By: Alan Walsh, Owner, Huntington Consultancy
A Topic That Makes People Uncomfortable
Credit & Collections is a topic that makes business people grit their teeth. By human nature, they instinctively shrink away from it.
Denying credit runs counter to our sales-oriented business mantra.. and few people like to make collection calls.
Sales forces resent the whole function as an intrusion on their selling activities and customer relations. They want no part of helping in the collections effort for fear of damaging their sensitive customer relations.. they want unlimited credit extended to everyone.. and they fear & resent the Credit Department contacting their customers.
Collections people tend to be shunned, and feel unappreciated. Senior managers are forever trying to find ways to blunt the Credit Department’s “teeth” for fear of damaging customer relations; and often intercede inappropriately in collection efforts.. short-circuiting the process and damaging the credibility of the Collection Representatives in the eyes of the customer. General Managers are usually sales-oriented, so they give a much more sympathetic ear to the Sales Staff than to the “evil” Credit Department.
Small businesses are especially sensitive to Credit & Collections.. because they covet every sale.. their credit review/assignment resources are usually slim to none.. and the owner is often the one who has to pick up the phone & ask for money because there’s no one else to do 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 bring him/herself to make the hard calls. Turnaround experts make big fees taking control of businesses and doing hard collections the owner can’t emotionally deal with.
Yet Credit & Collections is necessary in every business. Even internet companies face the prospect of having customers challenge credit card transactions; and then having to justify getting paid to the credit card company.
Uncollected Receivables Raise Havoc to Company Financials
The damage done by an uncollected receivable is wide-spread. Not only does the company lose 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 the proportionate portion of overhead expenses, and the profit piece, are lost. Plus, most companies still pay the salesman a commission despite the fact that the sale was never collected.
Improving the Credit & Collection Function
No business can stand to have any significant losses due to uncollected receivables for long and hope to survive, and yet Credit & Collections is usually a less-then-optimum function in most companies; relegated to some corporate back-water. That having been said, this article presents some practical suggestions based upon experience by which companies can improve their Credit & Collections efforts.
The Corporate Culture Must Change
From the President/CEO on down to the people making the collection calls, an attitude and culture 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 a certain timeframe, at a certain price.. and the customer agrees to pay a certain amount to you 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 an unemotional, fact-based, even-handed manner; stressing the contractual business obligation. All communications with the customer should convey a consistent message; without short-circuiting interference being introduced at any level of the company. If the company decides for whatever reason to “eat” –or- forgive the debt, it should be done in a manner that doesn’t undercut the credibility of the Collections personnel in the customer’s eyes.
Get Sales Into the Picture
The organization that needs to make the biggest cultural change is Sales. They need to be made aware that they’re part of a bigger organization.. that uncollected receivables are hugely damaging.. and that they have a role to play.
The Expanded Role of Sales
Sales is the front-line of the company. They’re the company’s eyes and ears in customer relations. 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 Call
So, given the reality that Sales is the natural enemy of Credit & Collections, how does management elicit their cooperation?
A very direct and effective method is to pay their commissions based upon on collected sales. No Collection.. No Commission. Suddenly, collections become an important factor in their lives. They still won’t like it, but it will force a fundamental change to their mind-set. There’s nothing like hitting someone in the pocketbook to get their attention. 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 to Sales showing the ways in which uncollected receivables damage the company. Most sales people are not very sophisticated in such matters, and need to understand it. They need to comprehend that their prospects are tied to the overall health of the company.
Management’s Wake-Up Call
Many companies pay bonuses to managers based upon company performance. But bad debts never seem to figure into the formula. Time for a change. There should also be some clear and coherent rules as to when managers can intercede in the credit & collection process; and how.
Credit & Collections is a Whole-Company Concern
At the very least, Credit and Sales should be meeting periodically to discuss customer statuses. Problem-accounts can be discussed and strategies for joint action devised. Sales should also have the opportunity to discuss the possible increase of Credit Terms for good customers who represent increased sales opportunities. I would expect the President/CEO would be paying attention to these discussions, if not actually participating.
Why do most companies restrict Credit Personnel to working from their desks? A surprise strategic visit to a past-due customer by a Credit Rep. can be very effective in shaking loose money and/or achieving a payment plan. Face-to-face contact is much harder to dodge than a phone call; and psychologically powerful. The Credit Rep. can also visit a new customer to gather information on determining appropriate Credit Limits; or reviewing the limits on an existing one. Besides, face-to-face contact establishes relationships.
In sticky “big-bucks” situations, perhaps the Sales Manager, and/or the President/CEO should be paying the customer a visit. Ratcheting up the attention in this way can be extremely effective.
Know Thy Customers
Of course you need to understand your customers and adjust accordingly. For instance, if you sell materials to a customer who does contract work, he’s not likely to get paid for his work until his contract is complete. When he gets paid, you get paid. Your payment terms will mature, and then he’ll start stalling you. Unfortunately, most aren’t sophisticated enough to bring this situation to your attention up-front, so bad relations ensue. This is an opportunity to become proactive and work out realistic terms that enable your companies to work 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 the company with the resources they have at hand. For instance, years ago I developed an inventory-financing program that enabled new customers to acquire inventory, and existing customers to acquire inventory for expansion, on extended terms. The customer would be required to sign a lien against all their inventory until the debt was paid. The program was hugely 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 our bad debt losses to a pittance. Customers could use the inventory to open new stores, and have time to get them self-sufficient before the debt came due. It was a win-win for everyone, and of course made Sales very happy.. as well as building loyal customers.
There are other things that can be done, but this article should get the main point across and provide some food for thought. Credit & Collections should be made a whole-company concern, because the whole company is impacted.
Filed under: Business, Business Startup, Career & Life Development, Education, Entrepreneurship, Leadership, Uncategorized | Tagged: Bad Berpt, Business, career, Career Advancement, Career Development, cash flow, Collections, Credit, debt, Entrepreneur, Executives, Finance, Goals, Innovation, Investment, Management, Managers, Money, Opportunity, People, Planning, Policy, Profit, sales, Saving, Strategy, Wealth | Comments Off