Credit & Collections.. The 500 Lb Gorilla in the Room
Credit & Collections: The 500 LB Gorilla in the RoomBy: Alan Walsh, Owner, Huntington Consultancywww.email@example.com(714) 465-2749A Topic That Makes People UncomfortableCredit & Collectionsis a topic that makes business people grit their teeth. By human nature,theyinstinctively shrink away from it.Denying credit runs counter to our sales-oriented business mantra.. and few people like tomake collection calls.Sales forces resent the whole function as an intrusion on their selling activities andcustomer relations. They want no part of helping in the collections effort for fear ofdamaging their sensitive customer relations..they want unlimited credit extended toeveryone..and they fear &resentthe Credit Department contacting their customers.Collections people tend to be shunned, and feel unappreciated. Senior managers are forevertrying to find ways to blunt the Credit Department’s “teeth” for fear of damaging customerrelations; and often intercede inappropriately in collection efforts.. short-circuiting theprocess and damaging the credibility of the CollectionRepresentatives in the eyes of thecustomer. General Managers are usually sales-oriented, so they give a much moresympathetic ear to the Sales Staff than to the “evil” Credit Department.Small businesses are especially sensitive to Credit & Collections.. because they covet everysale.. their credit review/assignment resources are usually slim to none.. and the owner isoften the one who has to pick up the phone & ask for money because there’s no one else todo it. They find it awkward &painful to shift from selling-mode one minute –to- collection-mode the next. Many businesses have failed because the owner just couldn’t bringhim/herself to make the hard calls. Turnaround experts make big fees taking control ofbusinesses and doing hard collections the owner can’t emotionally deal with.Yet Credit & Collections is necessaryin every business. Even internet companies face theprospect of having customers challenge credit card transactions; and then having to justifygetting paid to the credit card company.Uncollected Receivables Raise Havoc to Company FinancialsThe damage done by an uncollected receivable is wide-spread. Not only does the companylose all the revenue to cover the money spent buying/producing the products & services and
putting them in the customer’s hands.. but also the revenue that would cover theproportionate portion of overhead expenses, and the profit piece, are lost. Plus, mostcompanies still pay the salesman a commission despite the fact that the sale was nevercollected.Improving the Credit & Collection FunctionNo business can stand to have any significant losses due to uncollected receivables for longand hope to survive, and yet Credit & Collections is usually a less-then-optimum function inmost companies; relegated to some corporate back-water. That having been said, thisarticle presents some practical suggestions based upon experience by which companies canimprove their Credit & Collections efforts.The Corporate Culture Must ChangeFrom the President/CEO on down to the people making the collection calls, an attitude andculture change is essential. This is done by recognizing what a sale really constitutes.A sale is a mini-contract. You agree to deliver goods or services to the customer within acertain timeframe, at a certain price.. and the customer agrees to pay a certain amount toyou within a certain timeframe. Failure to pay constitutes breach of contract –and- theft.All communications with the customer regarding the unpaid receivable should be made in anunemotional, fact-based, even-handed manner; stressing the contractual businessobligation. All communications with the customer should convey a consistent message;without short-circuiting interference being introduced at any level of the company. If thecompany decides for whatever reason to “eat” –or- forgive the debt, it should be done in amanner that doesn’t undercut the credibility of the Collections personnel in the customer’seyes.Get Sales Into the PictureThe organization that needs to make the biggest cultural change is Sales. They need to bemade aware that they’re part of a bigger organization.. that uncollected receivables arehugely damaging.. and that they have a role to play.The Expanded Role of SalesSales is the front-line of the company. They’re the company’s eyes and ears in customerrelations. There’s much they can and should contribute to protecting the company.
Sales physically visits customers, and is in a position to make observations that can be used in making credit extension decisions; such as the condition of the business. Sales can sniff out customers who look likely to default and/or disappear. They can advise Credit promptly when the customer actually closes their doors and/or vanishes. Sales can go out and pick up checks. It’s much harder for a customer to dodge unpaid debts when there’s someone standing at their desk. Sales can intercede when the customer isn’t answering collection calls. Sales can convey Credit messages from the company to customers in a close and personal manner. If a customer disappears, Sales can make local inquiries to get clues for tracking the customer down. Sales usually knows how to navigate the customer’s internal organization better than Credit.In severe cases, company management should be prepared to make customer visits too.Giving Sales Their Wake-Up CallSo, given the reality that Sales is the natural enemy of Credit & Collections, how doesmanagement elicit their cooperation?A very direct and effective method is to pay their commissions based upon oncollectedsales. No Collection.. No Commission.Suddenly, collections become animportant factor in their lives. They still won’t like it, but it will force a fundamental changeto their mind-set. There’s nothing like hitting someone in the pocketbook to get theirattention. Besides, why should they get paid for a sale that was never fully consummated?It would also help for someone from Finance &Accounting to make a brief presentation toSales showing the ways in which uncollected receivables damage the company. Most salespeople are not very sophisticated in such matters, and need to understand it. They need tocomprehend that their prospects are tied to the overall health of the company.Management’s Wake-Up CallMany companies pay bonuses to managers based upon company performance. But baddebts never seem to figure into the formula. Time for a change. There should also besome clear and coherent rules as to when managers can intercede in the credit & collectionprocess; and how.Credit & Collections is a Whole-Company Concern
At the very least, Credit and Sales should be meeting periodically to discuss customerstatuses. Problem-accounts can be discussed and strategiesfor joint action devised. Salesshould also have the opportunity to discuss the possible increase of Credit Terms for goodcustomers who represent increased sales opportunities. I would expect the President/CEOwould be paying attention to these discussions, if not actually participating.Why do most companies restrict Credit Personnel to working from their desks? A surprisestrategic visit to a past-due customer by a Credit Rep. can be very effective in shaking loosemoney and/or achieving a payment plan. Face-to-face contact is much harder to dodge thana phone call; and psychologically powerful. The Credit Rep. can also visit a new customer togather information on determining appropriate Credit Limits; or reviewing the limits on anexisting one. Besides, face-to-face contact establishes relationships.In sticky “big-bucks” situations, perhaps the Sales Manager, and/or the President/CEOshould be paying the customer a visit. Ratcheting up the attention in this way can beextremely effective.Know Thy CustomersOf course you need to understand your customers and adjust accordingly. For instance, ifyou sell materials to a customer who does contract work, he’s not likely to get paid for hiswork until his contract is complete. When he gets paid, you get paid. Your payment termswill mature, and then he’ll start stalling you. Unfortunately, most aren’t sophisticatedenough to bring this situation to your attention up-front, so bad relations ensue. This is anopportunity to become proactive and work out realistic terms that enable your companies towork together on a long-term basis; building loyal customers.Turning the Tables.. Why Should Sales Have All the Fun?Credit also needs to take the big-picture view and look for opportunities to promote thecompany with the resources they have at hand. For instance, years ago I developed aninventory-financing program that enabled new customers to acquire inventory, and existingcustomers to acquire inventory for expansion, on extended terms. The customer would berequired to sign a lien against all their inventory until the debt was paid. The program washugely successful and enabled us to increase our business by about 1/3 over two years.Only two customers defaulted, and we were able to recoup enough inventory to keep ourbad debt losses to a pittance. Customers could use the inventory to open new stores, andhave time to get them self-sufficient before the debt came due. It was a win-win foreveryone, and of course made Sales very happy.. as well as building loyal customers.Conclusion
There are other things that can be done, but this article should get the main point acrossand provide some food for thought. Credit & Collections should be made a whole-companyconcern,because the whole company is impacted.