The role of the accounts receivable and credit departments are often thought of in terms of risk management and debt collections. Is the role of these departments changing? How are these departments reacting to the current economic slowdown?

Industrial Distribution asked four experts to give us their insight into these issues. Pat Merritt, credit manager of Alamo Iron Works; Sheri Dickhaut, credit manager of Applied Industrial Technologies; Abe WalkingBear Sanchez, president of the A/R Management Group, Inc.; and Dr. Alan Bates, chairman of the Profit Planning Group, participated in a roundtable discussion on these topics. What follows are excerpts from this discussion.

ID: What are the primary roles of the credit and accounts receivable departments?

Dickhaut: We have combined these departments into our trade credit department. We have outsourced and automated so we can increase our value-added services. In addition to the traditional credit and billing functions, we do a lot of root cause analysis when there are discrepancies in accounts.

Merritt: We have blended these departments, which makes perfect sense. We really are an extension of the sales force. What we try to do is facilitate sales and minimize the risk on accounts. Everyone wants to sell to 5A2 or 5A1 companies, but where the money is to be made is on marginal accounts.

Sanchez: Maybe we should call it the customer financing or customer/sales support center. You have to look at why we are incurring the cost, which is to get profitable sales that otherwise would be lost. It amazes me when you look at job descriptions. Seldom does it say you should make a profit.

Bates: Too often that is not the attitude, but I think it is the only attitude you can take.

ID: How are the roles of these departments changing?

Dickhaut: We have seen a transition from a transactional to an analytical department. What has enabled us to do that is technology. We spend more time on debit, credit, and deduction management, which is critical to keep the accounts clean. This allows a true picture of what is outstanding. We have to be flexible to handle various payment and remittance options since customers' systems are more sophisticated now.

These changes have given us the opportunity to create partnerships with the customers' A/P department to work out these issues.

Sanchez: Root cause analysis is one of the most important aspects of the credit function. Things will go wrong; it could be something to do with the process, lack of information, proof of delivery, or any number of things. If you have a method of feedback to identify the source, you can clean up the process. It allows you to monitor your entire business and make the company more profitable through increased efficiency.

ID: How should these departments interact with the sales force?

Sanchez: It depends on the strategy of the organization. If you are trying to grow the company by expanding your new customer base, you want the sales force out bringing in new customers. If the strategy, as the economy slows, is working on customer retention, then you would want the sales force involved. Most past dues are tied to something going wrong, and sales guys have a way of getting things fixed.

Merritt: We involve the sales force by providing them with information. We give them a heads up on those customers that are slow before there is a credit hold. It gives them an opportunity to work with the customer. We keep in contact and sometimes the salesman can provide information about their customer's situation. However, we try not to involve them in the collection process.

ID: Do you hold back commissions?

Merritt: Unfortunately, no.

Bates: In a recent study, half of the firms charge back the sales force for bad debts. Nobody knows whether they should or not.

Sanchez: My feeling is that they should be charged back, but based on the product value at time of sale. Dead inventory or unused capacity may have little value. That should be taken into account.

It comes down to whether the role of credit is a sales or an accounting function. If it's a sales function, how are you going to measure performance? The root of credit's inefficiency comes down to performance measurements.

You can talk all day about looking for profitable sales, working with customers to keep them buying rather than put them on C.O.D. and maximizing unused capacity, but management is holding credit departments responsible for days sales outstanding and percentage of bad debt. Those aren't sales functions; those are risk functions. If you measure performance on DSO and percentage of bad debt that is what you'll get, not increased sales and profitability.

ID: What effect does the recent economic slowdown have upon the role of credit and A/R?

Bates: What you think would happen, does. Customers drag out payments, but it's better to get a slow sale than no sale.

Merritt: We are certainly extending credit differently than in the past and looking at the customers a little differently.

One of the things I'm doing is trying to stay informed. Last year we were hit by the bankruptcies of some rather large customers that one wouldn't expect. Now, I use the Internet to research our customers to get as much information as possible.

Dickhaut: We have seen higher bad debt this year. We are taking a more proactive role and conducting more frequent reviews and analysis. We are doing more research on the industries and especially on our chronic past due accounts.

