers).

     Recently, Pendleton received a very large order (for about 2,000 blankets) from an unknown company. "They had virtually no credit history and seemed to be small," Wineland says. "So I was immediately concerned about why they wanted to make such a large initial purchase."

     When he called the company they explained that they were exporters and were planning to sell the blankets to a number of their accounts in South America. To guarantee this, Wineland added language to the sales agreement specifying that the customer would not sell any of the merchandise in the United States. "However," he continues, "the blankets soon appeared for resale at a large local discounter. We traced then back to that sale and, needless to say, we don't do business with that diverter anymore."

   • Visits. When Wineland is unable to get all the information he needs from a large customer by mail, fax or phone, he often arranges a personal visit. During the visit, he looks for a number of things, but he is primarily interested in the appearance of the premises in general and in the discussions he has with a CFO, controller, or other senior financial executive. "In general, if a company does a conscientious job of keeping its premises neat and clean, they also do a good job of keeping their bookkeeping neat and clean," he observes.

When meeting with a CFO or controller, Wineland tries to find out how the company handles its money, what kinds of banking relationships it has, how much and what type of other credit is available to the company, and whether there are any outstanding loans and at what rates of interest.

Long-Term Management
"We analyze all of our accounts at least once a year," reports Wineland. "If we see anything that concerns us, we analyze the account quarterly, and pay special attention to the 10-Q reports it files with the SEC, as well as the quarterly reports we receive from our customers." (Wineland has made it a point to get on the mailing lists for these financial reports from the company's customers.)

"Of course, if there are any kind of collections problems, we stay on top of the account on a daily basis," he adds.

He also relies heavily on salespeople to keep him updated on any changes in customer situations. "They do a good job managing customer orders within credit limits," he says, "And they let me know if things change, and keep keep me posted on situations that require collection efforts."

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.

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