Credit Today Survey Proves Huge ROI to Industry Credit Group Members

CMA hosts the largest Industry Credit Group meetings in California and Nevada.

According to a recent article by CMA partner Credit Today, a survey of the participants in Industry Credit Groups throughout the United States (including some CMA members) explained that their overall investment of under $2,000 per year in an industry credit group returns over $250,000 in cost savings (yes; you read that correctly). That’s an investment that is hard to pass up. This cost savings is up from the last survey, which was conducted in 2012.

For those who don’t know, Industry Credit Groups are simply a group of companies that share customers in a common industry who meet either in person or virtually to share factual credit information about their common customers.

According to the article, it can be a daunting task to try to make sense of all the data out there about your customers. Membership in a credit industry groups is so valuable because it provides a mechanism for socializing the data surrounding your customers, giving insights and context to it. The data socialization aspects, along with greater efficiency, make Industry Credit Group membership compelling, even for those that may only share a minimal number of customers with the other group members.

According to the survey, a very large majority (81%) of credit organizations are members of credit industry groups. Additionally, most groups (86 percent) do not share payment data outside their group.

As a whole, the total yearly cost associated with industry credit group membership is rising, although the cost of credit reports is falling, but despite these rising costs, industry credit groups are viewed as providing more value across the board than information from the credit reporting agencies.

To read the entire article, click here (note: you must be a Credit Today subscriber to access).

To read more about the Industry Credit Groups that CMA offers, click here.


Automated Remittance Processing: A Checklist of Critical Issues

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Remittance processing and applying customer payments in a timely and accurate manner is a key part of the order-to-cash process -- and a great place to cut costs and improve your credit department's productivity.

As detailed in Credit Today’s Technology Buyer’s Guide, Version 3.0 on Remittance Processing, applying customer payments in a timely and accurate manner is a key part of the order-to-cash process — and a great place to cut costs and improve your credit department’s productivity.

If you key payments manually into an A/R software module, cash posting can take considerable time. In addition, due to a lack of information, some payments will be posted on account pending further research (or otherwise tagged to a suspense account or flagged for follow-up). Automated remittance processing systems will greatly reduce the time and labor required to post customer payments and also increase the number of postings that are cleared on the first pass.

First up, let’s consider what you should know to do a thorough upgrade of your remittance processing. Here’s a checklist of critical issues:


Remittance checklist by Credit Today

While EDI has been around for quite some time without fully delivering on its promise, primarily due to the complexities inherent in establishing each individual trading relationship, electronic payments are nonetheless growing rapidly. The use of ACH for commercial transactions is growing while the use of paper checks is declining (See “Credit Today Benchmarking Survey: The Latest Data on Cash Application & Remittance Processing“). Moreover, with the enactment of Check 21 legislation, allowing images of paper checks to be used as a substitute check in the clearing process, this trend will undoubtedly accelerate.

Even so, there remain ample opportunities to implement auto-cash solutions, which are usually associated with bank lockbox operations processing paper checks, to address the inefficiencies of manual remittance processing. Until trading partners are able to move to an entirely electronic payment and remittance processing system, the software used to process transactions must be able to address the multitude of exceptions that arise in conjunction with B2B transactions.

This again is the lesson learned with EDI. It is possible to build a system that works with a customer and a vendor, but chances are the vendor can’t fully migrate that system to another customer because of the nuances of their trading relationship and their own internal systems.

The beauty of auto-cash is that it teaches us how to handle high payment volumes from lots of customers. This knowledge will be extremely useful as companies add more electronic trading partners. Emerging advances in technology such as the use of XML data tags are providing the flexible structure necessary to easily build data bridges between trading partners. As remittance processing technologies improve, so will your ability to process transactions quickly.


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Credit Extension: Thinking About Your Customer as an Investment

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“As a credit manager, every time I get a credit application I look at it as if it were an investment in stocks,” says an innovative credit manager we spoke with. Credit extension is an investment by your company in somebody, he points out, so he looks at it as if the question were, “‘Would I put money into this?’ Because that’s exactly what we’re doing when we extend credit.”

“I believe a lot of it is intuitive. You look into all the variables. If the guy’s got personal debts of $50,000 a month and the only income he has is a yogurt shop, am I going to dump $50,000 worth of product into his place? That’s an example of the basic type of thing I look at, but the intuitive factor also goes beyond the basics. “When you hardly have anything come back on you (in terms of bad debts) as credit manager, you know you’re doing it right. So after a while you just take a look at each situation and go for it if it feels right. That’s how your receivables will stay low, if you look closely at all your accounts before the fact.

Now, it’s important to note that here at Credit Today, we’re big believers in data. But two points: One, you can’t always get data. And two, common sense is always a critical part of good credit decisions.

“If you make good investments in your customers, if you go with the right ones and nurture them along, it will work out–especially if you have the cooperation of Sales and you can tell Sales, ‘Don’t load the customer up. Don’t give the guy 50 pallets of product if he’s just opened. Don’t saddle him with that debt.’ It’s just common sense.

“You can’t learn common sense. But you can make a decision to commit to the job. When you’re in there, you’ve got to give 110 percent.”

Thanks to Credit Today’s “Tip of the Week.”


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How to Quantify Your Gut Reactions in Credit

This article originally appeared in Credit Today, the leading publication for the credit professional.
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All of us in credit will, at some time or another, find ourselves in a position where we need to ask probing questions of a potentially problematic customer. And some credit execs we know – when the exposure justifies it – listen in on analyst conference calls hosted by their public company customers.

Much time and effort is devoted to figuring out the right questions to ask, and then to analyzing the answers received. But what about another, perhaps more important question: Is the person telling the truth at all?

Most credit execs we know have amazingly sensitive and accurate internal B.S. detectors (pardon the French, but that’s what this is all about). For some reason, that skill seems to come with the territory. Or maybe it’s learned over the years. Of course, that’s the “gut feeling” that we all know about. And we can also attest that gut feelings are rarely wrong.

That said, thought, we’ve always been of the mind that being able to QUANTIFY your gut feelings is the best way to go.

