Trust – But Verify

The Value of Validating Your Customer & Supply Chain 

     The phrase “Trust-But Verify” comes from an old Russian proverb. Ironically in the 1980’s it was a favorite mantra of Ronald Reagan.  Wikipedia defines it as: a form of advice given which recommends that, while a source of information might be considered reliable, one should perform additional research to verify that such information is accurate, or trustworthy.

     Back when I was a kid and just got into the receivable management business, I had a boss that used this phrase all the time – and it drove me nuts! Today we have staff in two countries and thousands of clients and can now tell you unequivocally that he was right. Trust your customer but don’t be naïve. Trust the information on the new credit application but complete your due diligence check list anyways.

It’s All About Risk Management

     Trusting your customer and vendors is important in business. Validating that your customer and vendors are capable of fulfilling their obligations is of equal importance – maybe even more so.

 So How Do I Trust But Verify?

     There are many ways to satisfy yourself that your client and vendors are capable of doing good consistent business with you. If possible, we recommend visiting your customer or vendors place of business where practical. Have a look around.  Is the yard busy? Does the stock on the shelves look current? What’s happening at their loading dock? Do the employees look busy? Are the phones ringing?

All these indications are good signs of the level of activity that your client or vendor is operating as a going concern.

What If You Can’t Visit?

     If the physical location of your client or vendor makes it impractical to do a premise visit, we recommend retaining the services of a credit investigation firm that maintains the ability to obtain information not readily available. They should have access to corporate records, land titles or deed information. They should have access to construction project data. Additionally they ought to maintain the capability of performing reference checks on trade suppliers and obtaining a bank check. It should be simple to use an investigation firm. Look for a vendor that provides online access and is equally easy to call on the phone.

Surprises are for Birthday Parties – Not Your Business

     In negotiations, information is power. Access to reliable current data on your customer and supply chain will help you to plan and source alternate suppliers if appropriate. Don’t get caught with no place to sit when the music stops.

About the author:  Brad Lohner is a Director of the PCR Group of Companies which owns Priority Credit Recovery, a Canadian commercial collection agency and AccountAdjustment Bureau, Inc., an American commercial agency. The PCR Group also consists of Lien-Pro – Canada’s only Construction and Builders lien filing firm, and Credit Process Advisors – a strategic credit management and accounts receivable outsourcing firm. Priority Credit Recovery and Account Adjustment Bureau are authorized agents of Lumbermen’s Credit Group, a construction and mercantile credit bureau with access to data throughout North America. 

Staying Out of The Doghouse

In the receivable management world, we see the good, bad and ugly of both business and human relations. While we have touched on this topic before. we believe it is a good time for another review. Let's review the secret to good business.

When I was a kid, my dad had a saying whenever I got into trouble. He would say “What are you in the doghouse for this time?”  As we work through our clients disputed receivables and consult with prospective clients, my dad’s question still rings in my head. Approximately 40% of the cases assigned to our firm in the last 24 months have not been a result of the customers inability to pay, but rather a dispute with delivery, quality, supply chain disruption, unfulfilled promises...and the list goes on. In these situations our firm acts more as a mediator than professional debt collector.

There is a way for creditors and their customer to stay “stay out of the doghouse” and that is to not be afraid of tough conversations. Addressing tough issues head on without your pride or ego getting in the way is difficult. For some, admitting mistakes is tough. Creating an environment where staff and customers can fess up to mistakes can be equally challenging. Trusting your boss to not crucify you for making a mistake can be tough.

So What Do You Do?

A young Jewish man was once quoted by his friend John as saying “… the truth shall make you free.” As was true over 2000 years ago – the same is true today. Phone your supplier or customer and admit you screwed up. While the recipient may not like the message initially, they will come to respect you for admitting the mistake.

Taking this approach will accomplish two things:

1)      Position yourself as a person or company of integrity, and/or;

2)      Establishing yourself as someone who can be trusted during a difficult negotiation.

Managing Expectations

The best way to position yourself as a person or company of integrity is to talk about the “tough stuff” up front. As mentioned earlier, if everyone did this, 40% less receivables would end up in third-party collections and business relations may be stronger than ever! The best way to minimize these troubles is to do your due diligence on your vendor supply chain and customers at least once each year. Check their credit rating, review their warranty claims, review their track records.

