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No Bad Debt?

No Bad Debt?

A friend of mine called to ask if it was possible to have no bad debt losses. My flippant response was: “Sure, if you don’t take any risk.”

Another friend of mine was fired after three years with no bad debt losses. Why? Because management said he was not taking enough risk. It is easy to limit risk if you limit sales to marginal or high risk customers and applicants for open account credit terms. However, there is a cost associated with this benefit.

If your credit granting criteria are set too tightly, you will turn away profitable business because of the possibility of slow pay or non-payment by one or more of these high risk accounts.

I told my friend that the role and the goal of the credit department is not to eliminate credit risk. Instead, it is to manage risks so that losses are contained and controlled. Of course, this is a lot more work than simply taking no risks and incurring no losses.

Why do most companies take these risks? The answer is simple: The companies do so because they are convinced that over the long-term the additional profits that will be generated on the open account sales made to marginal or high risk accounts will more than offset the bad debt losses that will be taken.

Michael Dennis, MBA, CBF, LCM

Michael Dennis, MBA, CBF, LCM

Here is the bottom line: I do not know of any well-managed, growing, profitable company that does not require their credit department to manage risk rather than avoid them. In my opinion, any company that routinely reports no bad debt losses is too conservative and is leaving profits on the table instead of in their pockets where they belong.

That’s my opinion, what are your thoughts?

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.

4 Responses to “No Bad Debt Losses? – Michael Dennis, CBF”

  1. Jodi says:

    Love it! Thanks Michael.

  2. Eddy Sumar says:

    Michael, this is great.

    Credit management is not about no bad debt losses; it is about maximizing sales revenue, protecting the bottom-line, expediting cashflow, all this while mitigating the risks. Risk and return is the Siamese twin.

    As always, thanks for sharing your thoughts.

  3. Christine Alfonso says:

    I have been accused by my sales department of being “too” risk averse. As Eddy stated so well, my role is to find the right balance between risk and reward in order to protect – or enhance – the bottom line.

    Mike, perhaps you could address dealing with the perception that credit is a roadblock to sales growth in an upcoming commentary.

    Thanks!

  4. Jeff Butterfield says:

    The real key is knowing what the level of risk and bad debt loss is acceptable for your company. Another key, which you have mentioned before, is keeping management informed. That way they are aware of the accounts that you constantly have your hands on, due to risk.

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