Once, while away from his home village on a hunting trip a mighty warrior and great archer came upon a tree with a target painted on it and in the very center of the target was an arrow. He then spotted another target and another and in each there was an arrow in the center of the targets. “Whoever shot these arrows must be a great marksman, I must meet him,” thought the warrior.
Coming to a village he had never visited before the warrior asked all he met if they knew who the great marksman was, but no one seemed to know.
Finally the warrior spoke to the tribal elders and told them he would await the great marksman who had shot the arrows, at the edge of the forest.
Before long a little girl came by and she asked if he was the one who waited for the person who had shot the arrows. He said he was the one and she told him that it was she who had shot the arrows.
Knowing the years of practice that it took him to become a great archer, the warrior found it hard to believe that a little girl could have hit the center of every target. He asked, “Tell me, how did you manage to always hit the center of the targets?” “Well sir,” said the girl, “first I shot an arrow into a tree and then I paint the target around the arrow.”
The Profit Imperative ...
Business managers in a for-profit enterprise have a responsibility and obligation to ensure that the investment made and work done result in a positive financial return, in a profit.
But, to their competitive disadvantage, many for-profit business managers become focused on “what” they do and “how” they do what they do and they fail to question the “why.”
How the performance of a business function is measured tells you what those doing the measurement believe the “purpose” of that function is ... how it contributes to the Profit Imperative.
As things change and new knowledge is acquired the “why” changes and so must the “what” and “how”.
New performance measurement focused on the new understanding must then follow.
Credit Sales And A/R Management Are Misunderstood And Underutilized
First the importance of Credit Sales and A/R Management.
a. 95 percent or more of all B2B Sales involve payment at a later date ... credit terms are extended
b. the resulting A/R is one of the largest assets of a business and the greatest source of working capital (cash flow in)
c. the most profitable sales have yet to happen ... additional sales to retained customers
Next let’s consider the investment made and costs incurred by extending credit terms.
a. additional administrative expense involved with information gathering, customer evaluation and investigation, account origination, billing and the cost of contacting past due accounts
b. the time value of money involved with carrying A/R instead of having sold on cash & carry
c. the potential for non-payment, incurring a bad debt loss
So why make the investment? Why extend credit to customers? To create accounting work?
This question has been asked of thousands of business owners, CEOs and C-Level managers and following are their answers.
a. it’s required ... their customers require time after the product or service is provided to ensure that they got what they wanted and then to process the billing for payment
b. downline customers ... their customer need time to add value to the P/S and to make sales to their own customers before they can pay
c. competitors ... they have competitors who extend credit terms and if they didn’t at would put them at a competitive disadvantage
The ONLY reason any for-profit business should make the investment or create the costs that go with extending credit terms is in order to get profitable sales that would otherwise be lost.
Credit and A/R Management are a Sales Support function and not an accounting function.
The “why” must drive the what and the how ... otherwise the result is the same as painting targets around already shot arrows.