What Went Wrong? – Michael Dennis, CBF

Learn From Mistakes

It is essential that we learn from our mistakes.  Bad debt losses are a cost of doing business, and every sale on open account terms carries some risk of nonpayment.  That said, when a bad debt loss occurs, you have two options:  (1) Lament your losses or (2) Learn from them.

I believe that there is at least one lesson to be learned from each bad debt loss.  An assessment about what went wrong can reveal any number of mistakes, but in my experience these mistakes generally fall into one of these categories:

  • The credit file was out of date and you were extending credit based incorrect or out-of-date information
  • The debtor was allowed to exceed the credit limit
  • Orders continued to release in spite of the fact the customer was past due
  • The collector’s efforts and follow up were in adequate
  • No financial analysis was done, or the analysis was inadequate, or it was done incorrectly
  • The problem account was not given to the credit department manager soon enough
  • The delinquent account was not placed for collection quickly enough

There are different solutions for each of the problems noted above, but the central theme is that bad debts can be reduced if collectors are give more structure, clearer directions,

Michael Dennis, MBA, CBF, LCM

more specific instructions and written guidance for managing delinquent accounts or for any active account considered to be a high risk.

That’s my opinion.  What’s yours?

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

5 Replies to “What Went Wrong? – Michael Dennis, CBF”

  1. There are a couple of other, less credit-centric reasons for write-offs that I’d like to share:

    1) Sales prevailed upon senior management to make a “business decision” to sell, in spite of recommended actions by Credit.

    2) “Friends of the Boss” who are immune to all collection actions, even if the department is allowed to initiate them. [Saw this a *lot* when I worked in the Deep South…]

    3) The customer’s customers, (or even just the one guy who’s 80% of their business), file bankruptcy en masse, forcing them to follow suit with little or no notice.

    Of course, everyone in Credit is familiar with the first two. Credit holds the line against losses, but too often Management works hard to find a workaround without taking into account the expertise and experience of the Credit personnel making the recommendations.

  2. It is vital that every mistake, every bad debt or write-off becomes a platform for learning. The mistake is the symptom to a cause. Credit professionals need to dig deep and find the root cause(s) to find the real cure.

  3. In a small business, we sometimes take chances knowing that the risks are high. My boss is fond of saying: No risk, No reward. He would also be the first to admit that when losses occur, he often finds it “hard to remember” making or approving the decision. This is the long way of saying that we have to use mistakes as a platform for learning as Eddy suggests, but in my opinion there needs to be a separate category for losses resulting from management decisions (or with my former employer) for management overrides of decisions relating to credit terms, credit holds, credit limits, credit insurance, collateral, etc.

  4. I agree with Karen. Not every loss is a mistake. Therefore, I am concerned that the original post may not have been clear that there is something to be learned from most but certainly not from all write offs. That’s my free advice Michael, and worth every penny you paid for it.

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