While attending a business conference in a rural setting, a business executive decided to take a walk. He hadn’t gone far before he encountered a large dog sitting in the middle of the road barking at everyone. Nearby was a young man who said to the executive, “He doesn’t belong to anyone; in fact he didn’t even have a name until some business types attending a conference took to calling him “Credit Manager.”
At this point, with a puzzled look on his face, the businessman asked, “Why did they name the dog Credit Manager?” The young man answered, “They said that they named him Credit Manager because all he does is sit around on his dead end and bark at everyone.”
The sales avoidance department, the ugly stepchild of accounting, and a necessary evil. Many business managers still think of credit and past due A/R management as a cost center and as a risk avoidance function. If the goal of a business is to avoid risks it should get out of extending credit terms and out of sales.
Wrong Area/Measurements
Traditionally the credit and A/R management area is found within the accounting department. The reason being to keep the sales guys from giving away the store and to safeguard the assets of the organization. Such traditional thinking often results in the credit / A/R management area taking on the characteristics of the accounting department.
Credit / A/R management is not an accounting function; it is a sales support function and those involved in credit and A/R management must be able to interface and communicate with just about every other area of the business as well as with customers, transportation companies and other vendors. Yes, the accounting department needs to know what is going on with the extension of credit and the management of what may be the largest asset a business has, its accounts receivable; but the primary goal of credit and A/R management is to support sales.
The other problem, besides the type of people involved, with credit being located within accounting lies with how it’s performance is measured, i.e. D.S.O. (Days Sales Outstanding) and % bad debt.
Measure for D.S.O. and % bad debt and the message being sent is that the job is to look for a way to say no, to reject any potential risk and should a customer ever become past due the job is to stop further credit sales. Measuring performance of the credit area by DSO and % bad debt results in the investment made in getting a customer to the point where they want to buy being lost; and along with the investment you can kiss off any potential future business with that customer.
Say Yes To Sales and Profit
Credit Approval should be defined from a perspective that the job is to fine a way to say yes to a profitable sale while remaining confident of payment. The risk associated with the “type” of business the customer is in, the “time” the customer has been in business and with “how” the customer has paid in the past must thenbe weighed against “the product value at time of sale.” There’s always a way to say yes based on terms and conditions of sale: down payment requirements, shorter terms, personal guarantees, third party guarantees, credit insurance, first born child. There’s always a way to say yes. Credit rejection should come from the customer, not the seller.
An enlightened credit department approaches credit approval from a perspective that the job is to find a way to say yes to every profitable sale.
Completing the Sale
When past due A/R management is placed within the accounting area and it’s performance measured by DSO and % bad debt it is referred to as “collections,” as the enforcement of payment.
An enlightened credit and A/R Management department understands that most past due accounts are good customers and that the traditional definition is out of step with the reasons why customers become past due.
A survey of 8000 businesses in a wide range of industries found that close to 25% of accounts receivable are delinquent at any given time, one day plus beyond terms, but less than 1% are written off as a bad debt loss.
Approaching the management of past due accounts, as the “process of completing the sale” recognizes that the large majority of past due customers are good, and that delinquent accounts represent lost sales opportunities. Customers who are past due may well take their next order elsewhere rather than deal with a vendor/supplier with whom they are delinquent. Keep customers current and you keep them buying. Mishandled “collections” may bring in the money, but may also create the loss of customers.
A successful client relayed to me, over a cup of coffee, that when she was a college student she had received a phone call from a bill collector working for a major retailer. She was past due and did pay the bill, but she has never again stepped back into one of the retailer’s stores and twenty years later she still resents the way with which she was dealt. Even more problematic than an affluent customer boycotting a retailer is the loss of a commercial customer’s goodwill; there are fewer of them and they have generational memory.
In Closing
Things are changing. More and more business executives are coming to see the role of Credit and A/R management as a sales support function. DSO and % bad debt still have a place as a way to gauge cash flow and losses, but the performance of the credit function is better measured by % of dollars applied for approved…and exceeded and by the % of A/R current to 30 days past due.
Who knows the day may come when some big , friendly, lovable dog without a name comes to be called “Credit Manager”.
This article was provided by our partner, Abe WalkingBear Sanchez.
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. 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, TEC, CU, CSU, Texas A&M, National Association of Credit Management – Kansas City, HTDA, BCFM, Poli Hi Solidur, Skinner Nurseries, Deardens, Rain Bird, STAFDA, IBM, Wisconsin Credit Association, 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
Have a great week!