“When your mother asks, 'Do you want a piece of advice?' it is a mere formality. It doesn't matter if you answer yes or no. You're going to get it anyway.” - Erma Bombeck
Following are some tips on how to use your Credit & A/R function more profitably in 2014.
Tip Number One:
Change from the use of a standard “Customer Credit Application” to a “Customer Information Form.”
The reason behind the use of a standard Customer Credit Application with standard T&Cs (terms and conditions) is to:
- Gather information on who the potential customer is and on how the customer does business for use in Credit Approval.
- To secure an Authorization to check the customer’s credit standing with Trade References and others.
- To secure a legally binding agreement on when payment is due and on specific T&Cs such as return policies ,restocking charges, PGs ( Personal Guaranty), judicial jurisdiction and the cost of enforcing payment (court costs and attorney’s fees or collection costs).
Customer Credit Applications can be either a pre-printed form that Sales gives to potential customers to fill out and return to the Credit Manager, or they can be on-line.
The missed opportunities and inefficiencies with the use of standard Credit Applications are:
- The time delay between the customer wanting to buy and the completion and submission of the Application to the Credit Manager.
- Standard T&Cs, as if one size fits all, that a customer may have a question on or objection to, such as a blanket PG.
A Customer Information Form is completed by Sales at the time the customer wishes to buy and much of the information on who the customer is and on how they do business will already be known. The only signature required with a Customer Information Form is the authorization needed to check the customer’s credit. T&Cs, including PGs, will be determined for each individual customer only after Credit has had time to investigate and evaluate the Customer and to factor in the Product Value (to seller) at Time of Sale.
Once a way is found to approve a profitable sale and the T&Cs are jointly determined with Sales, a customer specific Account Confirmation is presented to the customer by Sales for the customer’s signature.
Profitable sales that could have otherwise been made may be lost if Credit starts thinking that there is only one way to accommodate all customers, as if one size fits all.
Tip Number Two:
Change from the Collections of past due/delinquent past due accounts receivable (A/R) to the Completion of The Sale.
Collections is the enforcement of payment and is a relationship between a debtor and a creditor and the debtor is the beholding party.
The missed opportunity in approaching past due A/R Management with a negative enforcement mindset is that – as a rule – the vast majority of customers who have not paid within the agreed upon terms are not trying to avoid payment. Treat past due customers as debtors and the most profitable sales, additional sales to existing customers, may be lost.
“Profit in business comes from repeat customers,” - W. Edwards Deming
Instead of collections, start calling past due A/R Management the Completion of The Sale, which is a relationship between a customer and seller and the seller is the beholding party.
Use a Sales Approach in determining why invoices are still open after the expiration of the due date, and then and only then make a specific presentation on how the payment issue can be resolved. Yes you need to get paid, but you also need to keep your most profitable sales yet to happen from going elsewhere.
Rather than working on past due invoices based on how they appear on the A/R Aging alphabetically, start with the largest dollar accounts first and then work down from there.
Remember the 80/20 rule: 80% of the past due dollars will be found in 20% of the past due accounts. And very often the 20% are also the source of your largest future sales.
Ask your Sales Completion Specialist (SCS) to keep a daily past due contact report showing who they have contacted, the reason for non-payment and the solution agreed upon with the customer.
Review the contact report with the SCS at the end of each day and discuss what other resolutions may be possible. Do this and the number and quality of past due customer contacts will go up along with your cash flow and future sales to existing customers.
Tip Number Three:
Change from the use of DSO and Bad Debt % to measure the performance of your Credit & A/R management to the use of Profit Goals and Measurements.
There is a risk factor involved anytime you sell based on payment at a later date (credit terms), as measured by use of DSO and Bad Debt %, but that risk is but just a variable cost of doing business and should not overshadow the profit potential.
In Credit Approval, the goal should be to find a way via T&Cs to make a profitable sale happen. You should measure for the % of applied for dollars approved and if it’s less than 100% you need to know why.
In The Completion of The Sale the goal should be to keep customer paying and buying from you. You should be measuring for the % of Credit Customers current to 60 days past due and you need to know the why behind the % of Credit Customers current to 60 days past due. Is it a matter of disputes or is it challenge to be dealt with within a market segment?
Tip Number Four:
Evaluate who is involved in Credit Approval and in The Completion of the Sale.
The ability to communicate is critical in Credit Sales and A/R management. In Credit Approval they need the ability to balance the Customer Profile (who & how) , the Customer’s Past Performance and the Product Value at Time of Sales and to come up with a way of saying yes to a profitable sale that would otherwise be lost. In the Completion of the Sale they need to be able to establish and maintain good relationships with customers. Everything else being equal, customers keep buying from someone they like vs. someone they don’t like.
Remember that 95% or more of all B2B Sales involve credit terms, and that a credit customer’s goodwill once lost may never be recovered.
My best wishes to all for the holidays, and best wishes for a profitable 2014 and beyond.