Sanchez: In this slow economy, even if they have the money, they hold back their payments. An unfortunate side effect is that companies get tighter on credit approval while not realizing their unused capacity is increasing. They still have as much as 50 percent of their costs tied to fixed expenses.

They need to start looking at unused capacity. Rather than tightening up on credit approval, they need to use their capacity, which isn't worth as much as it was before. They need to reach out to customers that they may not have wanted to do business with before and work hard to find ways to accommodate them while still remaining confident of payment.

ID: What factors affect how you treat a delinquent account?

Merritt: One of the things you are looking at is, "why aren't they paying?" What you are listening for is the reason behind why their payment pattern has changed. Depending upon their response, our reaction may be different. We try to be as gentle in our collection approach as long as we can.

Dickhaut: What it comes down to is keeping open communication. The most important thing is the relationship you have with the customer at all levels. If you have a strong partnership with that customer, this is just another opportunity to communicate with them.

Sanchez: The classifieds are filled with ads for credit A/R. They are looking for accounting degrees and software experience, but not communication skills. First and foremost, credit guys are communicators; with customers, sales reps, A/P people and attorneys. If you can't communicate well, you're at a disadvantage.

ID: How often do you visit your customers?

Merritt: I do some visits, but those are, unfortunately, to negotiate terms. I don't get the opportunity to go out with the sale folks just to say "hi" and see what our customers' business is really like. That's a good point. It is key that we understand our customer's business as well as we do our own.

Bates: In a lot of these companies, nobody goes out to see the customer. Everyone, including the warehouse staff, should visit. You find out a lot of things if you go and talk to them.

Sanchez: A business is a collection of people. Competition begins with the sale and continues through the entire process. If you don't believe you are competing against other credit guys, then you're kidding yourself.

Learn their names, use contact management and really build personal relationships with their A/P guys. They aren't going to warn you that the company is going under if you don't even know their name, but if you send a stuffed animal to their sick child and ask how their anniversary was you have a relationship with them.

ID: How can the distributor better protect itself from customers going bankrupt and incurring bad debt?

Merritt: There is no way you can bulletproof yourself, but you can look for the signs — late payments or changes in the payment patterns. Sometimes there are no signs. We try to be proactive about gathering information. We have met with the entire sales staff to really involve them in the process — to inform us if there has been downsizing, or if they lost a major contract, that is the kind of information we need.

Dickhaut: You can limit your exposure to some degree. We monitor changes in payment and purchasing habits. We look to industry trends for triggers and red lights. We also keep close relationships with the sales force and management teams to give and get information through their relationship with the customer. We can then identify at-risk accounts.

Sanchez: You can look for the trends and be aware of the industry segment your customer is in, but communication is critical. In one case, a company received a bankruptcy notice for a considerable debt. The sales guy came and said, "Well, he told me six months ago that things were really bad." The salesman had not said a word about it until then.

Bates: There are usually lots of subtle signs. Maybe they no longer sweep the parking lot, the janitorial staff is cut, they are slow to return phone calls. These occur long before there is a financial crisis. These are the things you need to know.

ID: How can the credit and A/R functions be made more efficient?

Dickhaut: One of the things is obviously the outsourcing of cash applications and taking advantage of new technologies. Also automating the frequent reporting to the sales force online. We can easily keep everyone updated and informed.

Meritt: One of the charges of the credit department is setting up new customers. Partly because of the Internet, people expect an instant response. They expect their account open within a few hours, while it used to take days. If we don't, they can purchase from someone else. We have streamlined the process.

With large initial orders, we still do a full credit review, but on small orders we can get the customer set up and deliver the product.

Sanchez: To be more efficient, define your goals. Goals for credit approval should be to expedite and maximze sales and minimize risks. I don't believe in credit apps. There are companies that don't do credit apps. I do a customer information form. Determine the product value, weigh it against the customer profile, then find a way to say yes. Following that, send out an account confirmation letter with the specific terms.

Bates: Percentage of bad debt usually runs about .1 or .2 percent. But what is the cost of losing a sale? Bad debt is a cost of doing business. Getting the sale and getting hit occasionally is better than not getting the sale at all.