CREDIT APPROVAL
The two biggest problems with credit approval are not getting enough information on the
customer and not checking it out when you do get it.
Many companies have trouble getting a rating over the phone because they approach it
incorrectly. Don’t just call up a trade reference and say, “I would like a rating on this account.”
Make it a sales call. Get the person’s name and make it personal. Work to develop rapport.
Many trade references will tell you they don’t rate over the phone. Be persistent but personable.
Keep asking. Y~u’ll be surprised how many times you will get the rating.
If you get three trade references and the first two look good, forget about the third one. Don’t
delay the process. Remember, the credit application is a pending sale. Within the department,
make credit approval the #1 priority because it means there is a customer waiting to do business.
Get the following information from your trade references:
• Date open; how long they have been doing business with your potential customer
• Their high credit
/
• Their current balance
• Terms of sales
• How they would rate the account
Once you get this information, go back and look at the customer’s profile. Any discrepancies
you find will raise the risk. For example, suppose the company has been in business nine years,
yet all their trade references are only six months old. That tells you to dig deeper. Call the
customer back and ask for a reference older than six months.
Compare the high credit and current balances among the different trade references. If they are
all the same, it could be good or bad news. Depending on the business, it could mean the
customer is at their limit with all their suppliers. It could also mean your competition is holding
back the customer’s growth. They may need a larger line of credit. It could be an opportunity
to take business away from competitors.
Selling to existing customers is the most profitable part of any business. When credit comes in,
look to see if you are selling as much as you can by extending as much credit as you can (while
you remain confident of payment).
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Sanchez, Page 5 of 12
I
CREDIT ApPROVAL
The two biggest problems with credit approval are not getting enough information on the
customer and not checking it out when you do get it.
Many companies have trouble getting a rating over the phone because they approach it
incorrectly. Don’t just call up a trade reference and say, “I would like a rating on this account.”
Make it a sales call. Get the person’s name and make it personal. Work to develop rapport.
Many trade references will tell you they don’t rate over the phone. Be persistent but personable.
Keep asking. You’Il be surprised how many times you will get the rating.
If you get three trade references and the first two look good, forget about the third one. Don’t
delay the process. Remember, the credit application is a pending sale. Within the department,
make credit approval the #1 priority because it means there is a customer waiting to do business.
Get the following information from your trade references:
• Date open; how long they have been doing business with your potential customer
• Their high credit
/
• Their current balance
• Terms of sales
• How they would rate the account
Once you get this information, go back and look at the customer’s profile. Any discrepancies
you find will raise the risk. For example, suppose the company has been in business nine years,
yet all their trade references are only six months old. That tells you to dig deeper. Call the
customer back and ask for a reference older than six months.
Compare the high credit and current balances among the different trade references. If they are
all the same, it could be good or bad news. Depending on the business, it could mean the
customer is at their limit with all their suppliers. It could also mean your competition is holding
back the customer’s growth. They may need a larger line of credit. It could be an opportunity
to take business away from competitors.
Selling to existing customers is the most profitable part of any business. When credit comes in,
look to see if you are selling as much as you can by extending as much credit as you can (while
you remain confident of payment).
TEC
Sanchez, Page 5 of 12
Examine the terms of sales. If your industry is normally net 30 days and one of the references ~.
has the customer on 10 days, it indicates a high risk. Ratings can be very ambiguous, but you
still need them to compare against the profile and all the other information you get.
BILLING CUSTOMERS
Billing begins with credit approval. If you don’t get the profile information, the chances of
making mistakes on the bill or sending it to the wrong place are greatly increased. You want
the customer’s billing department to be able to pay the bill the first time. If you leave off
purchase orders or contract numbers, you can create a monster. Errors cost you money. They
destroy customer good will and lose sales.
Ask the questions up front. Are their sales tax exempt? (If so, make sure you get a copy of
the certificate.) Do they have special billing requirements? Who should receive the invoice?
Who should you contact if there is a problem?
Get your invoice out promptly and give the customer all the information they need. If you
delay, customers forget what you have done for them. They may be waiting on your invoice
to bill their customers.
