The saying, "An account properly opened is at least 80% collectable" is an important one to remember. Excessive bad-debt write offs should not be used as an excuse for the cost of doing business. Many successful businesses today operate with minimal (under 0.5%) write offs. The key is proper credit investigation. In opening credit for a first-time customer, rely heavily on:

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

• The credit application/agreement.
• Credit reports (e.g., D&B, TRW).
• Bank reports (e.g., credit lines, loans, N.S.F. checks).
• References (but not suppliers whom they must pay on time to remain in operation).
• Financial statements.

1. No financial statement forthcoming. The customer may refuse to provide this, and if it is not a publicly traded company, the customer is not required to provide one.
2. An unaudited financial statement. The best way to interpret an unaudited statement is to believe less than half of what you read. If possible, ask for a copy of the financial statement the customer provides to its bank, which should be somewhat more accurate.
3. An audited financial statement. You can easily obtain this if the customer's company is publicly traded.

• Current assets less current liabilities (This shows what the company is worth if liquidation occurs.).
• Working capital ratio (current assets to current liabilities). A healthy ratio of at least 2 to 1 shows that the customer makes more than he spends and thus will be able to weather temporary hard times.
• Long-term debt (as a ratio to sales and assets). This covers the customer's loans to shareholders and creditors.
• Sales growth. If possible, try to compare this with previous years to establish sales trends.
• Inventory. Is it pledged to a bank or unencumbered? Are the assets made up largely of obsolete goods in a warehouse?
• Salaries. Are management salaries in line with the size of the business? If not, it may mean the owners consider the business a short-term venture.
• Profit. Did the company make money, lose money, or break even?
• Contracts. If the customer is a service or construction company, how many contracts are pending?
• Facilities. Does the customer own its facilities or lease? (Ownership often indicates long-term commitment.)
• Product. Does the customer's product seem faddish and/or prone to drastic changes?
• Financing. Was the company started with personal savings or bank financing? (Personal savings can indicate a stronger commitment to success.)
• Operating costs. Are general operating costs in line with revenues?

A 20-year credit management veteran, Paula Thorpe conducts training seminars for other credit professionals on coping with changing times, customer service, and new developments in the field. She is a member of the NACM, the Advertising Media Credit Executives Association, and the Ontario chapter of the Credit Development Group. She is a member of the education committee of the International Credit Association and sits on the legislative committee of the Credit Institute of Canada.

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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