Which brings us to a study released a couple of years ago by David F. Larcker, professor of accounting at Stanford University, entitled “Detecting Deceptive Discussions in Conference Calls,” which offers up some ways to “quantify your gut feelings.” This study specifically focuses on conference calls for public companies (in part because the data was public and could be analyzed), but the lessons-learned from this study are worth noting for ANY communication you’ll hear from a company executive.

  • Lying Tip 1 – For example, if, when listening to a company official, you hear phrases like “the team” and “the company” over “I” and “we,” that’s a linguistic cue that they could be lying. Larcker’s study found that executives who later revised their firm’s financial statements displayed distinct styles of speech in analyst calls, including language that “disassociates themselves from their subject matter.”
  • Lying Tip 2 – Less than truthful execs also tended to speak in generalities rather than specifics, and replaced common adjectives like “good” and “respectable” with effusive adjectives like “incredible.”

To conduct his study, Larcker’s team loaded 30,000 transcripts of public conference calls from 2003 to 2007 onto an electronic document, which they then analyzed for phrases psychologists and linguists usually associate with deception. Fourteen percent of the executives analyzed said something that raised a red flag.

One such transcript they looked at was a conference call with Erin Callan, the former Lehman Brothers CFO, just months before the firm’s collapse. In it, she used the word “great” 14 times, “strong” 24 times and “incredibly” eight times to describe the bank’s recent performance. She used the word “challenging” six times and “tough” only once.
Such an overly positive tone as Callan’s is a dead giveaway, the report noted, that a person is being less than candid.


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Credit Today Legal Case Study: The ‘Business Exception’ to the Fair Credit Reporting Act


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By Ann Morales Olazábal

Landers Lighting Co. is a large manufacturer and retailer of lighting products. In addition to its retail business, Landers does fairly sizable sales to local contractors, some of whom are on open credit terms. One of its longstanding business customers is Del Amo Electric, Inc. (DAE), a contractor in the business of installing and servicing lighting and other electrical fixtures. Frank Del Amo is DEA’s president, and he and his wife are the company’s sole shareholders.

DEA’s account with Landers has gotten in arrears recently, and the parties have informally discussed the possibility of Mr. and Mrs. Del Amo personally guarantying a note representing the $26,000 outstanding balance owed by DEA. Consequently, Landers’s credit manager is considering pulling a consumer credit report on the Del Amos “to ascertain their personal creditworthiness. Landers routinely obtains such credit reports on its retail customers by way of a contractual agreement with one of the three largest nationally recognized consumer credit information providers.

Under these circumstances, and given the business-oriented purpose of the credit report, may Landers legally obtain Mr. and Mrs. Del Amo’s consumer credit report?

Make your decision and read below for the answer!




The ‘Business Exception’ to the Fair Credit Reporting Act

By Ann Morales Olazábal

No. The Fair Credit Reporting Act is a consumer protection statute that requires credit reporting agencies to “adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information.” 15 U.S.C. Section 1681(b).

Most of the provisions of the FCRA regulate the behavior of credit reporting agencies. But, because consumer credit reporting agencies cannot prohibit illegal use of consumer credit information if credit report users are not bound by law to obtain consumer credit reports only for permissible purposes, the FCRA also extends to the conduct of parties who request credit information.
Generally speaking, credit reports can legally be requested by those considering (1) the extension or collection of consumer credit accounts, (2) employment of a consumer, (3) underwriting of insurance for a consumer, (4) a consumer’s entitlement to government benefits, or (5) any another “legitimate business need” in connection with a consumer business transaction.

This latter purpose for obtaining credit reports has long been referred to as the “business exception” to the FCRA. Six years ago, the FCRA was substantially amended as part of the Consumer Credit Reporting Reform Act of 1996. Since then, the precise language of the “business exception” provision of the FCRA has read as follows: . . . any consumer reporting agency may furnish a consumer report under the following circumstances . . . (3) To a person which it has reason to believe . . . (F) otherwise has a legitimate business need for the information — (i) in connection with a business transaction that is initiated by the consumer.

Exception in Question

While courts had previously held that businesses extending trade credit may have had a legitimate need for consumer credit information on sole shareholders, the 1996 amendment to the statute’s language threw the continuing validity of the FCRA business exception, as we once knew it, into question.

Subsequent Federal Trade Commission Staff Opinion letters interpreting the FCRA make it clear that where a credit application is made by a business entity, the statute does not provide a permissible purpose for a creditor to obtain a consumer report on a guarantor or co-signer for–or a principal, owner, or officer of–the commercial credit applicant. Thus, no consumer credit report should be obtained in circumstances similar to this case without the individual subject’s consent.

Both the entities and individuals who are involved in obtaining and using consumer credit information in circumstances other than those specifically outlined in and permitted by the FCRA can be held liable in private lawsuits brought by the subject(s) of the credit report. Therefore, both Landers and its credit manager, individually, could be sued and held legally liable for any resulting damage award, if a consumer credit report is obtained on the Del Amos, in connection with their offer to guaranty their business’s outstanding debt.

The best practice is always to obtain the consumer’s written consent before requesting a consumer report from a credit reporting agency. Another alternative may be to investigate the Del Amos’ business history and status by way of a commercial credit information agency, which would not be subject to the strictures of the FCRA.

Ann M. Olazábal, MBA, JD, formerly Credit Today’s Legal Editor, is Vice Dean, Undergraduate Business Education, Chair and Professor, Business Law at the University of Miami School of Business Administration.

Thanks to Credit Today’s library of Legal Case Studies


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Metrics For Job Security in Credit

This article originally appeared in Credit Today, the leading publication for the credit professional.
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In his book “Accounts Receivable Management Best Practices,” author John Salek, VP, Order to Cash for outsourcing giant Genpact, offers two important principles for what metrics you track and report to management.

  1. Report monthly and minimize the number of metrics routinely reported.
  2. Report on the basic dimensions of the receivable asset:
    – Risk. Age profile, risk profile by credit score, and bad debt expense.
    – Turnover. DSO actual versus best possible and cash collected.
    – Quality. Billing quality index, level of clutter.
    – Cost. Cost of accounts receivable management group as percent of revenue.
    – Service. Cycle time of disputes and credit application turnaround.