/
Put the terms of sales on the invoice and statement, but make sure they are the same as on the
credit application and/or account letter. When assessing a late charge, it’s easier and cheaper
to put it on a statement instead of an invoice.
COLLECTIONS
The first decision in collections is who should do it. That depends on your strategy. If your
strategy is to grow the business and get new accounts, your salespeople should be out knocking
on doors, not trying to collect money. On the other hand, if you don’t want new business and
want to focus on servicing existing accounts, salespeople are best for making the collections.
If you’re grooming someone for management, put them in collections for a while. They will
gain a world of experience in every aspect of the business.
Every delinquent customer falls into one of three categories. Each has a specific profile.
TYPE ONE – SLOW PAY: Typically, this will be your largest percentage of delinquent
customers. These are good, stable customers. They are going to be around a while and have
the ability to pay. They can cut you a check and it will clear. You don’t want to lose them. ~
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If it’s a large company, they’re paying slow because they’re practicing cash management. They
are using you as a term of short-term financing.
Smaller companies and government agencies tend to be more disorganized. They are lazy and/or
indifferent about paying on time. People that say “The check is in the mail ” are slow pay
customers.
TYPE Two – PROBLEMS: These customers either have systems or financial problems. Systems
problems are the most common. If anything can go wrong, it will go wrong. Checks are often
misapplied to another account, mail gets lost; anything can happen. When there is a system
problem, you have to track it down and fix it, the sooner the better. If the problem builds over
a long time, it takes a lot of reconciliation to keep the customer.
Financial problems occur when the customer doesn’t have the money. However, they normally
don’t come right out and tell you they don’t have it. Instead, they tell you why they don’t have
it. When you hear things like: “I lost my job” or “It’s a slow time of the year for us” or “Our
customers aren’t paying,” you know you’re dealing with a financial problem.
Financial problems can be temporary or serious. Temporary problems are short-term. The
customer doesn’t have the money today but they will have it next week. They are generally
cooperative. Work with them and be willing to cut them some slack.
Be wary of putting customers on COD. Unless you are their sole provider, all you will do is
drive them to the competition. And they will put your current payables on the bottom of their
pile.
The serious financial problem is long-term. If the terms are net 30 and the customer hasn’t paid
by 60 days and can’t pay, you have a long-term problem. If they don’t have any idea when they
will be able to pay you, they are a serious financial problem. This is a major red flag. This
group runs a 90 risk of failure. Chances are good you will take a hit. Therefore, identify
these customers as soon as possible. Don’t wait until you have 120 days worth of billing to find
out they are filing for bankruptcy.
Many times it is the salesperson’s responsibility to pass on information when the client is in
trouble. If the salesperson is on commission, consider putting a charge-back of your loss to
their commission. If the customer doesn’t pay, why should the salesperson get paid? They have
to keep the lines of communication open.
TYPE THREE – A VOIDANCE: These are customers who deliberately try to avoid payment. They
enjoy beating others out of their money. They are uncooperative and won’t return phone calls.
They lie and tell you it is a systems problem. They break arrangements and skip out on you.
Fortunately, this is the smallest percentage of unpaid collectables, usually less than 1 of total
receivables. Yet, most companies have an “enforcement of payment” mindset. They spend way
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,....–—––——_ .. __ ..
too much time and energy on this very small category. Identify this group as early as possible
and cut them off to limit your loss. Then put them in the hands of a third-party collections
professional.
FOUR-STEP SALES ApPROACH
1. Contact the decision maker
2. Determine the need or desire
3. Make the presentation based on the need or desire
4. Close and follow up
This basic sales process also works in collections. The only difference is you need to know
what type of customer you’re dealing with so you can customize your presentation accordingly.
The good thing about collectables is they are a captive audience. They owe you money so they
can’t pretend they aren’t interested.
In collections, the decision maker is the person who can tell you two things: when you will get
paid and why. The person who cuts the check often doesn’t make the decision. To find out
why payment is delayed, get to the person who decides when payment goes out. If you don’t
know why, you can’t tell what type of collectable they are.
