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Notice to Publications Copyright 1982 -
2007 A/R Management Group, Inc. www.armg-usa.com All
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By: Abe WalkingBear Sanchez
Old
Set Of Givens (Paradigm) Incompatible with
Modern Business
No Sexy
Spread Sheets,
B2B Credit Is About More Sales,
Better Cash Flow and Efficiency
Phoenix, AZ:
It
happened
again.
Following my delivery of an after lunch presentation titled "What
Top Business Managers
Don't Know About Credit and How It Hurts Their Company" several
people approached me
and said that they had planned to eat and then skip out on my
presentation, but they
were
sure glad they hadn't.
This group of distribution and manufacturing executives were no
different than
many
other top business managers who still equate Credit with accounting and
with risk
management.
They learned a different way...and went away with their thinking
changed.
In
his
book, The Structure of Scientific Revolutions, first published in
1962..Thomas
Kuhn
defines a paradigm as an accepted set of givens which
provide a model
problem and a
successful solution that works for that time. And as things
change the
old paradigm
becomes incompatible with the new reality. New knowledge in time brings
about a
shift,
a Paradigm Shift.
The Old Credit Paradigm
The
folks
in Phoenix., like many other business executives, were caught up
in
thinking about
credit in much the same way as their fathers and grandfathers did in
the
1950s...but today's
world is very different and the old risk management/accounting thinking
must give way to a
new understanding if modern companies are to utilize their credit area
to its
fullest profit
potential.
The
1950's
were very much defined by W.W.II which preceded the 50s. It was a
time of
pent up demand and growing demand for goods and services, it was a time
of
Americans
having money in the bank or in war bonds, it was a time of great social
change
worldwide
and a time of limited competition .
In
a seller's
market, with people standing in line to buy things, credit was
seen as a
privilege,
as a favor to some and not others. In such a business environment the
focus was
rightly
placed on avoiding the risk of customers failing to pay, of incurring
bad debt
losses. DSO,
average turntime on the A/R, and % bad debt were appropriate
performance
measurements
when the goal was risk management .
Credit In Today's World
The shortages of the 50s are long gone.
In
today's
world of rapid change, of mergers, of huge international companies and
of
increasing local small businesses,
of big box stores and of cyber competition the old
risk management
paradigm
is a handicap.
Last year my colleague Declan Flood , Executive Director of the IICM http://www.iicm.ie/ ,
visited America for the first time. Prior to coming to America I said
to him
that like Ireland, it
is a land filled with mini-storage warehouses, of basements,
attics,
garages and storage
sheds crammed full of stuff...only more so. The shortages of the
50s are
long gone,
along with people having savings. Monkeys? We didn't evolve from
monkeys...but
from
pack rats.
In 2007 things are very different from the way they were in the 50s.
In
order to
compete modern companies must have quality in their products and
services and
quality in the way they carry out business functions. A lack of
quality
in a business will lead
to increased cost of doing business for everyone involved in a
transaction and
in time to the
failure of a company to survive, much less turn a profit.
The Profit System of B2B Credit
While
the following
explanation of the Profit System of B2B Credit
addresses the purpose,
the policies and lightly touches on people
requirements and
performance measurements of
commercial or B2B credit; the same concepts apply to B2C or consumer
credit.
However,
a
major difference between extending credit to consumers and to
businesses is
that there are many more consumers than there are businesses. And
while, almost
across
the board, consumer customer service levels continue to hit
all time
lows; companies can
and will stop buying from a supplier/vendor who abuses them, who
drives up
their cost of
doing business...as will the next generation of managers. Long
after the
memory of failure
fades the bitter taste lingers on.
Purpose:
The
only
reason for a business to incur the additional costs that go with
extending
credit
to their customers is to get a profitable sale that would
otherwise be
lost.
If business customers have the ability and wiliness to pay up front
extending credit should
not be considered. If they can cut a check with the order... grab it.
Credit is a lubricant of commerce and allows for the expanded
movement of
products and
services.
Policies:
Every
business function can be broken down to its major components...every
business
function.
Understandable and thereby achievable goals can then be established for
each
of the major components. Policies are goal driven guidelines.
The
major
components for the credit function are credit approval, past due
A/R
management (Not Collections) and internal
communications.
If
credit
is extended to get profitable sales that would otherwise be lost
then it
follows
that the goal of credit approval should be to find a way to say
yes to
profitable sales while
remaining confident of payment.
The
vast
majority of past due customers are not out to avoid payment. Past due
A/R
Management is not collections, the enforcement of payment, it is the
process of
completing the sale.
The goal of past due A/R Management is to keep customers current
...and
buying.
The most profitable sales are often repeat sales to the same
customers.
In
the
course of approving new credit customers and in resolving the many
things that
can and do go wrong in B2B commerce, the credit function interfaces
with
customers,
vendors, and with many different internal departments.
This places the credit function in an ideal position to identify and
communicate areas
of opportunity for improvement which in turn leads to the
constant
improvement of how
things are done. And that leads to controlling the cost of doing
business
for everyone
involved.
People
Requirements and Performance Measurements:
First
and
foremost the people carrying out the credit function must be able to
communicate. Before you ask for a resume ask for a ten minute
telephone
interview.
Measure
the
performance of credit approval based on the % of applied for
dollars
successfully approved...or even exceeded.
Measure the performance of past due A/R Management based on %
current to
30 days
past due..and remember this is a general guideline and there are always
possibilities for
profitable exceptions.
Measure the performance of Internal Communications based on the number
of improvements
identified.
Summary
Whatever
we
focus on and we give energy to, grows.
Business executives who continue to think of their credit
function
as a negative, as a cost center,
as a necessary evil and as the ugly step-child of accounting
...do so at
their own risk.
And they may hurry through lunch and miss out on the desert.
http://www.armg-usa.com/corp-LargeLeast.html
The Author
Abe WalkingBear Sanchez is an International Speaker / Trainer /
Consultant
on the subject of
cash flow / sales enhancement and business knowledge organization and
use.
Founder and President
of www.armg-usa.com , WalkingBear has authored hundreds of business
articles,
has worked with
numerous companies in a wide range of industries since 1982 and has
spoken at
many venues
including the Shakespeare Globe Theater in London. A hard hitting and
fast
paced speaker,
he brings life and energy to a critical business function whose true
potential
has yet to be realized by most businesses.
Atradius, Irish Institute of Credit Management, Cimex Training,
Export
Development Canada, Vistage,
CU, CSU, Texas A&M, National Association of Credit Management -
Midwest,
HTDA, BCFM,
Poli Hi Solidur, Skinner Nurseries, Deardens, Rain Bird, STAFDA, IBM,
University of Industrial
Distribution, are but a few of the groups, schools, companies and
associations
for whom
WalkingBear has conducted programs.
WalkingBear can be reached through:
A/R Management Group, Inc.
P.O. Box 457
Canon City, CO 81215
(719) 276-0595
email: abe@armg-usa.com
www.armg-usa.com
Certified on the copyrighted B2B Profit System:
Luis Eduardo Perez Mata
Cimex Training
http://www.cimextraining.com
Declan Flood
Irish Institute of Credit Management
http://www.iicm.ie