These are at once both complete and concise as a way to measure how both your receivables and your department are doing.

The first one of the five “basic dimensions of the receivable asset” above is something we see most credit managers report and often in great depth. The last four, not as much, but they are every bit as critical as the first one.

As we ponder these, we think the last two, in particular, are not just important for you and top management to track and work on. We are also certain they’re great metrics to track to ensure job security!

How do you stack up in all five of these?


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Credit’s Mission Statement

This article originally appeared in Credit Today, the leading publication for the credit professional.

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A truly effective credit department should operate with a central, driving mission statement, surrounded by the four specialized activities of credit approval, billing, collections, and monitoring. Before being able to set goals for these four activities, though, you need to create your mission statement–your “vision” of what you want the credit department to be and do. While most credit departments have forms, job descriptions, copies of letters, and memos, very few have formal written mission statements (visions) or the subsequent activities, policies and procedures that outline and reinforce these mission statements.

Before creating your mission statement, you first must define what credit is. Ask some credit managers, and you may get answers such as:

  • “The ability to pay”
  • “The willingness to pay”
  • “Faith and trust”

These are indeed factors in the credit approval process, but they do not define what credit is. Credit is “the selling of a product or service based on payment at a later date.”

Why even have a credit department? After all, it’s a cost center, isn’t it? It consumes resources in

  • Administration. These include the costs of credit checks, sending invoices, etc.
  • Accounts receivable. Sure, you can borrow from the banks based on the strength of your A/R to a point, but this only drives up your debt service cost.
  • The potential for bad debt loss.

In view of these costs, why even extend credit in the first place? Why not just demand full payment? Most credit managers respond to these questions with answers such as:

  • “My customers require it. They’re unable to pay all at one time.”
  • “I sell to customers who extend credit to their customers and therefore can’t pay us until they get paid.”
  • “Our competitors extend credit, so, in order to remain competitive, we must also extend credit.”

In one sense, these are slightly different answers, but in another sense, they are all saying the same thing. That is: The only reason to extend credit is to make a sale that would otherwise be lost. And, getting back to our earlier definition, credit is “the selling of a product or service based on payment at a later date.” The key word in this definition is “selling.”

So the true mission statement and vision of the successful credit department must be to use credit tools and activities to make sales that would otherwise be lost. This takes credit out of the “cost center” arena and places it squarely where it belongs–as a profit center.

Thanks to Credit Today’s Tip of the Week.


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Unsigned Check? Don’t Return It!

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“Whether a mistake is intentional or unintentional, we do not allow incorrect checks to tie up our cash flow,” says a Texas credit manager we know, who never returns a check to a customer. Instead she sends the following letter:



Thank you for your check #3410 dated January 28, 2018, in the amount of $585.38.

While processing this check through our accounts receivable department, we noticed that it was not signed.

However, since we are entitled to the proceeds of this item, we continued to process it with the notation, “Signature guaranteed by ____________c.” Would you please instruct your bank to process this check when it is received?

Thank you for your cooperation in this matter and past good business. Please let us serve you again soon.


“Everyone involved in the transaction–the customer, the customer’s bank, and our own bank–is informed of the error and how and why we corrected it,” she says. “The letter, along with a copy of the corrected check, is sent to the customer and to the paying bank. A copy of the letter is also attached to the corrected, endorsed check, which is then placed for deposit.

“For unsigned checks, our guarantee is typed on the signature line. For checks with varying amounts entered in the numerical and written sections, we correct the wrong amount with the notation Correct amount guaranteed to be (amount). Of course, I adapt the customer’s letter to fit each error,” she says.

“I’ve never had a customer or a bank question or return a check that is handled in this manner,” she concludes. “After all, we are only correcting and guaranteeing that to which we are entitled.”

Thanks to Credit Today’s Tip of the Week.

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Credit Today Collection Agency Survey: Collection Profession Leaders Weigh In on the Credit Profession, By David Schmidt

This article originally appeared in Credit Today, the leading publication for the credit professional.
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How Capable is the Typical Credit Executive?

In our recent survey of collection agency leaders, we asked for their take on how their clients – credit professionals – are doing. Now, our readers might wonder “why ask this question at all?” And the answer to that is easy. Collection agencies – while certainly dealing with “after-the-fact” results – are in a unique position to judge the quality of the work of their clients. They see the “leftovers” from all kinds of accounts receivable operations – the good and the bad; the tightly run operations and the sloppily run. They see it all. They see the files and what went into the decisions to extend credit. Overall, they see as much as anyone which gives them a unique perspective enabling them to assess both the quality of credit decisions as well as the collection capabilities. In addition, the respondents we reached out to are all experienced and have been through many ups and downs.

Overall, collection agencies view the credit executives that they work with as generally doing a good job. Fewer than 1 in 5 were viewed as being in a critical situation either due to overwhelming challenges (13 percent) or lack of skills and ineffective processes (5 percent). Even so, a similar number of credit pros were seen as competent, but having difficulty keeping up with the rate of change (18 percent). On the top end of the scale, just 1 in 10 credit execs were seen as on the top of their game, with over half doing a good job, but still facing room for improvement.

This differs a from the views expressed by other vendors (software and service companies) in the trade credit marketplace. In a survey completed last summer survey completed last summer (see “Vendors Speak Out on Credit Profession Today”), the vendors felt that slightly more than 1 in 4 credit pros were in a critical situation compared to the 1 in 5 ratio observed by the agencies. Also, 6 percent of the vendors felt that credit execs are at a disadvantage in comparison to AP automation, an observation none of the collection agencies made, and which might be an indication of the technological bias of the vendors. Otherwise, over two-thirds of the vendors felt credit pros were competent or doing a good job, but facing significant challenges — just slightly less than the agencies.

Despite these moderate differences of opinion, both collection agencies and other trade credit vendors see a lot of room for improvement in credit and collection management. The good news is, both the agencies and other vendors are a ready source of expertise for you to tap into to lift your own skills along with the efficiency of your organization to a higher level.

What Will Impact Credit Execs the Most?