The best way to start out is: “Hello. I‘m Joe Jones from ABC Company. Our records show
that invoice #111 dated January 1st is still open. Can you help me with this matter?” Then be
quiet and listen. The customer will start giving you a reason for non-payment.
Use this opportunity to make sure your information is up to date. This also allows you to see
how cooperative the customer is. If they withhold information, chances are they are a type three
customer. Once you decide what type of customer you’re dealing with, make your presentation
based on that type.
For type one, call early, be consistent, and be friendly. Your presentation should focus on
selling the customer on paying you closer to the agreed upon terms of sale. Become the squeaky
wheel. If you don’t continually follow up, you get bumped down the payment list. Call early
and often and sell on the benefits of paying earlier. If you can’t convert them to paying early,
bump up your prices so you can maintain margins.
For type two systems customers, be a detective. Find out all the facts and work to get things
fixed. For type two financial temporary customers, express a willingness to work with them.
Sell them on the benefits of continuing to buy from you.
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Sanchez, Page 8 of 12
For type two customers, cut them off at once. Put them on COD only. They may have been
your best customer, but they can wipe out a lot of sales by going bankrupt. Empathize with
their position but be firm that you can’t extend further credit. Then get on their side of the table
and begin exploring ways to improve your position.
At this point, you are in a race with every other creditor. Shift into recovery mode and look
for ways to improve your position. Some ways to improve your position are:
• Conversion to promissory note with a personal guarantee
• Return of product
• Conversion to promissory note with additional security
Look for ways to barter and trade. Anything is better than a bankruptcy note. Get the debt off
your receivables aging and put it on note receivables. Keep your receivables aging clean for two
reasons. The bank won’t lend you any money on receivables over 60 days. They also see it
as a sign of mismanagement and will charge you a higher rate for any money they lend you.
For type three customers, immediately put them on COD. Catch them early and limit your loss.
Then send them to a collections agency or attorney. If it is a large dollar amount and the
company has assets, give it to an attorney on a contingency basis. If it’s a small dollar amount,
give it to a collections agency.
/
ORGANIZING COLLECTIONS
As a rule, the second part of the alphabet is more delinquent than the first. Human nature is
to start at the beginning of the alphabet and work your way through. This can lead to a situation
where you are calling an “A” who owes you $40 and never get around to calling a “Z” who
owes you thousands of dollars.
Throw out the alphabetical approach and call according to the dollar amount. Twenty percent
of your delinquent AIR’s represent 80 of the total dollars. Go for the big bucks first and work
your way down to the smaller amounts.
People also tend to start working with the 120’s (days), then go to the 90’s and 60’s. That’s the
wrong approach. Start right out of the gate. Call people 4-5 days after the due date. If it’s a
systems problem or a type two financial serious, you want to know about it as early as possible.
Problems are much easier to fix at this stage. You get the biggest bang for your buck contacting
customers right out of the gate.
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Instead of keeping your notes with the aging reports, set up a separate card system. Sanchez
recommends the “double alpha” follow–up system. Start with two trays to keep the cards in
alphabetical order. One tray is for actives; the other is for inactives. Each contact card has the
customer name and profile on the front and notes on the back to document all customer contact.
The third part of the system is a calendar.
STEP 1: Make up the contact cards to keep notes.
STEP 2: Put the date the customer says they will pay you on the calendar and put the note in
the active file.
STEP 3: Each day, pull the notes for that day of the month and check to see if payment is
received.
STEP 4: If payment is made, put the note in the inactive file. If you write off the debt and you
don’t want to do business with them again, put them in the inactive file and cross-reference the
principles.
Get somebody who enjoys personal contact to make the collections. If you give it to people who
don’t like contacting others, it won’t get done.
The key to collections is contacting the customer and finding out what is going on. Pick up the
phone and make contact. If the dollar amount is large, visit the customer in person.
