The ghost of Christmas past due
Christmas and the holiday season are always a difficult time for credit staff. We know credit managers who bemoan the fact that their days sales outstanding (DSO), one of the standard measures of credit management performance, jumps 10 days in January.
What does this mean? Well, assume that the company sells, on average, $100,000 worth of product per day. Let's say the usual DSO at the end of the month is 45. This means that there is 45 days worth of sales outstanding or $4.5 million at that point. Then along comes Christmas. All the customers go on holiday and some of them fail to pay their accounts. Their customers haven't paid them, perhaps they've paid out large amounts of holiday pay, and perhaps most importantly, office administration simply falls behind. At the end of January the DSO is up to 55 - $5.5 million.
That extra million dollars outstanding is an extra million on the creditor company's overdraft. At 12% per annum that means an extra $10,000 for the month if it's only a monthly aberration. But it's not. It takes another three or four months to get back to its usual 45 days. Because people are overdue, they're put on stop credit, so they use another supplier for a few months. Some of them never get up to date and leave bad debts. Christmas - bah, humbug.
I heard another interesting little Christmas credit story the other day. John, a director for a thriving small business in Auckland took some holidays at Christmas.
He had had a conversation with the Wellington-based credit controller for one of his creditors just before Christmas about an overdue $50 account. John was already in holiday mode at the time. He said he thought there was a credit to come but he would deal with it and would pay if owed it. He thought he'd fix it in the in January 20th cheque run. Christmas came and he went on holiday. He was due back on the 8th of January but he stayed in town and popped into the office occasionally, and he kept his cellular phone on.
While he was away, the credit controller rang the office several times. When John popped in one day he got a message from one of the skeleton staff that the credit person from XYZ had been calling about this account. "I think there's some problem with it," he said. "Tell her I'll be back on the 8th and I'll sort it out then."
A day or two later, his cell phone rang. It was the credit person from XYZ calling about the overdue $50. "I think you guys actually owe us more than that," he said. "I'll sort it out when I get back on the 8th." However, she seemed unable to wait until the 8th. One of the skeletons contacted him before then to tell him her supervisor had rung the office again. "Look," said John, "I've told her that I'll sort it out when I'm back on the 8th." In all, there were nine phone calls about this $50 account.
On the 8th, John came back to work. He looked into the account. He did owe the money. XYZ owed his company $400 which the embarrassed supervisor promised to pay. The upshot of these nine phone calls was that XYZ got paid $50, paid out $400 and irritated one of its good customers.
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An interesting idea suggested on the website of a Pennsylvania-based law firm which specialises in credit matters is "to include with the credit application or as part of the sales agreement a confession of judgment clause. If a debtor defaults, you simply file a complaint in confession of judgment in any court of record and issue an execution against the debtor's business assets. By agreeing to the clause, the debtor agrees beforehand that if he defaults, a judgment may be entered against him without a trial."
In New Zealand, a confession of claim is sometimes used by savvy creditors and collectors after they have sued. The process server serves the initiating documents - the Notice of Proceeding and Statement of Claim - and the debtor caves in and promises to pay off the debt by instalments to avoid judgment. "Okay," says the process server, "but you have to sign this confession of claim."
The plaintiff can then file the admission and get judgment without further ado if it chooses. Normally, the admission is not filed but held by the creditor, to ensure that the agreement is kept. There is no set form for the admission but it must be clear and unequivocal.
Coming back to the American approach, we wouldn't have thought judgment could be entered on anything which looked like a blanket confession and didn't refer to a specific debt.
Getting one signed at the outset just leaving the court number and amount of claim confessed blank is perhaps possible, but is likely to scare off some customers. You certainly wouldn't get me signing one.
In any case, the debtor could surely contest it if they wanted to - confessing to a future claim for an unspecified amount (in respect of which they may have made payments or may dispute charges) seems contrary to fair process. Your best hope would be that the debtor was too poor, lazy, or stupid to argue against the confession. If they did argue it, the creditor's reputation as a fair dealer may suffer with Judges and or the public if it was reported.
So we wouldn't recommend that anyone in this country try this. However, if anyone does try it we'd be fascinated to hear how it works out.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants.