Flawed Vision Old Approach has Negative Effects  By: Abe WalkingBear Sanchez

“You’d think the goals for the credit and collection area  are to find ways to reject new  customers  and  drive  away  old  ones;  based on the use of traditional DSO (days sales outstanding) and bad debt performance measurements.”

Companies extending credit terms often have more money tied up in A/R than any other asset.  Next to cash on hand the A/R is the most liquid asset available being but one step removed from money in the bank.  Yet; the credit and collection function which is responsible for creating and managing the A/R may be the most misunderstood, underutilized, and undervalued area of business.

Costs - Why - What
     Extending credit creates costs and risk.  There’s the cost of gathering information on new customers, obtaining reports and ratings, and in evaluating the customer and the sale.  If approved, there’s the cost of setting up the account and billing/accounting.  Further, if a company borrows on its A/R, there’s additional debt service cost.   Should the customers not pay when due there’s the cost of collections and possibly bad debt write offs.
     If extending credit creates costs and risks why not dump credit and go to a cash and carry basis and pass the cost/risk savings on to customers?

Because there are customers who require that vendors/suppliers provide their product/service and then give them time to determine if they received what was ordered and to process the bill for payment.
     There are customers who must sell to their down-line customers and collect from them before they can pay their own creditors.  And there are competitors who offer credit terms.
     The only reason anyone should extend credit to customers is in order to get a sale that would otherwise be lost.  If your cusotmers can and are willing to pay at the time of purchase  don’t force credit on them, just grab the money.

Mission Statement
     Credit is the selling of a product or service based on payment at a later date.  It is a lubricant of commerce that allows for the expanded movement of products and services.  It is a sales support function .
     Yes there’s risk associated with extending credit but risk avoidance must not be the primary focus.  Sales Support is why credit exists and that must be the vision that drives the credit and collection area of business.

Major Components
     Credit approval, billing, collections and internal communications (performance measurements and reports) are the major components involved within the credit function.  Each component must be propelled by a goal(s) which remain true to the Sales Support mission statement.
 
 

Wrong Message
      The credit approval process has at times been described as finding ways to say no and the credit department has been referred to as the sales avoidance department. Considering
that the credit people are being told, via performance measurements, that risk avoidance is the goal; it’s surprising that any customer gets approved.

Right Message
     The goal of the credit approval process should be to maximize sales and minimize risks.  Working to find ways of  saying yes to every possible sale while remaining confident of payment better complys with the sales support mission statement.
     Credit customers are funny, don’t send them a bill or send one that is late, incomplete, has errors or isn’t understandable; and they won’t send you money.  The goal of billing is straight forward and simple; facilitate payment.
     While delinquent customers can make up 25% or more of the total A/R, less than 1% (on average) are ever written off as a loss.  Most past dues are good customers who will pay; there are reasons why they pay late.  Contrary to the old enforcement of payment mindset, collections is the process of completing the sale.  The goals are (1) keep customers current so they buy from you, not your competitor and (2) the early identification and control of potential losses.

Dr. Don Rice,  of Texas A & M says “Employees respect what management inspects not what management expects.” How you track the ongoing processes, and the measurements you employ are essential to achieving desired results. Tracking the credit approval phase by the time it takes and the effort exerted to find a way to make the sale, re-enforces the Maximize Sales - Minimize Risks goal.  Billing should be measured and tracked to ensure that it’s timely, accurate, complete and understandable; that it facilitates payment not hinders it.  Collections must be gauged and measured by current customers and the early identification of potential losses.  The goal of reports and performance measurements must be to bolster the sales support mission statement, not contradict it.

Process and People Requirements
 The step by step processes must be driven by the goals and lead to their achievement.  Question why things are being done and the how will follow.
     All too often   the wrong  people are involved in Credit and Collections.  People do best those things they like to do.  Evaluate your present staff, are they communicators? Do they enjoy customer contact and problem solving?  Are they organized, detail oriented, and have good follow-up skills?  If not you have a problem.

The Customer/Sales Support Department
     “Two men look through the same bars; one sees the mud the other the stars.”   The credit and collection area has long been seen as a negative, a cost center and a necessary evil.  In order to change this a new vision is required; one that is more in keeping with the reason why credit exists.  Changing the old Credit and Collection department to the new Customer/SalesSupport Department   reflects the new vision of credit as being a positive, and a profit center.  Remember, expectations will wither without proper guides, processes and monitoring.

Benefits
What can you expect from a sales and profit driven credit and collection function?

• An  expanded customer base
• More sales
• Better customer service
• Speedier turntime on A/R
• Controlled bad debt losses
• Improved efficiency
• Higher staff and customer retention.

The Author

Abe WalkingBear Sanchez is an International Speaker / Trainer on the subject of cash flow / sales enhancement and business knowledge organization and use. Founder and President of www.armg-usa.com , Abe also sits on the board of www.BestBizways.com Inc.

TEC (The Executive Committee), "Inc." Magazine Annual Business Conference, CU (Denver), CSU (Ft. Collins), IBM, NASFT, PEI, BCFM, RAB, STAFDA, WIMA, ISD, Pet Industry Distributors Assn., Rain Bird, Winroc, Johnstone Supply, Able Distributing, Evergreen Marketing Group, Southern Wholesalers Assn., Touchstone/2000 Software are but a few of the groups, schools, companies and associations for whom Abe has conducted programs.