DAILY PAST DUE AIR ANALYSIS
Regardless of who is doing the contact, keep track of the calls you make on a daily basis. With
commercial accounts, the best time to call is Monday morning. Get on the phone and start
calling; this will create enough work to get you through the week. Wait until after lunch to do
the back-up work. With personal customers, start calling on Thursday and go through Friday,
when people usually get paid.
Three tools can help you track your calls:
DAn–Y AIR ANALYSIS: This records who you contacted and when. Make sure you are
contacting the large dollar amounts first.
SYSTEMS PROBLEM LOG: This tracks and logs the source of problems so you don’t fall into the
same hole again. This report helps you collect accounts and also improves your own internal
efficiency.
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COLLECTION DAY INDEX: This computes your average turn time on AIR’s. Most companies
use the Days Sales Outstanding (DSO) formula, but it has one real problem. It takes into
account ongoing sales. If your sales go up in any month, the DSO goes down. It doesn’t
provide an accurate reflection of how you are managing AIR’s. If you use the DSO formula,
average it over a period of months to get a more accurate figure.
The collection day index doesn’t care about ongoing sales. It takes the beginning AIR balance
on the first of the month. Three times during the month, you run a report to see how much of
the original balance you have collected and compare the percentage against previous months.
This uncovers any blips in performance and lets you know when the money will be coming in.
The collection day index is an important performance measurement for two reasons. It helps
you determine how well you are managing the asset, and it helps you more accurately project
cash flow.
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dgm
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ABENICIO WALKING BEAR SANCHEZ
A front line, profit oriented businessman
and entrepreneur, Abe Sanchez began his career in
credit and collections in 1967 as a repoman for a finance company.
Following time as a finance company manager, retail credit manager, consumer
banker and collection agency owner and manager, Sanchez took a position as a corporate
credit manager with a $55 million a year distribution company. It was during this time that
he developed his “Sales Support” approach to credit and collection management. Since
entering the consulting and training field in 1982, Sanchez has worked with
numerous small and large companies in a wide range of industries. The
developer of the copyrighted “Sanchez Sales Support System of
Credit and Collection Management” and the “Sanchez
Inverted Pyramid Past Due Model,” Sanchez has
authored many business articles and has
appeared on radio, T. V. and in
training videos.
AIR Management Group, Inc.
P.O. Box 1123
Wheat Ridge, CO 80034
(303) 420-7393 • (303) 697–5417 fax
TEC
5469 Kearny Villa Road, Suite 101, San Diego, CA 92123
(619)627-4050 • (619)627-0769 fax
THE CHANGING WORLD OF COMPENSATION
~erine M. Meek
President, Meek and Associates
“Organizations have to be willing to share their successes.
If employees are asked to share the risks,
then they have to share the rewards. ”
Most compensation systems are boring. Most compensation systems do not pay for
performance. Few encourage commitment to the organization. And while they can send
powerful messages to employees about the kind of organization they work for and the skills
and behaviors it values, most of those messages — and systems –are uninspiring. In fact, they
often inhibit organizations and employees from achieving their highest levels of performance.
The Table below illustrates some messages that organizations send through pay.
• Team Incentives • We Value Teamwork and
.............…. – ..•....•.....•..............•...............…......….................................. ·····················_·················1··············..…...........................….............................................…........…...............…............................. – m
Incentives and Perquisites only for
Executives • Status and Hierarchy are Important
111[·······················
• Sales Commission on Volume On • Sales have no influence on Ma ins
• We have an Entrepreneurial Philosophy _. !n
• Highly-Leveraged Incentives Risk/Reward
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Base Pay • Security
Benefits • Guarantees
Annuallncreases • No Risk
anagers Always Paid More than • Become a Manager
Individu or Technical
For example, if your company’s program is composed only of base pay and paid benefits, the
message is: “We are an organization that values security; we guarantee the same rate of pay
every two weeks; and, we don’t want you to take risks because we’re not willing to reward
you”. Similarly, if you always pay your managers more than technical or individual
contributors, the clear message is “become a manager.”
It’s important to identify the messages you are currently sending through the pay program and
make sure those are the messages you want to send. If not, you can change them by
changing your pay system.