We also asked the collection agencies to “Please tell us about the two or three issues or trends that you expect to have a significant impact on your clients’ collection practices. What advice do you have for business credit execs as they seek to respond or adjust to these issues or trends?”

Read on to learn about the unique perspectives of these collection agency leaders:

Peter Roth

Risks are Evolving
“Debtors are more savvy than ever, and they are looking for ways to cloud the process. Credit executives must be very thorough in their vetting of the collection agencies they use. Proper licensing, bonding and insurance is vital. As businesses look for ways to increase productivity and lower overhead, they sometimes see the credit and collection department as merely a minor player in their business process. When a business begins limiting resources and manpower in the credit and collection process, the credit executive must have a relationship with an agency that can provide the “full measure” of service. The collection agency must have the flexibility to assist the credit executive throughout the credit and collection process.”
– Peter Roth, President, CST Company

John Student

“Credit and credit card fraud — do your due diligence. Increase new customers — follow for payments sooner than usual. Slow pay getting slower — slow pay becomes no pay when not addressed.”
– John Student, CEO, Jonathan Neil and Associates

Jennifer Tirra-Daniels

“Geopolitical risks remain elevated around the world, underlining certain vulnerabilities that could negatively impact businesses. It is important to do your due diligence, work with reputable sources and federal agencies to help screen customers and mitigate risk. Credit applications are good. Some businesses sell on open terms. With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters for international sales.”

– Jennifer Tirra-Daniels, Director of Global Business Services, ABC-Amega, Incorporated

Bankruptcy and other Corporate Risks

“Bankruptcies will likely increase for the small and medium marginal businesses and my best advice would be to stick to credit limits as companies will try to obtain higher credit limits in the run up (90 -120 days) prior to filing bankruptcy. Companies that are turned down for credit will attempt to buy product COD/CIA but could write bad checks, so you should be aware of the bad check laws in any state that you do business in. I would suggest requiring payment by wire or cashier’s checks. Even with cashier’s checks, they can sometimes be fake or have payment stopped, so you should allow enough time for the banks to make a return of the item before shipping the product.”

– Bruce A. Jamrozy, President, Scott and Goldman

Mary Cowan

“Two issues involve large bankruptcies that affect all industries such as Westinghouse and large mergers by foreign entities. Credit professionals should have a clear understanding with their corporate office of what they can and cannot do on their own, and what has to have corporate approval. Do not get comfortable or lackadaisical in your collection practices.”

– Mary Cowan, President, NCS

Octávio Aronis

Stay Close to Your Customer
“1) Pay close attention to your clients’ financial situation as well as the country where your clients are located. 2) Get secured by using firm, enforceable terms with your customers. 3) Build contacts with good collection professionals in order to benefit from the relationships when needed.”

Octavio Aronis, Attorney, Aronis Advogados

“Get those personal guarantees signed in the beginning! Our clients sales departments rule the roost! Be wary of marginal credits in the beginning!”

– Bruce Seligman, President, Financial Recovery, Incorporated

Ed Burton

“The potential increase in domestic manufacturing and tax incentives will generate activity for this year and possibly into next year. With that in mind, gearing up for credit file review is imperative for keeping your customer base intact and reducing risk. Be sure your staff is retrained and ready for the continued growth. Too many companies are relying on too few truly experienced credit professionals. We are seeing many firms hire folks with no credit experience and relying on AI.”

– Edward Burton, President, CST Worldwide

Elliott Portman

“Clients aren’t prepared to chase their money and need to support the collection efforts by supplying documents and/or information when needed.”

– Elliot Portman, Attorney, Portman Law Group, P.C.

Budgets and Automation

“Budget constraints seem to reduce attendance in credit groups and limit ability to develop relationships with peers from competing companies. Often I hear new software programs are introduced without any contribution or input from the credit department or from the credit professionals in the frontline.”

– Lou Figueroa, Vice President Global Services, BARR Credit Services

Bob Gerstel

“Two key trends include budget cuts and the use of robotics. We believe that credit executives, if able, should be networking with their peers and customers to stay up on trends in the industry as well learn new tools that aid the profession.”

– Bob Gerstel, CEO, AG Adjustments


“1) FDCPA and TCPA add risk in commercial collections. It’s important to partner with vendors who have demonstrated compliance with both. 2) Business credit executives doing business internationally run the risk of corporate brand issues by using agencies not licensed nor bonded in the debtor’s country. Ask for documented compliance to avoid reputational risk. 3) Cost of recovery – review statistics of retaining “self-paying” customers who pay slightly outside terms and outsource all others to a white-label provider before sending to third-party. Manage your top 20% of revenue customers with white gloves and outsource the 80% of customers responsible for 20% of revenues.”

– Brad Lohner, Director, Priority Credit Recovery Incorporated

John Chotkowski

Staffing Issues

“Risks include:
1) Increased workload and not enough people to handle it. Utilize the tools available – collection agencies are one example.
2) In-house staff recently hired – untrained and unqualified. Develop and institute a concrete training process; and
3) Demand for easy credit. The growth spurt will make one forget the errors of the pre-2007 period. This is a huge mistake. There are no shortcuts to sustainable and healthy growth.”

– John Chotkowski, Vice President – General Collection Manager, Commercial Collection Corporation of New York

“Running with a lean staff may be among the biggest challenges credit and collection departments will face. With the possibility of a smaller, less experienced staff, the expertise of your collection agency may have a strong impact on the department’s performance.”

– Pete Roth, President, CST Co.

Terry Taylor

“Don’t overreact to anything, don’t rely exclusively on technology, keep away from the CFPB.”

– Jon Lunn, COO, Sko Brenner American

“Remain flexible.”

– David Ward, Delta Recovery Systems

“More education.”

– Terry Taylor, CEO, Dynamic Legal Recovery

In Conclusion

While this survey covered a lot of ground, we believe it provides credit execs with a unique framework for evaluating how your credit department stacks up with the recommendations of the collection agencies. If nothing else, we’ve listed 63 primary recommendations (and 41 second level recommendations) for improving collections and preparing for the next economic downturn. However, on top of this you get a peek at the shared perspectives of these 45 collection agencies.

