Managing Credit in an Urgent Sales Environment
When a company has to rapidly increase sales just to hold its own, some credit concessions have to be made. But that doesn't mean putting up with chronically late payments or shipping to dead beats. Here's how one veteran credit woman runs a tight credit ship in an urgent sales environment. Computer component prices have been dropping so rapidly that companies in the industry have typically had to double unit sales every year just to maintain our gross sales revenues. This means, of course, that they're constantly looking for new customers.
"We review hundreds of applications a year," notes Credit and Collection Manager Margaret Spencer of CaliSem Laboratories (Garden Grove, Calif.), "and of necessity we've lowered our standards for credit granting significantly."
What does she mean by "lowered standards?" "Not on selling on open account terms to every possible customer, as some of our salespeople apparently believe." she replies. "It means that, over time, we've become more willing to take chances with new customers." Payment Performance
"At the same time, we've also learned from experience to carefully monitor payment performance of new accounts," she continues. "We'll call if a new customer is even one day late with payment. Those calls sometimes surprise, and occasionally even offend new customers, but over time we've learned that the more liberal we are in our collection follow up, the more new customers test our flexibility. I believe in the long run that we're solving rather than creating problems by letting customers know what we expect in terms of prompt payment." When, for example, a new account recently went past due and a collection call was made immediately, the account payables clerk was angry about receiving a call so soon. Spencer received a call from the debtor company's controller complaining about the aggressive collection tactics. She told him that she thought it would be unfair to other customers that pay right on time not to require on-time payments from a new account. "I explained that, as a broker, everything we did was geared to keeping our costs down and our prices competitive," she says. "The controller was not pleased by my explanation, but at least this company now knows what to expect from us in the future." With this approach to new account management, it follow that her collection strategy and tactics are hard nosed. "Establish specific collections policies and require everyone to follow them," she advises. "Review and revise your collection techniques frequently." Specifically, she recommends:
- Taking careful and thorough notes of every collection call made. The extra time it takes to be thorough will be more than compensated or if you need to follow up on that call.
- Eliminating any grace period you allow before calling a past due customer.
- Rigorously enforcing your cash discount policy. Don't play favorites, and eliminate discretion about whether or not unlearned discounts should be charged back. They should be.
When a customer's payments pattern changes, asking them why. For example, if a customer used to pay early and take the early payment discount and now pays late you should find out why. If a customer used to pay ten days slow and is now trying to pay your invoices twenty to thirty days late, you need to ask about this significant change in their payment patter.Refusing to allow or accept the fact that customers ignore our collection calls. If you do not get a call back after two attempts, move up the chain of command to your contact's supervisor. Establishing deadlines beyond which you will hold orders. "At CaliSem we have a rule that if a customer has an undisputed balance that is more than 30 days past due, there has to be a documented reason why we are continuing to ship on open account terms," she says. "In the absence of a valid reason to continue releasing orders, the account is to be placed on credit hold." Computer Software
It was ten years ago, the CaliSem got software that allowed Credit to store a limited amount of on-line collection notes. "It was like night and day compared to the old way of tracking payment commitments and decisions annually," Spencer recalls. 'Our new software package contains both a collection management and a deduction management module. The most important feature of the collection management software is that it identifies to me and to the collectors which past due accounts should be called, and in what order. This software has made collections more efficient and more productive. The software allows me to monitor the number of accounts each collector has contacted, and to find out which priority calls were not made. With this software, we averaged at least 10% more calls a day--and these calls are more productive than ever before.
CaliSem has now added a deduction management module that allows Credit to
- address deductions systematically,
- record each step taken in the process,
- generate standardized letters or faxes about deductions, and
- schedule follow ups to make certain they are being repaid
Or, in the alternative, the module allows staffers to make certain deductions are being credited promptly. It also allows for review the status of any outstanding deduction without having to ask the collector for an update."The Internet is increasingly relied upon for help in evaluating new accounts. "Part of our new accounts review process involves checking the Internet to see if an applicant has a web page," says Spencer. "If so, I'm given the web site address and look at the information on the web page before making a decision. We also use the Internet to update our financial statements on customers that happen to be public companies in the U.S. in the EDGAR database and in Canada on the SEDAR document retrieval system. "We use the Internet to keep our files currently regularly downloading information about our publicly held customers. As a result, we use our on-line credit report provider less often and we should be able to cut our annual contract by at least 30% next year." The Internet is used in collections for sending e-mail messages to some delinquent accounts. "Sometimes, we attach [append] account statements to our e-mail messages to help customers to reconcile their records to ours. The advantages of e-mail over the fax is that it is faster, cheaper and we feel the documents we append tend to be more legible." Cooperation With Sales
A company that has to double unit sales annually to maintain gross revenues obviously needs some harmony between Credit and Sales. CaliSem Credit's mission statement reads: In partnership with the sales department, the credit department's mission is to make quality credit decisions about orders pending and about credit limit increase requests. The credit department will collect past due balances as quickly as possible. At the same time, we will cause as little disruption a possible to the flow of goods, and as little damage as possible to the good will between this company and its customers" Among the ways Credit works cooperatively with the Sales, Spencer lists these:
- New salespeople spend a week in training before they are sent into the field, and the credit department is part of the training process.
- Potential customers are prescreened so salespeople avoid spending unproductive time with companies that we are unlikely to want to sell to.
- Salespeople are provided with detailed information on the credit-decision making process. "For example," says Spencer, "if we hold orders, we tell the salesperson why, how many calls were made to whom, how many payment commitments were made and broken, how far past due the account has become, and what it would take to get the account of credit hold at this time."
She attributes much of the harmony between the departments to the efforts of the sales vice president. "Without his respect, I think that the effectiveness and credibility of my department would be seriously undermined," she says."Fortunately, while we don't always agree, I'm convinced that he respects the work I do and recognizes that I'm not his opponent, I am an ally of the sales department whenever I can be." By way of example, she cites the company's annual sales meeting where she was asked to speak. "The mood during my presentation was tense," she says, "and the question-and-answer session that followed involved a series of pointed questions about why this or that account was handled by the credit department in a certain way. After a few of thee questions, the sales vice president intervened and stated that it would be impossible for me to address specific questions about individual customers without the files in front of me. He then directed the salespeople not to ask questions about specific accounts and to concentrate on broader issues." The Profitability Question
How much does customer account profitability figure in to the credit decision making process? It is a factor, she notes, but hardly the only factor. "We have access on line to the overall account profitability, and to the profit margin on an individual order that might be up for review. If the decision about whether or not to release the order is a close one, I normally look at the profit margin on the order. In theory, the larger the margin the more credit risk I should be willing to take. In reality, I am expected to manage and control credit risk and credit delinquencies irrespective of the order's profit margin. "If I take an order into my boss to discuss the pro's and con's of releasing the order I always know the margin on that order. However, whether you stand to make 2% or 20% on an order, you only earn the profit if you are paid for the invoice--therefore profit on a sale is minor consideration when compared to the question of whether or not we will ever be paid by the customer or applicant." 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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