_‘– YSTS FOR CHANGE
I he world of compensation is changing dramatically throughout corporate America, regardless
of industry or size. Many forces are causing this change process. I’ve categorized them into
four major areas:
Business environment
Values and culture
Contract with employees
Organization structure.
Let’s look at how these catalysts are changing traditional compensation systems.
1. Business Environment
The globalization of the U.S. economy, the shift to service-based industries, and the impact of
technology on how we work has led many organizations to change business strategies.
Today, companies need to engender a work environment that is focused on the customer,
encourages increased productivity, reinforces teamwork and allows flexible cost structures that
vary with competitive markets.
Yet, most compensation systems do not support this business environment:
The majority of compensation is fixed, with no or limited variability
Individual, not team, performance is typically rewarded
Most companies, despite the rhetoric, do not pay for performance
Compensation is rarely linked to customer service or satisfaction
Employees from the top to the bottom of the organization feel entitled to increasing levels of
pay, regardless of productivity or results.
It is becoming increasingly clear that organizations will have to adapt pay systems to meet
these business realities.
2. Values and Culture
For all the talk today about company values, many organizations don’t realize the
contradictions between what they say and what they do.
Talk is cheap. Conflicts arise when organizations don’t walk their talk. As the following table
indicates, conflicting messages are communicated when a company’s pay programs are not
aligned with its values.
2
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Traditional Job Evaluation Factors
Bear in mind that employees are more likely to look at what a company pays rather than what
it says. If quality is an important value, it should be reinforced through some element of the
total compensation system.
If customer delight is to be more than “happy talk”, consider what one of our clients does — the
threshold for the incentive plan is feedback from customers about service quality. If the
company does not achieve the customer satisfaction threshold goal, no incentives are paid,
regardless of financial performance.
Non-cash recognition awards are a very effective way to reinforce your values. They can be a
low–cost, high-impact element of the total compensation package.
One of the consistent findings in our studies of pay and motivation is that cash compensation,
while always important, is often overshadowed by employees’ needs for growth, challenge,
and the feeling of being valued and appreciated.
Consider a srnal: bank in California that has managed to thrive in a highly competitive market.
Its strategy is simple: it focuses employees on improving service and reducing costs, and
rewards them for their efforts.
For example, employees who provide outstanding or innovative customer service receive
special awards. Employees are nominated by customers, supervisors or their peers. Another
program recognizes employee teams that come up with cost-saving ideas. If ideas are
accepted, team members become part of the “Cost Busters Club.” Large posters of the team
are prominently displayed throughout the bank and club members have the opportunity to be
part of the implementation team.
Think about the types of awards that make sense for your specific employee group. Here are
some examples:
Provide a day off with pay
Provide tickets to sports, music or cultural events
Establish and name an award after an exceptional employee
Take out an advertisement in the local newspaper thanking your employees for their
contributions
Provide a donation in an employee’s name to the charity of his or her choice
Let recipients visit customers
Have an Oscar-like awards banquet with trophies and plaques
Have the president or manager of choice do the recipient’s job for a day.
3
.ontrect with Employees
The final catalyst for changing pay is the so-called contract with employees. The old contract
has been broken, but what do we put in its place? As the following table illustrates,
organizations need to tie employee pay to organizational success and results. Organizations
can’t continue to pay guaranteed income based on effort or service. We can’t increase fixed
payroll costs every year. The days of automatically passing those costs on to customers are
long gone.
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Work hard and the company will take
care of
... ~ .....…........…•.•••..…..............•.....….…•...........….•..…
• You are entitled to annual increases
– .. -.- ..... _.– .... – .‘
You will be rewarded for long service
and status
4. Organization Structure
You will share in rewards if the company
is successful
You have to earn com etitive
You will be rewarded for results and
performance
The third change catalyst is how you are organized. When companies were structured
vertically, decisions were made at the top. The managers’ role was to control, and employees
did as they were told.
Pay systems reflected that type of structure:
They were vertical — pay increased as you moved up the ladder
They were stable. and predictable — you could count on a 5 increase every year
They were functional and scope-based — marketing and sales were typically paid more
than operations; and the more employees you supervised, the higher your pay.