If you don’t do a good job, they will end up cleaning up your mess. That can be good for an agency in the short term, but chances are you are not going to last long in your position and they will end up competing against other agencies for business with your replacement. The best collection agencies, therefore, take a longer view of their relationship with you and your company. They want to build a relationship that sees you and your companies succeed in terms of receivables performance. Moreover, they have both the expertise and capabilities to help you become a better credit manager. Good agencies offer much more than just third party collections, as this survey reveals.

Thanks to Credit Today’s Benchmarking.

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The Six Characteristics of the Perfect Business

By Rob Lawson, Editor, Credit Today

This article originally appeared in Credit Today, the leading publication for the credit professional.
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In most of my conversations with CreditRiskMonitor CEO Jerry Flum, we talk about markets and stocks. Jerry is an unabashed bear. He thinks the debt levels (measured as a percent of GDP, at all levels of government world-wide, as well as on individual levels) are at totally unsustainable levels. No living human has ever experienced what’s going on now, so no one has any idea what’s about to happen (hint: “watch out below!”).

At heart, Flum is a securities analyst and was something of a “boy wonder” of hedge funds long before they were common on Wall Street. He lectures at MIT and has close relationships with many of the top analysts on Wall Street. So we pay attention to his views.

In a recent conversation, the idea of “perfect company” came up.

He noted that in CreditRiskMonitor’s annual report, he cites 6 characteristics of the perfect business (which, we’ll forgive him for thinking he’s managing something fitting those characteristics). After checking out their list (which he says he wrote himself), we concur with his assessment and think it’s a list worth sharing:

  • Low price – Is the price of their product service low relative to its value? Is the price of the product or service low relative to its competitors?
  • Non-cyclical – Is the business immune to business cycle changes? (Think of an electric utility on one extreme vs. housing-related businesses on the other end of the spectrum).
  • Recurring revenue stream – Is the product or service something needed just one time (a TV for example), or do customers need to continue to purchase the product (razors or food, as examples)?
  • Profit multiplier – Does the business benefit from economies of scale as it gets larger (most software, cable TV or a railroad as examples)? Or do variable costs rise along with volume (anything labor-intensive, such as hospitals or hair salons, as examples)? Obviously, the latter is not as good as the former.
  • Self-financing – Does the business require outside financing (even if only occasionally) to stay afloat? (some auto dealerships and mortgage companies fit this description) If so, it’s dependent on the “kindness of others” and, from a long-term perspective, that always raises risks.
  • Management – as any credit pro will tell you, integrity is the first and most important thing to focus on here. But of course, competence is critical. You really do need both.

As a credit pro, you won’t go wrong if you keep these principles in mind when thinking about and analyzing your customers and your portfolio as a whole.

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Characteristics Needed For Success

This article originally appeared in Credit Today, the leading publication for the credit professional.
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By Peggy Morrow

Do you have what it takes to succeed in the ever-changing business environment? Here are a few behaviors and characteristics I have noticed in successful people. How do you rate?

1. You have the ability to juggle multiple assignments. It seems as if everyone has too much to do today. It is important to prioritize duties and negotiate with the people who assign you projects. Spend some time brushing up on your time management skills.

2. You keep learning and growing in your knowledge of new technologies. The better you are at using new technologies, the more successful you will be.

3. You demonstrate an ability to adapt to change. I feel we are experiencing a cataclysmic time of change and it is not going to go away or slow down. Develop more flexibility by exposing yourself to new interests and taking more risks. Organizations want people who can quickly adapt to the whirlwind of change going on in the world.

4. You push yourself out of your comfort zone by deliberately changing your routines. Make it a point to reach out to people who are different than you. Go to lunch with different people than the usual gang. Even something as simple as changing your normal route home can make you more adaptable to change. Learn something new. Get out of your rut.

5. You are an exceptional communicator. Polish your presentation skills, writing ability, and personal appearance. Remember these channels of communication–your words, tone of voice, body language, and image. Are they all sending the same message that you are a competent professional?

6. You get along with your co-workers. Surprise! Not everyone is easy to work with. Compliment your co-workers on their work, let your work habits be a model to others, and stop criticizing others.

How did you do? Pick one you think you could improve and start working on it.

Peggy Morrow, CSP, is a professional speaker, seminar leader and author of the recently-released book, “Customer Service: How To Do It Right!” To have her work with your group call (281) 280-8190 or email

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Senior Credit Exec Forum: Boss wants to change terms on a customer slated for bankruptcy– any suggestions?

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Question: My boss wants to change terms on a customer that is slated for bankruptcy in the next few months. Other than stopping shipment, any suggestions?


Credit Manager, Game Manufacturer


Credit card, C.O.D or prepayment are just few of the terms you can change the customer to.


Credit Manager; Industrial manufacturer

Put them on 100% pre-pay. There’s no guarantee that the courts won’t consider it preferential payment, meaning you’d eventually have to pay a small amount back, but that only happened to us once.

Credit & Collections Associate; Industrial manufacturer


Prepay should never be considered a “preference payment” since by definition, preference has to be a payment on antecedent debt. Prepay is your safest option.

If you don’t choose prepay/COD and instead you change terms to something shorter, you will set yourself up for a preference suit and you will lose your ordinary course defense. You would still have New Value defense if your boss insists on offering shorter terms.

Director-North America Credit Operations; Consumer products manufacturer


If you’re sure that bankruptcy is imminent, our policy is to change the account terms to prepay and only accept credit card or certified funds/wire transfers for new orders. This is not considered preference. Once the bankruptcy is received; as long as its not a Chapter 7, we suspend the current account. We will open a new account again on a prepay basis once we receive notification from the court that the bankruptcy workout is accepted. It remains prepay terms until we’re able to assess the performance of the company. DIP checks are accepted and we continue to sell as long as the comfort zone isn’t ruffled. If suspicion of a change to Chapter 7 is in the horizon we do take precautions on sizeable orders.

Credit Manager, Household products manufacturer


Further to the below point, if you offer Net 20 day terms (or less) and they file, you may be protected by the administrative claim provision 503(b)9 of the bankruptcy code (assuming it’s a Chapter 11 reorganization).
Each case is different, but Admin Claims receive a higher priority and are often paid 100% for any shipments made within 20 days of the bankruptcy filing.

