A Sale Or A Loan
Lou Mollitiere is President (recently promoted) of Milliken and Michaels, Inc. and one of our credit policy experts. Milliken and Michaels, a national commercial debt recovery firm, recently became part of NCO. They help companies collect problem accounts receivables. During our visits, Lou and I talk about sound accounts receivable collection practices.Lou tells us that if you are going to extend credit, you must have a credit policy. Here are some of the major components he recommends.
Information
Provide your payment requirements and collect your prospect's credit information. Lou says the best time to get the info is at the point of sale, when everyone is happy. Here's Lou's short list:
• Trade reference (at least two). Call them!!!
• Who are your prospect's customers? If they are extending credit to a company you know is in trouble, that will likely affect your account. Armed with that information, you can make your decision accordingly.
• Terms of the account: Net 30, 2% discount if paid within 10 days. Due upon receipt. Whatever. Make sure the customer clearly understands your terms.
Account Level
Determine the level of credit for each customer. This is based on their size, credit worthiness, AND your working capital.
Diligent Follow-up
Call customers quickly when the account goes over the agreed payment terms. Lou says that after 90 days, the likelihood of collecting your account is 72%, down from 90% within the first 30 days.
Now, let's do some business.
You just made a sale. Congratulations. I know you're excited. Your small business needs the business, right?! Your dream is coming true. You've worked so hard to create a place where people want to come and buy your stuff.
Sorry about the cold water treatment, but I have a question: Did you get your money before your stuff went out the door? Retail operations selling to consumers usually do. But if your customers are businesses, they like to have an open account relationship and pay you (theoretically) within 30 days.
Remember, if you sell something and don't get the money at the point of sale, you haven't so much made a sale, as you have made a loan. That probably wouldn't be a bad thing to write down somewhere, and remind yourself and your employees to think about every time you make a sale on terms.
Lou reminds us that if you extend credit, and you have a 30% gross profit margin, that means you have to fund 70% of the price of your products until you get paid. Since most companies plan for a single digit net profit, I think Lou's number is more like 90%+.
You say, "But Jim, it's the big plant out in the industrial park. I've been working them hard to give me a some of their business. And anyway, they're a big outfit. That account is as good as gold. I'll get my money."
Fine. But did you ask them when?
Now exasperated with my annoying questions, you respond, "Jim, you don't ask a big company like that for credit information. The more questions you ask just sends them to my big competitor. I gave these guys six proposals before I got my first order."
I understand that the world knows your big new customer has plenty of money. But you might be surprised to learn that many of these "Big Dogs" have a payment policy that doesn't match your credit policy. Yeah, you'll get paid, but will you be in business when the check shows up?
When you provide an open account to a small customer, you set the terms and you tell them what they are. The big guys already know what you want. The discussion you want to have with them is not only about your credit policy, but also about their payment policy. Here's how it might sound:
"Ms. Williams, I really appreciate your business. As you know, we're a small business. In order to make sure we can serve you successfully, I base my working capital requirements on being paid within 30 days of receipt of invoice. Will we be able to count on that from your firm?"
Someone once told me that if you don't have any bad debt, your credit policy is probably too rigid. Larger firms budget for bad debt. Us small guys need to collect it all.
Write this on a rock... A poor credit policy can potentially hit you from two directions: small customers incrementally and insidiously chipping away at your cashflow; big customers sucking working capital out of your company like a vacuum cleaner. Either way, someone else has your cash. How do you feel about that?
