Credit management and punishment
"Jason! You do that one more time and that's it - we'll go straight home. I'm not telling you again. Don't touch it...Jason, I'm telling you...NO...I'm not going to tell you again...don't touch it...Jason...don't you dare do that again..."
This is the kind of thing I often hear parents say to their children while the little darlings happily continue to do whatever it is they are not supposed to be doing. Children learn very quickly which threats are empty, and just how far they can push their parents. Debtors know the same things about their creditors - some creditors only have to threaten a particular action and debtors rush to pay. Other creditors can threaten the same action and debtors take not the slightest bit of notice.
Punishment is a very simple construct, with only a few basic guidelines, yet many of us use it ineffectively because we don't know, or we don't keep to, the basics. If you've ever said anything along the lines of "I'm not warning you again..." only to have your kids continue that behaviour, chances are you're not using punishment correctly.
There are two main types of punishment. Positive punishment occurs when you apply something unpleasant to the situation in order to decrease a behaviour occurring and includes things like physical violence, legal action,and bankruptcy. Negative punishment occurs when you remove something pleasant from a situation in order to reduce a behaviour. By sending a naughty child to a time-out room, for example, you are effectively removing the social interaction and stimulation they may otherwise receive from the rest of the household. In credit,the most obvious type of negative punishment is stopping supply.
The following guidelines apply regardless of whether the punishment is positive or negative.
1. First of all, threats only work well if you are prepared to do what you have threatened to do. "If you don't pay by Friday we'll have no alternative but to take legal action" may increase the speed with which some debtors reach for the cheque book, but what if the debt is for $200 and the debtor doesn't respond to your threat? Chances are, you're not going to bother taking legal action for such a small amount, but you have just demonstrated to the debtor that you do not need to be taken at your word - in other words, your threats are a bluff.If you’re never going to deal them again, bluffing about taking legal action does little harm. If they call the bluff, you are generally no worse off than you would have been had you said nothing. The exception is the situation where other, current customers might find out that you bluff in such circumstances. (Please note that if you, for example, say "we’ll bankrupt you before the end of next week," when in fact it is logistically impossible to issue the documents and get a hearing by then, you risk falling foul of the Fair Trading Act which frowns on misleading and deceptive conduct.)
2. Consequences need to be clearly expressed. "Pay by Friday or I'll be forced to take further action."So? What does that mean for the debtor? Apart from giving them the impression that you haven't yet made up your mind what to do, probably not much. There is, of course, some benefit in not being too detailed in your plans- it may induce an apprehension of the unknown (remember those kids at school who told you to do something "or else"?) but giving a specific consequence indicates you are not just making idle threats. Tell the debtor what the action might be, and how it will affect them personally. "If we haven't received payment by Friday we'll be forced to lodge you as a default on the Baycorp database. What this may mean is that next time you try to buy a car or a stereo on HP, you’re turned down."
3. The most effective punishment is the one that immediately follows the behaviour you want to stop. As dog owners will know, there is no point in reprimanding the puppy two hours after he's chewed the cushions off the couch - he just won't make the connection between the behaviour and the consequence. The closer in time the punishment occurs to the behaviour, the more chance there is that the connection is made and the behaviour extinguished. In credit, this means that after having threatened to take legal action on Wednesday if payment is not received, then the documents should be on that person's desk by Friday, or by the next week at the latest. If they finally receive the documents in three months time, not only have you waited longer for your money, but the effects of punishment have worn off somewhat.
4. Intense punishment is more effective than weak punishment. If, the first time a horse touches an electric fence, it receives a very large voltage shock, it is unlikely to touch that fence again. The behaviour (of touching the fence) is immediately eliminated. If the horse receives only a very weak punishment - say a reprimand,then the behaviour is more likely to continue, especially if there is enough reward on the other side of that fence to overcome the effects of the punishment. If the behaviour continues, then the punisher is tempted to try something a bit harsher, and then a bit harsher again. What often happens in this instance is that the punished one gradually becomes used to increasingly severe punishments, so that eventually, even the most severe action may have little effect.
For example, if Everlate Ltd is repeatedly overdue and repeatedly put on stop supply, they become acclimatised to this. Being put on stop doesn’t faze them anymore. If you, as credit manager, take the next step and lodge them as a default on the Baycorp credit information database, they may decide that’s not a big deal either.The way to break the pattern may be to tell them that from next month they will be defaulted with Baycorp as soon as the account goes into arrears.
It is important to note though, that if you go too far with the punishment, you not only decrease the "slow-paying" behaviour, but might also lose the customer’s future business. This is one to be judged very carefully -as severe a punishment as you can use without losing the customer (assuming you don’t want to lose them).
In summary, the main messages are speed and consistency. And for readers who are parents, remember, the same rules apply to dealing with your kids.
Sarah Fifield Ph.D is a psychologist.