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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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!

This article originally appeared in Credit Today, the leading publication for the credit professional.
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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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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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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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Tips For Setting Your Automatic Write-off Threshold

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!

Do you have an automatic write-off threshold for small balances left outstanding on your A/R?

Some companies can research every short payment that comes their way, but for many, it’s simply not practical to do that. To keep up, you must set a minimum threshold, under which you automatically write off everything.

The two key variables to consider when setting this limit are:

  1. The cost to you of researching a short payment, and
  2. The likelihood of receiving payment.

As to number 1, the cost is simple. It’s the manpower required, per deduction, to research. You’ll want to take a couple of weeks and come up with an overall average amount per deduction. Let’s say you come up with 15 minutes per deduction. Then multiply this by the hourly cost of the staff involved.

But your cost is only one part of the analysis in this situation. If you find that traditionally your customers are right 85 percent of the time when taking a deduction (which is the typical average), then you will collect only 15 cents out of every dollar deducted.

At what level does your research become profitable? Do the math. You might find it’s higher than you realized. But two words of caution:

  1. don’t let anyone in your customer base know that you do this, and
  2. periodically research balances lower than your threshold so you can spot abuses.

This article originally appeared in Credit Today, the leading publication for the credit professional.
Click here for Special CMA Member $10 Trial!

Hurricane Impacted Credit, By Wayne Muller

Houston, much of Florida, all of Puerto Rico. This has been a hurricane season for the ages. What do you do when, practically overnight, normally prosperous and prompt-paying customers are, at least temporarily, ruined by wind and water? This company shows the way.

Kichler Lighting got lucky this year. Few customers were affected by the hurricanes and even those did not suffer much damage. But back in 2005 when Katrina ravaged New Orleans it was a different story entirely. Several customers lost all or major parts of their businesses to the catastrophic flooding. Kichler pitched in to help immediately.

“First we delayed the due dates on their invoices and worked with them as to what they thought would be an appropriate time frame,” explains David Feigenbaum, CCE, Director of Corporate Credit. No one asked for anything outlandish, so they were all given what they asked for and assured that Kichler would be there ready to help with new shipments whenever they needed them.

One customer had two locations, both in the city. One was totally devastated, to the point where he never reopened it. Consolidating the stores and getting them operational took months. “We just worked with him and told him nothing would be due until he was ready to go,” says Feigenbaum. “The big thing these folks have to go through is insurance claims. They take months.

“We worked with a few customers who were out of business for months, carrying the debt until such time as they were back in business. Then they needed to restock because everything in their inventories was ruined. We worked out special terms to allow them longer payouts on the new goods so that it didn’t come due until they had the chance to sell it and turn it into cash.”

This year Kichler sent out an email to the sales force immediately after the storms in Texas, Florida and Puerto Rico. “We stressed that we wanted to help and did not want to be part of the problem,” he says. “The email stated that if any customers needed assistance they could either call us directly or go through them. On those occasions where we’ve been asked, that’s what we’ve done.”

A few have asked for some time beyond normal terms because their computers are down, but the requests have been few and far between.

“If someone comes to us and says, ‘My inventory is all wet. I need to restock. I’ve got my insurance check but it won’t cover my loss in full’ we’ll work with them to spread it out and make it fit their cash flow,” he says. “The last thing we want to do is have them have a huge bill come due when their cash flow isn’t healthy. All that will do is make a bad situation worse.”

All of Kichler’s customers in New Orleans eventually recovered and are now back to good health. But the city’s population has shrunk considerably. A lot of people left and never came back.

The son of one of the company’s New Orleans customers moved to Houston after Katrina and is now a very significant customer there. “So we ended up with a new customer in a new place,” notes Feigenbaum. “And the really good news is that he’s in a part of Houston that didn’t get hit by Irma.”

Addendum: At press time, just as we were about press “send” on this week’s tip, we learned that Kichler received the following note of appreciation from a customer:

“I wanted to thank you guys for helping us out on our cash flow issues that we’re in due to Harvey. Thankfully all our employees and myself were extremely fortunate in the storm. We had a couple employees that had minor flooding, one with less than an inch and one with about 6” of water. Our office was untouched and the majority of our customers got through it with very little damage. The biggest issue at the moment is the slowdown of business while everyone is getting back on their feet. Our billing was cut in half but we’re hoping it will bounce back in October.

“Again, thank you for everything you guys do for us. It’s never been over looked or gone unappreciated. We will be catching everything up ASAP.”

Hard to buy that kind of goodwill!

Copyright Credit Today Online. Reprinted with permission.

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