I Like Playing Texas Hold-Em. I Must Be A Credit Manager, by Guy Nishida

I Like Playing Texas Hold-Em.  I Must Be A Credit Manager
I Like Playing Texas Hold-Em. I Must Be A Credit Manager

I find many similarities between playing winning poker and being a successful Credit Manager.   I believe there are definitely transferable skills. Deciding whether or not to play a hand of cards is part gambling and part investing – – identical ingredients in deciding whether or not to extend credit.  Both require one to make decisions based on incomplete information.  You have not seen all the cards yet and you do not know the cards the other player holds.  In both cases you must make an educated guess and calculate the potential profit both in the short-term and the long-term against the risk.

You sometimes have hard information and sometimes you can glean facts and make suppositions based on your customer’s responses, attitude, posture – – his “tells.” “Tells” is poker jargon for spoken words as well as signs and mannerisms a player exhibits, intentionally to mislead or unconsciously because he is unaware his actions are reflexive of the stress level.  Criminal investigators seek “tells” to judge whether a suspect is lying or not.

During a poker hand, I look at my opponent’s eyes when he speaks.  Is he turning away, looking down, are his eyelids fluttering? Are veins in his neck pumping more visibly?  Is he relaxed or is his breathing shallow?  Is he feigning being relaxed?  Is he initiating what some players call self-soothing motions?  Often when a player is lying or nervous, he will rub his hands or face, wet his lips or make other movements to calm himself.  Is his delivery, inflection and tone identical when he is relating how his last golf outing went and later when affirming his ability to pay timely?  Are his actions consistent with the facts at hand?  Is he too defensive; too arrogant?  You may need to quickly shift gears and surprise a customer with a hardball question after some initial innocuous chit chat.  Does he suddenly become nervous and more deliberate in his response?

A credit manager should develop his own set of “tells” to measure the truth level of the conversations he holds with accounts.  In this regard, when experts encourage credit managers to visit customers on their home turf, it can be argued that you are not only looking for signs of distress or profitability by viewing the brick and mortar facility; you are seeking “tells” from the management, purchasing & accounting personnel thru their verbiage and mannerisms.  In poker you are not always simply playing your hand.  You are also playing the player.  In Credit you are not only viewing reports and references.  You are also measuring those responsible to pay you.

We often worry about whether our hand has “showdown value” and can beat a bluff or whether our opponent holds a stronger or weaker hand.  We wonder if the potential profit outweighs the possible value range of our opponent’s hand.  Instead of considering the real odds that our opponent has a hand that has us beat; we worry more that he does have this hand.  Because of this natural tendency, we often give up on our own strong cards.  In like manner, as Credit Managers we should focus as much on the strength of what we offer the customer and less on any perceived threat that the customer will go elsewhere or will cancel an order.  Assuming your company is offering a superior product at a competitive price, a fair credit limit and reasonable terms cannot be a deal-breaker.  When your customer has a history of tardy payments you should not consider your situation unique.  Most probably, he is paying your competitors in the same manner.  Any posturing to the contrary is not based on fact and is nothing more than a poker bluff.

As mentioned, you are playing against the opponent as much as you are calculating odds and ROI.  Because credit decisions are often equal parts art to science, we also judge the credit-worthiness of an account on the integrity and honesty of our contacts and not solely on the record of the company.  But you must judge them thru clear glasses.  Their credit rating cannot be increased simply because the salesman has gone golfing with the customer or because he attended their child’s birthday party.  Poker players often bet for a reason – – they want your money in the pot or they want you to release your hand because they are fearful you have them beat.  Likewise, sometimes a customer’s display of affluence and their liberal entertaining budget are innocent but other times they are investing time and money as a bluff to get the credit and cooperation they need but don’t deserve.

Like the betting pattern of an opponent in a poker game, you must ask yourself if the history and actions of the customer seeking credit are consistent with the story they created.  In the case of poker players, even when their betting pattern suggests they have a strong hand let it be known that they constantly lie.  Braggadocio is part of the game of poker.  Business customers often mimic this gaming tactic.  You must decide how often you can be wrong by “calling the bet” or “calling their bluff” and still keep your employer more profitable than he would have been had you not made the call.  And you must decide how often you will not extend credit thereby mucking” your hand – – possibly losing the sale because the risk is too great.  In poker we say that you must learn to “read” your opponent.

