I recently received an email from a credit manager friend of mine I will call Al. The email explained that Al’s employer just hired a new CFO. The CFO told Al that the company’s bad debt loss history was unacceptable and that something had to be done immediately. Al suggested the following:
1. Hold orders more frequently and more quickly on past due accounts
2. Lower credit limits on marginal credit risks
3. Refuse to grant open account terms to high risk applicants
4. Require collateral or security from high risk customers and applicants
5. Update credit files more frequently
6. Attend industry credit group meetings more often
The CFO responded that these ideas would result in fewer sales and higher administrative costs. She told Al to “think outside the box” and come up with better suggestions before their next meeting.
Al asked me for my suggestions. I responded that his new boss was setting a trap. Al was being given a task that he could not complete if for no other reason than this: In order to reduce credit risk, you have to limit credit lines as well as hold orders on past due accounts. This scenario reminds me of a story a friend of mine told me. He was a pitcher and his coach walked out to the mound during a game and told him: “Don’t throw anything this guy can hit, but whatever you do don’t walk the batter.
The truth is that everyone knows how to reduce credit risk, and the six suggestions listed above are a great start. We know and the CFO should know there is always a trade off when a company tries to reduce credit risk. Under similar circumstances, I have made this commitment to management: I will guarantee lower credit risk and fewer write offs if you can guarantee to take the heat over lost sales opportunities.
That’s my opinion on this issue. 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.