– Manager, Credit & Receivables; Industrial manufacturer


You can also work out percentage payment at the time of the order and full payment before shipment.

Credit Manager; Manufacturer


Prepayment is the safest option as it wouldn’t be considered a preference payment.

Credit & Collections; Medical equipment maker


This article originally appeared in Credit Today, the leading publication for the credit professional.
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Do You Think (and Act) Like a Salesman When Visiting Customers?

A Rather Unusual Approach When Visiting Customers

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

On his visits to customer organizations, experienced international credit exec and now consultant Eddy Sumar (ERS Consulting Services) makes it a point to meet as many people as he can — everyone from the receptionist to the president.

“The receptionist, for example, will be my first contact anytime I call that customer,” he explains. “I want her to remember me, so she can facilitate my connection to the right person.”

Sumar also recommends spending time with everyone in the accounts payable process: the person who receives and processes the invoice, the person who signs the check, the person who authorizes release of the check, and so on. “You want to make all of them feel important,” he emphasizes.

As a former accounts payable person himself, Sumar understands what payables people experience. “I always remember wondering why salespeople visited the purchasing people, gave them gifts, and took them to lunch, but never paid attention to us,” he recalls. Sumar feels credit execs should makes it a point to give small gifts of introduction and appreciation to payables people, such as pens or key chains with your company logo, or to take them out to lunch. He has received a number of calls from these people thanking him for these gestures, he says.

More important than the appreciation he receives, however, are the results.

Three Big Benefits

Sumar has also found that personal visits can clear up misunderstandings that might have occurred over the phone. Once, for example, he had the opportunity to visit a customer whose payables person had been very difficult to deal with in the past. “When I visited, we seemed to hit it off almost immediately,” he reports. Following that, she did not default on even one payment, he related.

Another benefit: Many customers, when they are experiencing cash-flow problems, will be much more prone to initiate contact with you if you have taken the time to visit and discuss your problems before they become serious, allowing you to work out appropriate arrangements.

An unexpected benefit is also improved relationships with the sales department. “When salespeople see the value you can provide to an account, it often pays dividends,” he says. “Once, for example, a customer was so impressed with some of the things I was saying that he asked if I’d conduct a seminar for his employees. When the salesperson heard about this, it really strengthened our relationship.” Whether or not you take all the steps Sumar does, it always makes sense to think strategically about how to get the most out of your customer visits – and not to forget anyone involved in the payment process. They’re ALL important.

This article originally appeared in Credit Today, the leading publication for the credit professional.
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What to Say When Applicants Don’t Meet Your Credit Standards

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Telling a new customer that they can’t get the credit they’d like is one of the most difficult — and important — things that a credit exec is called upon to do.

“Unfortunately,” says Bruce Diamond, formerly a credit manager at Horizon, “I do not think there is ever a win in trying to explain to a customer with poor credit why you will not extend credit. The explanation leads to a dialog that just goes in circles, and from my experience, usually ends with no better result than if you stick with your mantra. Mine is: According to the credit information that is available, you do not currently qualify for an open line of credit.”

By keeping your explanation very straightforward and to the point, you reduce the chance of getting into a deteriorating debate with the applicant.

The prospective customer will respond that he gets credit from others. Be ready for that. The simple reply to give is this: everyone has their own standards and unfortunately you do not meet ours.

Then stop talking and try to say goodbye.

This article originally appeared in Credit Today, the leading publication for the credit professional.
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Boosting Credit Staff Effectiveness With Formal Performance Measurements

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

“It’s essential for every member of our associate family first to understand the limitations of our resources and then to be able to show how and why their function is important to the organization and how we can contribute to its profitability and growth,” declares David J. Carere, CCE, CPA, CIA, director of credit risk management for Rich Products Corp. (Buffalo, N.Y.). “Formal performance measurements help us demonstrate this. For example, we can show the total number of dollars in the receivables portfolio and the benefits the organization gets from timely collection of those accounts.”

Benefits of formal performance measures for associates include:

  • Clearly established expectations.
  • Alignment in pursuing goals and directions that are important.
  • Creation of a stable environment and a sense of certainty for the associates. “They know what is important and why,” explains Carere.

In setting targets, Carere realized that he needed to take several factors into account:

  • Targets must be consistent with and support the overall departmental mission and objectives.
  • Targets must be limited to a small number of important ones. “If you create too many, you not only water down the importance of each, but it makes it very confusing and overwhelming for the associates to deal with so many,” he explains.
  • Targets must be achievable. “If targets are not achievable, it only sets associates up for failure,” notes Credit Manager Suzanne Gastle.
  • Targets must be set for both individuals and teams. “There are some measures that are good for individuals and some that are good for a team,” explains Carere. “When individuals are recognized and rewarded for excellent personal performance, and a sense of team is fostered, you get the best of both worlds.”

Associate Input

While Carere and the department managers could have created the performance measures in a vacuum, they elected to encourage and utilize associate input. “Associates need to know that the measures are fair and objective, and they need to understand why they are important,” notes Carere. “For example, they need to understand how much money the organization saves when they are able to reduce DSO by one day.”

Carere began discussing the performance measurement initiative at monthly departmental breakfast meetings. He also began soliciting associate feedback at these meetings. One result of this feedback was a decision not to set individual DSO goals as he had initially planned to do.

“They helped me see that there was a real lack of comparability with this approach, as well as some other potential problems,” he explains. Taking this feedback into account, Carere eventually changed the DSO component to a team goal. He also implemented a feature that measures DSO performance from year to year, taking extenuating circumstances into account.

Departmental Measures

In the Rich Products’ organizational structure, the credit and collection department handles credit extension and collection efforts, and the accounts receivable department applies payments, reconciles accounts on a daily basis, and initiates deduction resolution.

Measurements/targets for Credit and Collections are:

Team Goals:

  • Current year DSO compared to prior year DSO (adjusting computation for changes and new unusual factors, such as differences in the customer base).
  • Bad debt as a percentage of credit sales (comparing current year’s percentage to prior year).

