Knowing your goals

Abe WalkingBear Sanchez believes that too many directors look at credit management in the wrong way. Sanchez, one of the world’s most original thinkers on credit management, believes it’s not so much about “enforcing payment” as “completing the sale”. He says: “The goals of credit management are to keep credit customers paying and buying. Remember that even during tough financial times, most past-due customers are not trying to avoid payment.” Even so, Sanchez acknowledges that an important part of credit management is identifying those customers who could be at risk of not paying.

 

Keeping customers happy

If a company aggravates customers by collecting money clumsily, they may not buy again. “There is a cost factor of between eight and 16 times more in getting a new customer versus keeping an old one,” warns Sanchez.

 

“The most profitable sale is the repeat sale and each repeat sale is ever-more profitable because it spreads the initial costs of marketing and sales over more transactions,” he adds.

 

Sanchez’s point is a timely reminder that credit management should be seen as part of the broader

way in which a company engages with its customers and encourages them to buy. In other words, it should be more about helping to make sales.

 

Steve Savva, chairman of the Association of Credit Professionals, also believes that the best credit

management begins with the sale, not with chasing the customer when a debt goes bad. It’s about trying to say “yes” to customers rather than “no”.

 

“When I was a credit manager, I encouraged the sales team to make it clear that the prices they were quoting were subject to 30-day payment terms,” he says. “If the customer wanted better prices and 60 days’ credit because they’d been offered it by an alternative supplier, we’d say that we’d consider it also—if they could show us evidence of the offer.

 

“If the customer was creditworthy and the deal was profitable, there was no reason why the credit manager shouldn’t say it was acceptable.”

 

Still, that kind of positive approach is going to make some directors nervous because it breaks the

conventional wisdom of having fixed payment terms. To calm their worries about more flexible credit arrangements, perhaps they should consider taking out credit insurance.

 

How credit insurance works

Many people don’t realise it, but trade credit insurance was set up by the UK Government after WW1 as an economic stimulus to offer businesses the confidence to take risks in order to expand.

“Since then credit insurers have provided far more than just payout if a debt goes bad,” says Tanya Giles, UK customer services manager at Atradius.

 

“Embraced fully, your trade credit insurer can become the strongest ally your business has, sharing critical information about your business partners, enabling you to make strategic trading decisions based on this detail, anywhere in the world,” says Giles.

 

Normally, insurance providers will look to insure trade credit to all your customers. But if you have blue-chip clients that are rock-solid payers, then it is possible to exclude them from the deal.

 

What you pay depends on a whole range of factors: the industry you’re in, the risk posed by your customers, the quality of your own credit management and a raft of other factors. You could pay anywhere between 0.1 and five per cent of the value of the invoices to insure, but you normally only insure 90 per cent of the value anyway. For that, you get access to a wide range of services.

 

“Trade credit insurance isn’t an alternative to good credit management practice, but part of it. Indeed, you’ll need to be able to show your insurer that you have well-organised systems and processes in place for the management of your credit, including pursuit of debt.” says Giles.

 

The important point about good credit management is that it’s not just about hectoring customers when things go wrong. “The best credit management is about talking to people and building relationships,” argues Philip King, director general at the Institute of Credit Management.

 

“Have constant conversations with customers, especially the bigger ones. But credit management is not a panacea. There will always be people who exploit their position—that’s life.”

 

 

Collecting Debts – Top Tips

Ten tips to help you tackle an overdue account

1 Know the customer. Regular late payers may need a tougher approach than a first-timer.

2 Plan the call. Is it a first request for payment or the latest in a long sequence of calls on the same overdue account?

3 Focus on objectives. What do you want to get out of the call?

4 Prepare for excuses. What reasons might they use not to pay? Have your answers ready.

5 Keep it business-like. Don’t allow the call to get personal or you’ll not be objective.

6 Call direct. It’s easier to get who you want on a direct line than through a switchboard.

7 Keep accurate records. Record promises made and by whom—especially important if you have to make a further call.

8 Insist on action. Don’t be fobbed off with vague promises of settlement. Agree firm dates and methods for payments.

9 Follow up. Make another call if the debtor doesn’t honour commitments.

10 Call in the professionals. Know when to seek help from a debt collection agency or solicitor.

 

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