But most operating structures have changed. They are flatter and horizontal, team-based,
flexible and cross-functional. And so we need pay systems to reinforce and support these
structural characteristics.
It doesn’t make a lot of sense to have a predictable, functional pay system in these chaotic
days of cross-functional teamwork.
4
.• JNG SUCCESS
‘::>0 where do we go from here? In my opinion, both organizations and employees have to
change. Organizations have to be willing to share their successes. If employees are asked to
share the risks, then they have to share the rewards.
Today, the gap between the highest-paid and the lowest-paid is wider in the U.S. than
anywhere else in the industrialized world. This is happening at a time when productivity and
corporate profits are steadily rising, and executives are continuing to receive huge salaries and
bonuses, in many cases, regardless of their companies’ results. Is it any wonder that
employees are angry and distrustful? Employee commitment to company success is not a
one-way street.
The days of loyalty and long service are gO,ne, and companies must do a far better job of
gaining employee commitment and decreasing the trust gap with their workforce.
Organizations need to rethink how they view employees. If employees are perceived as
costs, then they can, of course, be cut. If, on the other hand, employees are treated as
assets, then perhaps the mindset will change to finding ways to increase the return on
these assets.
Companies have to make empowerment more than a buzz word. Most of today‘s
employees operate in a high discretion workplace. Employees need to be encouraged to
use their discretionary work time to the Company’s advantage and not be held back by their
lack of decision-makinq authority.
Companies have to invest significantly more than they do today in educating and training
the workforce. Skills that are in high demand today will be obsolete tomorrow. And the
education has to include business and financial training.
Employees, for their part, will also have to change to be successful:
Employees have “to recognize the need to continuously upgrade and improve their skills
and knowledge.
They have to accept the responsibility and accountability of empowerment. If employees
are involved in decision-making, they can’t blame the boss for the quality of the decisions.
Employees have to learn to change their behaviors and commitment to results, customer
service and teamwork.
5
So what about compensation in this constantly changing environment? Here are some factors
to consider as pay — as it inevitably will — moves from controlled, stable and fixed dollars to
pay that varies with success and results:
Make sure your program is integrated with your business strategy
– Design it to focus employees on areas critical to organization survival and success by
rewarding results employees can influence
– Be sure the plan and the process reflect your culture and values
– Focus on the customer, both external and internal. Use some element of your total pay
program to recoqnize and reward customer service and satisfaction.
Make sure the program is cost-effective. If your company is squeezing out profit margins to
survive, participate in that effort by maintaining or reducing fixed compensation costs.
Don’t be stingy. If you want outstanding results, pay outstanding rewards.
Employees typically feel the results of the downside of performance. It is equally important
that they benefit on the upside.
Don’t expect perceptions to change overnight. Traditional systems have been around a
long time. Changing to a variable pay philosophy is not a short-term project.
Be prepared to spend time and effort to train and educate managers and employees,
alleviate their fears, and gain understanding, acceptance, and credibility for any new
approaches
– Do this through clear, ongoing communications. These messages must reinforce the
link between the company’s ability to achieve business goals and succeed in the
marketplace and its ability to support an effective compensation plan.
Above all, inspire. Do whatever you need to do to get people excited and focused on
improving performance and results
– Make the program important. Publicize it, promote it, market it. Make sure everyone
knows and understands its importance to them and to the organization.
There is much talk today about compensation. Much of the talk centers on the motivational
impact of pay and incentives. While motivation is, of course, a key element, as we have
reviewed, there are other catalysts pushing organizations to change the way they pay
employees. Not the least of these is the critical need to vary cost structures. For most
organizations, compensation is the largest element of operating costs. If business dictates a
reduction in costs, companies are forced to reduce labor costs by layoffs and downsizings.
However, many organizations are changing the way they view people and pay — away from
traditional, cost-of-doing-business programs to programs that focus employees on improving
business performance and rewarding them for their contributions.
* * * * * * *
6