Individual Goals:

  • Percentage of accounts assigned to a credit associate that have been properly followed up on.
  • Achievement of mutually established targets for slow-aging categories.

Measurements/targets for Accounts Receivable are:

Team Goal: Timely application of customer receipts by specific deadlines throughout the week.

Individual Goal: Accuracy of receipt applications, measured by monthly self-reporting errors.

Communication, Rewards and Recognition

Providing feedback to associates on a regular basis is important to the success of an initiative like this. “Associates see their progress on a monthly and quarterly basis,” explains Carere. He posts performance numbers each month, and when associates meet with their managers to review quarterly performance objectives they discuss performance measurements, too.

How are associates rewarded for improvements in performance? While many executives might arbitrarily create a blanket reward system, Carere realized that each person is unique and is motivated by different things. For this reason, he arranged for the department managers to meet with each associate and find out what they wanted (e.g., time off, gifts, cash, etc.).

Despite the challenges associated with this process, Carere continues to focus on what he considers to be the most important motivator of all–recognition. “It doesn’t put food on the table,” he admits, “but people really like to hear how much they are appreciated.”

People or Technology? Where will the improvements come from in the department? Carere believes that the associates have always been doing a good job. As such, he does not expect them to work a great deal harder.

Where he expects improvements to originate is with technology. “For example, we’re implementing a document management system in the cash receipts area to improve performance there,” he says.

On the surface, it may seem that expecting technology to make the improvements runs counter to a performance measurement system. After all, if it is technology that is making the improvements, why reward the associates? In addition, what motivation do the associates have to improve if the opportunity to improve is in the hands of technology?

Carere explains that, while technology is the basis for the improvement, associate involvement with the technology is critical to success. “We arrange for them to participate in the selection of the technology,” he says. “In addition, the performance measurement system provides the motivation for them to embrace the technology and utilize it to its fullest.”

While it’s too early to see any specific improvements as a result of the system, Gastle expects some benefits soon: “I think the measurement system will eliminate a lot of the subjectivity we’ve had to deal with in the past.”

This article originally appeared in Credit Today, the leading publication for the credit professional.
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Nine Key Questions to Ask Yourself Before Putting Together an Improvement Plan

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

  1. How does the credit department fit into the bigger corporate picture?
  2. Why are customers calling you?
  3. What are your ideal service-level objectives?
  4. What does it cost to run your department for one hour?
  5. Are your employees happy?
  6. What does the future look like in 12 to 18 months?
  7. How does existing and new technology affect your department?
  8. What’s your disaster recovery plan?
  9. What are your three most important improvement initiatives?

This article originally appeared in Credit Today, the leading publication for the credit professional.
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Survey: Thirty Percent of Credit Departments Are Understaffed

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Thirty percent of today’s credit departments are understaffed, according to data from Credit Today’s soon-to-be-released Staff Benchmarking Survey. That is despite a significant ramping up of staff sizes in comparison with seven years ago, during the depths of the Great Recession.

Credit Today has been working diligently behind the scenes for some months now putting together its most comprehensive Staff Benchmarking Survey ever, and here’s the first unveiling of data from this significant industry survey.

Just How Short?

Of those departments that are understaffed, it would require, on average, 4.1 additional staffers to get them up to where they’d like to be. This is up markedly from 7 years ago, when the average shortfall was pegged at 1.7 staffers. Digging a little deeper, we find that consumer products manufacturing credit execs — in particular the larger firms — are facing the greatest staffing shortfall.

Understaffing Impact on DSO

The second big takeaway from this stat is a comparison of the DSO of those who are understaffed with those who are fully staffed. Companies whose credit departments are understaffed have a DSO 3.3 days higher than those describing themselves as adequately staffed.

We can’t say definitively whether the under-staffing is the cause of the higher DSO — certainly many variables come into play — but a staffing shortfall leaves credit departments unable to manage A/R as effectively as they could and DSO is certainly likely to suffer as a result.

Our belief has always been that at a well-run credit department, staffing is an investment that pays dividends and this statistic bears that out.

Top management — when considering the costs of staffing — ought certainly to also factor in the costs of DSO, as well as all the other profitability metrics associated with well-run receivables.

The following table breaks down the relationship by industry.

Stay tuned for the formal release of this survey — and much more in-depth data — soon!

This article originally appeared in Credit Today, the leading publication for the credit professional.
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Coping With the Chronic Complaining Customer

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Like it or not, handling complaints is part of the work that goes on in a credit department. And it’s a task that’s vital to your company’s success. How well you handle gripes from disgruntled customers can make the difference between getting paid and keeping the customers–or losing their business altogether.

You answer the phone, hear the voice on the other end of the line, and feel your blood pressure begin to rise. It’s one of your chronic complainers, credit customers that always have a problem. Much as you’d like to turn the call over to someone else, you’re the one of the firing line. How are you going to keep from losing your cool–and losing the customer? Here’s help.

  1. Listen actively. It’s important not to turn a deaf ear to the chronic complainer. To begin with, there is often a legitimate grievance of some kind. If you don’t take corrective steps, the problem could come back to haunt you.

    Key Point:
    Paraphrase the complainer’s main points. Say something like “Excuse me, but do I understand you to say that the package didn’t arrive, you’ve written twice and received no response, and that’s why you didn’t pay your bill?”

    Added point: Be sure to acknowledge the caller’s feelings. A big part of the chronic complainer’s problem is the sense of powerlessness that comes from feeling that nobody knows, cares, or even understands how he or she is suffering. Verbalizing what you take to be the customer’s emotional reaction to the situation helps to break the cycle of blame, ignore, blame-for-ignoring, etc.

  2. Establish the facts. A key feature of chronic complainers is their tendency to exaggerate facts and then to overgeneralize them. Thus, if a chronic complainer tried to call you three times during lunch hour, it becomes: “I tried calling you all day, but, as usual, you were trying to avoid me.”

    Key Point: Limit the scope of the complaint by asking questions that isolate the facts. Ask when, exactly, the customer’s unanswered calls were made, unanswered letters were written, or the problem was first noticed. Check your files or phone logs to verify these statements, and state your findings. Remember to keep the discussion on a factual level. Don’t comment on the implications of the facts because this will lead very naturally to responses like: “You see, I told you your department fouled up.”

