Risk of Not Having a Credit Policy

Risk of Not Having a Credit Policy

     Today’s business owners and C-level financial executives are concentrating on two themes: Margin and Risk Mitigation. When properly managed, these key business metrics provide greater profitability to the shareholders of the business. Increased profitability enables business to re-invest profits and/or shareholders to spend more money, both of which are core fundamentals of a strong economy. 

     One area that is often under-valued, until it’s too late, is the investment in the development of trained credit staff, coupled with development of a credit policy that is unique to your business. Allowing your customers to purchase goods or services and pay for them later or overtime, gives you access to sales that you wouldn’t normally have. A sound credit policy and trained receivable management team, can greatly enhance both margin and reduce bad debt. If left unmanaged or strictly left to sales staff, it may expose your company to serious, even fatal consequences.

     Credit policy development must consider and involve every component of the business chassis: Business Development, Order Fulfillment, Information Technology, Finance, and Delivery. Omission of any one of these components can lead to a dysfunctional organization.

Business Development

There is no sense allowing your sales staff to invest valuable time and resources to pursue a potential customer only to learn that their prospect’s credit is so bad his own family wouldn’t lend him money. Yet this scenario is allowed to play out time and time again throughout the country. Credit policy must involve sales and marketing executives to help them determine where to best allocate their resources to obtain the best possible customers.

Order Fulfillment

Incorrect order fulfillment can create unnecessary delays in your company’s cash flow. Customers will use these mistakes as an excuse to hold payment for your product or service. Even worse, your staff may have to visit the work site several times to correct deficiencies, further eroding profitability. A credit policy would deal with these issues by ensuring the Terms and Conditions of your customer credit applications or agreement cover these potential issues through project finance draws and hold-backs.

Information Technology

Credit policy, as it relates to your I.T department, should consider everything from correct pricing, to creation of invoicing and messaging on your invoices. Simple things like the omission of your companies interest charged on past due invoices will preclude you from collecting interest later on. And of course, incorrect pricing just creates more excuses to delay payment until you can provide your customer with a corrected invoice.

Finance

Credit policy should touch upon many areas of your companies Finance department: Reminder letters, when to call customer, what to say to the customer, frequency of follow-up, early pay and cash discounts all impact margin and cash flow.

Delivery

Timely delivery of your product or service impacts everyone. If you’re a critical supplier, a late or damaged shipment may give rise to cash flow issues for both you and your customer. Credit policy that deals with back orders, short or damaged shipments and proofs of delivery all have negative consequences to your business.

While a well-constructed credit policy can’t cover every contingency, its development will get your whole team thinking about how risk management, profitability/margin, and how their own personal involvement; can significantly influence the fortunes of their employer and staffs continued employment.

Unauthorized Deductions or Short Pays

Unauthorized Deductions or Short Pays

There are numerous excuses why a customer short-pays an invoice. Some are legitimate such as defective product. Other deductions are not legitimate – taking discounts outside of the discount period is the most common example. Other reasons include:

-          Returns not accounted for;

-          Incorrect invoices, prices, discounts, and potential allowances

-          Customer having cash flow, sales, or financial problems

-          New staff at customer’s business, and

-          Quantity or weights of goods

The challenge businesses face when dealing with unauthorized deductions or short-pays is that many departments become involve – sales, credit, customer service, shipping-and that the responsibility for solving the problem, which usually ends up being your company’s problem, rests with no on in particular. Therefore, when a customer complains to a sales representative for instance, about an invoice, and the sales representative doesn’t tell anyone and credit department gets involved 60 days later, a relatively small problem may become much larger. Another common occurrence is a discount deducted from the payment. How much time and effort can be expended chasing $100.00? The customer, however, who is doing this purposefully, gets away with it once, which becomes habit-forming.

Through our affiliate, Credit Process Advisors (www.creditprocessadvisors.com), PCR maintains a staff of trained credit and contract professionals to help manage this process, therefore freeing your own staff to be much more productive. PCR will work with you to develop a policy for unauthorized deductions.

Benefits and Pitfalls of Legal Demand Letters

Benefits and Pitfalls of Legal Demand Letters

When you’re calling your slow-paying customer and receive yet another broken promise, some of the options to choose from include: 1) Sending a lawyers demand letter, or 2) sending a collection agency 10 Day Demand letter. So what happens next if the customer doesn’t respond? 

So let’s review your options

Lawyers Demand Letter

When retaining a law firm to send a legal demand letter, some firms will charge for this service and others will not. Receiving a demand letter from a law firm can be very intimidating and a good portion of your customers will respond favourably. In this instance, your cost to collect the account is minimal. So what happens if the customer doesn’t respond to the legal demand letter? Generally, the vast majority of law firms work on an hourly fee basis. And while your lawyer hopes you receive payment, the underlying goal is that your customer doesn’t respond, so the law firm can begin billing you their hourly fee for their services. When this happens, your total cost to collect the debt begin to add up and you will receive a bill from the firm whether the claim is collected or not.

 

Collection Agency 10 Day Demand

A 10 Day Demand Letter from a collection agency is substantially similar to that of a law firm. The idea is that if your claim is paid in full within the 10 day period, there is no fee to you. Should your customer only pay a portion or nothing at all, the collection agency will automatically begin recovery efforts on the balance remaining and their No Collection – No Charge collection fees would apply. Like law firms, agencies issue these demand letters to provide a valuable service to their good customers. However agencies also hope that the account rolls into collections as this is how they make money. The major difference between an agency 10 Day Demand letter and a lawyer’s demand letter becomes evident when your customer doesn’t pay. The collection agencies fees are only applicable when they collect. And the agency is very motivated to recover your funds, so they will make many calls to your customer and report your claim to the appropriate credit bureaus, whereas most law firms do not report to the credit bureaus. Collection firms don’t wait to receive instructions from you, or charge for reporting to you, they simply take whatever steps they deem necessary to negotiate with your customer for payment, making the collection process a little more simple.

So what’s the bottom line?

Generally a demand letter is very effective if the creditor sends it out early rather than waiting until it’s too late. The cost of a free legal demand letter and a free collection agency 10 day demand letter only becomes evident when the customer doesn’t pay.