Managing Customer Credit

CEOs are wrestling with managing customer credit. Many CEOs are having to work closely with their CFO or Controller to manage customer credit — to protect their own firm while not damaging relationships with key customers, and to ensure each piece of business is profitable.

What are top CEOs doing to handle this, and what should they be doing? We tap several experts for this extended episode.  (Click to listen)

Guest experts were:

Mitch Pisik, CEO and President of Breckwell Products, is a former CFO and has an enviable track record of improving business results. Mitch believes every CEO needs to be hands-on with managing customer credit. It’s a “basic blocking and tackling” aspect of business.

Without positive cash flow you do not have a viable business.
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Salespeople typically want more credit for each “great customer,” since it can help them close a sale. Mitch educates his salespeople: “If they pay us, they’re a great customer. If they don’t pay, they’ve effectively stolen from us.”

Credit can actually be a tool for growing the company — do it badly and you can go out of business, yet do it well and it can accelerate your growth.

When a good customer is growing and needs help managing that growth, you can extend them credit judiciously in ways that help them grow, reduce their need for immediate cash, and you can strengthen the relationship in the process.

When negotiating the customer terms, always bring up the credit terms — they never will.

Customers have long memories — if you work with them in a tough time, giving them credit when you might be justified in pulling back, or reducing it but by less than is justified by the situation, and they get through that period successfully, they can become very loyal because they remember that you gave them a break when they needed it.

Mitch has inherited customers who were leaned on heavily and not given credit, and they resented it.

Downturn as Opportunity

It’s during a downturn that the biggest shifts in market share take place. Yes you want to use credit to maintain the good relationships — but only the good ones. Extending credit to someone who ultimately doesn’t pay, is bad business. Walk this tightrope well, and you can get big returns.

So work closely with the right customers. A key is communication: How do we give credit, why, when do we change credit terms, and so on.

Mitch worked once at a place that had no written credit policy. So all the customers felt that every decision was arbitrary, and that bothered them. Plus, everything became a negotiation. Mitch had his people put the policies in writing and sharing them — and stick with it. Customers feel fairly treated and they respect you more.

Mitch had two over-arching rules that he used with customers who worked with him and his credit manager Nancy — don’t bounce a check, and don’t lie to Nancy. Everything else can get worked out.

Managing credit is really managing risk. As long as I don’t put my firm’s health at risk, I’m fine. Ask both “What is the worst that can happen?” and “How can I grow or shrink the credit line appropriately in response to their behavior?”

Accounting Pressure

It can be easy for an accountant to write off an old bill. Don’t leave it up to the accountants. Mitch had a policy of personally signing every write-off, both to make it harder to write thinks off, and because it sent the signal to the accountants that write-offs were going to be watched carefully. If you write off something you could have collected, it’s a pure deadweight loss of revenue, and it directly hits the bottom line.

Mitch would even ask, “If this were coming out of your own pocket, would you write it off, or would you try to collect it?”

Guidelines for Customer Credit

Communication – explain the basis on which you offer credit, and how it can change
References – actually call their references
Timeliness – Send out bills on time
Stay on Top – contact clients within two days of being late, and for larger amounts call them proactively two days before the due date
No Leeway – if they are late once, give them one warning that they will lose their credit line; if they bounce one check they immediately go on COD, Cash in Advance or Credit Card only

For a full set of guidelines see Ron Opher’s web site here:

Ron notes that half of his tops refer to collecting and maintaining data — such as getting an updated credit application periodically, and taking and filing photocopies of checks used for payment, and so on.

Lots of people drop the ball after a client is no longer new — the data is not refreshed, and because we didn’t keep the data updated we have a much harder time actually collecting the money.

Early Warnings

You should be looking at early signs of problems ahead. It’s more than the cash payments. Suppose someone’s buying suddenly drops off — they go from spending $1 million to $750,000. You need to adjust the terms down.

For years this wasn’t an issue, and now the past few years it’s very much an issue.

Suppose your customer who spends $1 million a month with you, and suddenly they only spend $333,000. This could be a sign that their customers have stopped buying. If I don’t notice, they could go three months not paying before they hit their (old, one-month) credit line.

Mitch sets the credit limit as 30 days’ terms and the amount would be 45 days running average of their historic orders. So they could order up to 50% more in the usual timeframe, more than enough to cover most short-term sales spikes that might occur when your customer has a good month. Using this formula, the credit rate adjusts automatically. Explain it to your customers up front.

CFO Magazine Scorecard

My guest Karlo Bustos shared that CFO Magazine has found that late payment is truly an across the board problem, not confined to any one industry — in 2009 the DSO (Days Sales Outstanding, a measure of late payment) had grown some 10% from 2008, and did so across all industries.

Over 13 years of tracking this number, this is the biggest deterioration they’ve ever seen.

And this means there are a lot of opportunities here for companies to benefit from. For example, being more transparent with clients, by being clearer internally so all relevant stakeholders know when I’m talking to Customer A about their credit situation.

CFO Magazine found there are some powerful tactics CFOs are using to better respond to this environment.

1. Reward salespeople for bringing in cash sales over credit sales, and pay when cash is received — this incents salespeople to negotiate sales, but also to negotiate terms in favor of collecting cash. Mitch has told salespeople who were pushing for looser credit, “How about I pay your commission based on when the payment comes in?” It focuses everyone on the importance of cash collections.

2. Take Credit Cards. Lots of CFOs wince at paying credit card fees. However, the wise CEO will balance the fee against the benefit of having the cash almost immediately, rather than in 45 or 60 days. So: move smaller purchases onto credit cards.

Power of an Honest “No”

Mitch has had clients tell him, a year later, that his decision to cut their credit back, helped save their business — it prevents them from spending themselves into a deeper hole, and it serves as a wake-up call to the client management in case they are in denial about their situation.

Listen to the whole episode here.

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