Satan was the first sales guy and credit the oldest profession

by Abe WalkingBear Sanchez

There are those people in credit management who will tell you that Satan was the first salesman; that by creating a need or desire for a product/service, in Eve’s case an apple, he made the first sale.

There are people who will tell you that credit is the second oldest profession; that once a sale is made, someone had to collect on it because the sales guy didn’t get a check with the order.

Every business function must have a clearly stated and understood purpose for being. Its purpose must fit in with the overall strategy of the organization and must answer the question, why incur the costs that go with this business function?

The best sale is a win-win deal. I know people work that win-win thing into the ground, but it’s true. When buyer and seller walk away happy and with what they want, you have fertile ground for future business.

The purpose of the sales function is to obtain and retain profitable customers.

The only reason for any business to incur the costs that go with extending credit (additional administrative expense, cost of time and money, bad debt) is to get a profitable sale that would otherwise be lost. The credit function should seek ways of saying yes (while remaining confident of payment) to profitable sales, and to keep credit customers current on payments so they keep buying.

Sales and credit are both in the profitable sale business.

The profit system of credit and collection management
There are cash sales and credit sales. With cash sales, the only step left after taking the order is making a bank deposit. With credit sales, getting the order is only the beginning.  

“How would you like to pay?” asks the sales guy. If the customer answers, "on 30-, 60- or 90- day terms,” you’re in the credit business; so do things as right as possible the first time.

In most credit operations there are four major components:
• credit approval;
• billing;
• past due A/R management (not collections);
• internal communications (reports, feedback, performance measurements).

Credit approval
First, we need to establish a goal-driven guideline for credit approval, or a policy.

If you consider the costs (investment made) in getting to the point where a customer wants to buy, it follows that the goal of credit approval is to look for ways to accommodate profitable sales while remaining confident of payment (to maximize sales and minimize risks).

Credit approval begins with salespeople obtaining needed information about the customer (time in business, type of business, corporate status) and how the customer does business (purchase order system, accounts payable cut off date, necessary documentation, billing requirements, etc.) Good salespeople know or should know who the customer has done business with in the past (trade references).

Most companies do a good job of getting information on who the customer is, but less of a good job on finding out how the customer does business. Maybe it’s not understood that credit approval must factor in things like the customers’ A/P cycles in determining whether or not it’s a profitable sale.

In order for the billing department to do its job right the first time, it needs to know what constitutes complete billing to the customer. Do they require logs, tear sheets, proof of delivery as part of the bill?

The job of credit approval is to take the information obtained by sales and verify it.  

Billing
The goal of billing is to facilitate payment, to make it simple for customers to pay. The key to successful billing is the Lawrence Welk approach.

Welk had an amazing talent as a musician. He could take music from any country or culture, put it through a bubble machine and make it all sound the same. He’d repeat himself a lot. 

"Tank you, tank you” he’d say.

With apologies to Welk, I came up with the TACU approach to billing.

• Timely: The clock for payment doesn’t start until the bill is sent.
• Accurate: Any errors and the customer won’t pay and you’ve driven up your cost and the customer’s cost of doing business.
• Complete: According to the customer's way of doing things
• Understandable: If you can’t make sense of your own billing, what are the chances your customers will understand?

Past due A/R management (not collections)
A survey of more than 8,000 companies in a wide range of industries found that while, on average, close to 25 percent of A/R are past due (one day plus beyond terms) at any given time, fewer than 1 percent are ever written off as a loss.

The vast majority of past due customers are not trying to avoid payment. There are good reasons why they don’t pay within terms. Past due A/R management is not about enforcing payment, that is what collection agents and collection attorneys do.  Past due A/R management is all about completing the sale.

The goals include:
1) Keep credit customers current and buying; often the most profitable sale is the repeat.
2) Identify the small percentage of past due customers that represent a potential for loss early on and control bad debt.

Whether they know it or not, salespeople make the best collectors (A/R managers).

Internal communications
“Employees respect what managers inspect, not what they expect,” said  Don Rice, Ph.D., Texas A&M

Talk about how credit is a sales function until you’re blue in the face and then measure performance based on days sales outstanding (average turn time on A/R) and percent bad debt and you might as well have saved your breath. Measure for risk and what you’ll get is a credit function driven by risk management and not profitable sales.

One of, if not the greatest payback, from credit is the ability to track the source of things that have gone wrong. When something has gone wrong and credit is involved, customers won’t pay until the problem is fixed.

In fixing systems problems, you identify areas of opportunity for improvement so as not to create the same problem again. Keep improving how things are done and you’ll drive down costs (yours and the customers) and raise customer service levels. It’s like compound interest.

In sales consulting, a classic line used to move a customer to make a change goes like this:

"Insanity is doing the same thing and expecting a different result.”

If we drop a rubber ball 10,000 times, and each time it falls toward the center of the earth, we’re crazy to think that the next time it’s going to float away.

How does your company measure performance for its credit function? Do your sales and credit functions cooperate, or are they counterproductive?

Abe WalkingBear Sanchez is an international speaker/trainer on the subject of cash flow/sales enhancement and business knowledge organization and use. Founder and president of   www.armg-usa.com , Abe also sits on the board of www.BestBizways.com Inc.

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