Poker players often make what is called a “feeler” bet.  They are attempting to gain insight into their opponent’s strength or weakness by their reaction to this bet.  It might be less than what they wish to bet but it is designed to be just enough to extract useful information.  In like manner Credit managers may not extend the full credit requested at the onset.  Credit managers often extend a token credit limit or make other compromises to accounts as a means of controlling the exposure while allowing the creditor to create a payment record with them.  The “feeler” credit limit is designed to measure the customer’s ability to manage their cash flow needs on an on-going basis.  It can reveal whether they have hot and cold cash months or a stable operation.  I won’t comment on the benefits of these tactics since they have been known to result in false “reads”.  In credit that might mean that the customer pays the initial small invoices in a timely manner but once they begin to place the large orders, you find the payments drag or cease.  From that standpoint, time is your ally in deciding whether more or less credit is justified as the relationship evolves.  You can control the size of the pot, the amount of your company’s exposure by the betting size or the amount of credit approved.  In poker this is called “pot control”.

Poker has a dictionary of unique terminology.  There are a number of concepts which are labeled “implied odds”, “pot odds”, value betting, “equity” among others and they all relate to measuring the intangible future benefits of remaining in the hand.  Poker players use the phrase “pick your spots”.  Loosely defined, it means that you play a hand when you are strong or your opponent is weak.  You continue when the sum total of conditions are favorable.  In today’s economy, Credit must pick and choose not only when to approve credit but for how much.  When we calculate whether or not to extend credit, we often use similar game theories/concepts in our decision-making process.  I think I speak for all Credit professionals when I state that salespersons are notorious for over-valuing a customer’s prospects for growing business/profits, the profit margin, the number of turns or potential for entrée into other aspects of their business.  Pragmatic poker players would be hard-pressed to over-value their hand and bet on completing the inside straight.  Likewise, Credit must not over-value the rosy outlook salespersons would use to calculate credit-worthiness.  The future benefits must bear some resemblance to fact.

In today’s problematic economic recovery, there is heightened pressure on salespersons to grow sales. At the same time, we are in a climate of new businesses that are undercapitalized and recovering businesses that have eaten thru cash reserves during the recession. Contrarian conditions yet credit is needed.  While the temptation is great, Credit must adhere to the poker concepts of measuring the benefits and the logic of carefully picking the spots where you will invest your company’s money.  For the younger generation of poker players who are perhaps less intuitive but more learned in poker theory, it is all about the numbers – – what we would call metrics.  We measure the risk-level utilizing tools and formulas internally-derived or generated in conjunction with outside credit services.  In this respect Credit is quickly becoming more science and less art.  But unlike poker players and credit card companies who are only working the percentages, Credit may lose sight of the importance of personal relationship-building.  We’ll leave the value of that objective for another day.

By the way, allow me to soothe the credit professional’s fears that he will extend too much credit or will lose a customer or sale because he gave too little credit. Know that poker players have a name for this.  It is called “variance”.  In poker lingo, this word explains the natural phenomenon of sometimes losing over the short or long-term even though you are playing your best.  You cannot completely control the outcome of any poker session nor any credit decision. A credit professional can only make the best decisions possible given the information gathered and intuition they have cultivated over years of experience.  Sometimes the results of your decision will not be gratifying to you or your company.   And the fallout will occur when you least expect it.  Although you cannot control variance, over time, your smart decisions will result in company profits and any uneven variance will balance.

There is a solid reason why businesses create a reserve for bad debt and why our world is replete with bankruptcy attorneys.  Bad things happen to bad customers as well as good-intentioned customers.  There is an old saw that says if you don’t have bad debt; you have likely been too strict on credit.  While you may negate bad debt, would your losses have been greater or less than the profitable business you left on the table?  You cannot always wait to be dealt a pair of aces to play a hand, the proverbial “pocket rockets”.  Rarely will you sign on the customer with perfect credit who has never paid anyone beyond terms.  What a successful poker player does and what you must do is to re-visit the decisions that haunt you and analyze them.  Did you misplay the hand; did you misread any signs or metrics?  Consult with your peers and learn from your mistakes.

In poker as in Credit, you can conduct yourself using many different styles and will necessarily mollify or heighten your basic personality traits.  Some poker players are passive, some aggressive, with many variations and combinations of all behavior patterns.  You’ll have to decide what style is most comfortable for you in the credit realm and what style works best given the myriad circumstances all credit professionals encounter.  Bear in mind that you must be capable of mixing your style to suit the circumstance.  There will be occasions where it is incumbent upon you to leave your comfort zone in your mental battles with the customer or prospect.  However, like poker players it is abundantly clear that being a passive credit professional will reap the least efficiency and least benefits. Be strong, and as they say in the poker world, “Get those cards in the air!”

Guy Nishida is the senior credit manager for E.T. Horn Company, a specialty ingredient and chemical distributor based in La Mirada, CA. He can be reached at 714.562.7679, or gnishida@ethorn.com