If you need assistance with the due diligence process contact our business partner Credit Process Advisors Inc. to obtain information such as credit information, bank checks, builder lien information, law suits, and receivable monitoring.

What does a Credit Manager look for in a Collections Agency?

Credit Managers are looking for an agency that will get their invoices paid as quickly as possible for as little expense as possible.  Aside from that they might be looking for the following:

1.       Professional service – the Agency is still acting as an agent of the company

2.       The Agent is compliant with all the applicable laws and all legislative acts so as to not put the company in a precarious position of liability

3.       The Agent is licensed, bonded and insured

4.       The Agent has staff with industry specific collection experience – A Credit Manager would be much more comfortable that an account is dealt with properly knowing there is prior knowledge of the industry

5.       The Credit Manager needs to know how the Agency instructs their staff regarding collections – are they aggressive; do they only make 1 call a week and move on with or without an answer; do they only send demand letters and quit after there is no contact; do they play the “numbers game” or do they provide more of a service to their customer; do they treat a small account with the same effort as a large account

6.       The Agent has proper geographic coverage the company requires

7.       The fee is competitive as uncomplicated as possible – a sliding scale can be confusing and all a Credit Manager wants to know is, what the cost is at the end of the day, for submitting the file.   A Credit Manager would also want the ability to negotiate a “Special” fee for unusually large accounts that may be submitted

8.       Agent invoices and/or issues customer payments to the company on a regular basis.  The Credit Manager usually must code the collection costs back to the original Cost of Goods Sold (the original G/L) to where the original charge came from so it’s important to understand how the invoicing needs to be done.   The longer the Agency holds a customer’s payment, the longer the Credit Manger is without their money

9.       Ease of retrieving information on an account submitted for collections – how can they review the accounts submitted to the Agent.  What is optimal to some Credit Managers is to be able to review the work done online – they may also be able to enter new information they have received and need to give to the collector assigned.  It is difficult to work via phone sometimes due to time constraints and being on the phone – it can often be days before you can connect to each other and it might be too late dependant on the information

10.   How and when the Agency determines when to recommend placing and account with a Collection Agency – it is important to retain a Collection Agency that has the same mind set as you do.  An experienced Credit Manager will want to retain an Agent that will do the best thing for their customers and not for themselves.  The Credit Manager will want to be assured that the Agency is acting in their best interests and that includes the issuance of accounts

11.   How and when the Agency determines when to recommend placing an account into Legal status.  An Agent should not waste time and effort on collections when they know from researching the company there is no chance of payment forthcoming.  The Agent should identify this issue with the Creditor as soon as possible for the Creditor to make the decision of Legal or Write off

12.   Every Credit Manager might want something tailored to them when issuing an account.  Every Credit Manager will say they are busy BUT they still need to report to their superiors what is happening on an account.  It is sufficient at the initial placement of an account to the Agency, to indicate to their superiors that an account is “Placed for Collections” but after a while, a review needs to be done to decide whether the account is collectible or if the account is to be written off and a decision made regarding how any future recovery would be recorded.  The Company Policy should define this but it may not.  It is important for the Collections Agency to be upfront and timely with their findings regarding the account submitted for collections

a.       What is the likely hood of getting any payment if not the payment in full including any historical collections/legal’s and their outcomes

b.      If an account is uncollectible by Collection means, offer another possible avenue to collect the funds (Civil Claims or Court of Queen’s Bench) and the potential cost to your customer if they decide to go that route.  It can be the case that a Collections Agent has a legal person on staff/retainer to do Civil Claims which is less costly than the Company would pay having to hire their own lawyer.

c.       Decide how long the Agency keeps the account active and what happens if they close the account

                                                               i.      If an account is closed with the Agency, what shows on the customer’s credit bureau and how does that affect them

d.      How does the customer want to handle potential disputes the Agency uncovers

13.   Does the Agency belong to any Credit Associations?  Some Credit Managers may find this important and others may not be interested.  An affiliation with a Credit or any other Association indicates the Agent is either becoming or is well established in the community where they are located.  This can make a Credit Manager comfortable in knowing the Agent has some longevity and investment in the community and their actual existence

14.   Does the Agency have any references?   A Credit Manager is more apt to retain an Agency’s services if their industry peers have had success with them.

It is important to remember that a Credit Manager uses outside sources to make their lives easier, not more difficult.  They don’t want to have to work out a calculation at the beginning or the end of the issuance of a file to the Agent.