  3. Resist the temptation to apologize. Although apologizing for some glitch may seem like the most natural thing in the world, it’s the wrong thing to do when you’re faced with an unhappy credit customer.
    Reason: Since the main thing the person is trying to do is fix blame–not solve problems–your apology will be seen as an open invitation for further blaming.

    Key Point: Ask problem-solving questions. For instance, ask “Would an extended warranty solve your problem?” or “Would a credit to your account be satisfactory?”

  4. Force the complainer to pose solutions. If the chronic complainer ignores your suggested solutions, evades the opportunity to help, and persists in trying to get you to admit what a poor company you work for, throw the ball back into the complainer’s court with this gambit:

    “I have to speak with someone else in 10 minutes. What sort of action plan can we work out in that time?”

    If the customer can’t come up with anything, he or she should at least recognize by this point that you alone can’t take all the blame for the impasse. And if the person does come up with a suggestion–no matter how impractical–you will have at least succeeded in getting him or her to stop complaining. Now your customer should be much more receptive to whatever reasonable compromises you come up with.

This article originally appeared in Credit Today, the leading publication for the credit professional.
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Can the bank seize these goods, even though the creditor and supplier agreed they were on consignment?

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

“We just heard you’re going to be selling off inventory from Claire’s Concrete, Inc.,” said Florence Sherman of FirstRate Concrete.

“That’s right,” replied Joe Kaplan of WestEnd Bank. “We had a security interest in all of Claire’s inventory.”

“Well, a lot of the raw materials Claire’s had belonged to us,” Sherman said. “We sent them materials on consignment. If they didn’t sell, we could take them back. Or, if we needed material manufactured into specific forms, we had Claire’s do the work, and we paid for it. So, we’ll be taking those materials back.”

“I see no indication that those materials belonged to you,” Kaplan replied.

“Look on the inventory sheets. Some of the materials have ‘FR’ in front of them. That means they belong to us.”

“But I can’t tell by looking in the warehouse which material is which,” Kaplan complained. “You didn’t post a sign. I didn’t find any UCC filing that identified your interest in any of these materials.”

“We didn’t have to file under the UCC,” Sherman snapped. “Claire’s knew which goods were which, and we had a firm understanding that our goods were to be kept separate from theirs.”

“Do you have this agreement in writing?” Kaplan inquired.

“No, it was an understanding,” Sherman stressed.

“Well, if you wanted to protect your interest in your raw materials, you should have identified them,” Kaplan repeated. “As a secured creditor, I must be able to come in and decide what goods belong to whom. The way things look, it appears everything belongs in Claire’s inventory. We’re going on with the sale.”

Can WestEnd Bank sell all the raw materials?

Yes they can.

Under the UCC, if goods are “delivered to a person for sale and such person maintains a place of business at which he deals in goods of the kind involved, under a name other than the name of the person making the delivery, then with respect to claims of creditors of the person conducting the business the goods are deemed to be on sale or return.”

Therefore, when Sherman shipped raw materials to Claire’s, they became part of Claire’s inventory since Claire’s dealt in the same goods as the type Sherman shipped.

Had Sherman wanted to protect her company’s interest, she should have either posted a sign near those specific raw materials to evidence her company’s interest in the goods or she should have filed a security interest. Because she did not take either step, the court found the bank had priority, and ruled that all of the raw materials belonged to the bank.

This article originally appeared in Credit Today, the leading publication for the credit professional.
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Talking Points For Speaking to Sales

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!


Communicating With Sales Regularly – Formally or Informally – is Always Important

Do you speak to your sales reps about what you’re doing in credit?

If you don’t, you should.

One of the most important roles of a credit exec is to constantly communicate credit’s role in your organization and how it relates to sales.

In a recent Credit Today listserv discussion, a member asked for suggestions on what she might include in an upcoming presentation to her company’s sales team. A number of great responses were received.

Lisa Childress, Corporate Credit Manager at Bison Building Materials, recommended covering the following topics with sales:

  1. How company profits are diminished the longer an invoice remains unpaid.
  2. What the cost of money (borrowing) is for your company. Also, are bank covenants you must adhere to?
  3. What their commission structures are. For example, are they on a “paid-when-paid” commission structure or do their commissions diminish as the account ages?
  4. How they and credit can maintain customer relations.
  5. Why you in credit absolutely recognize the importance of continued sales.

Cheryl, Fischer, CCP, credit manager at Barber Glass Industries, advised that the way you make your presentation with sales can make a big difference. “You have to communicate to them on their level, she wrote. “And that is definitely not a slight!” she clarified.

Visuals are Key

She’s learned over the years that sales reps in general are visual people and suggested very brief overhead computer visuals. “Graphs are always very helpful. Keep it short, sweet, and to the point with pictures and I don’t think you will find their eyes glazing over.”

And Jeff Borgens, CBA, Corporate Credit & QMS Manager at Aiphone Corporation, offered up some great suggestions as well.

First, he suggested, emphasize the principals of business partnership and mutual expectations. “It’s a partnership and we look for quality partners (customers) we can count on.”

Sales should also understand that credit will do what it says it will do and that “ongoing payments equal ongoing shipments.”

Second, make sure you “talk their language” when communicating with sales people. This means emphasizing customer needs and how you strive to meet those within the policies you’ve established. Talk to them about how you will help make the sale, rather than stop a sale if at all possible. And cover some of the tools you have to make that happen, such as guarantees, credit cards, letters of credit, or other security agreements. Make sure they know you’re not “sales prevention,” but are there to facilitate the sale, he wrote.

Finally, he suggested reminding sales that we need to be aware of the role our customers play with our product.

If you sell to someone else who is depending on delivery of “your” product, and that customer ends up on credit hold and hence can’t get the goods down thru the channel, it potentially puts your firm a bad light. “We need to be conscientious of those that buy thru the channel by making sure our business partners are reliable,” he wrote.
This article originally appeared in Credit Today, the leading publication for the credit professional.

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