The credit control conundrum
This article first appeared in the NBR in December 2008
Credit management isn't just about collecting money, it's about keeping customers. Non-commercial organisations tend to struggle with this. Many years ago I did some training for collection staff at a government organisation, one of a number which has the power to take wages direct from their debtor's employers, without notice to the debtor. One of their problems, as I explained to the managers I was dealing with, was that the collectors had worked out that their easiest option was to make only a cursory effort to contact debtors (by mail), then, after a period prescribed in the relevant regulations, seize the money direct from the employers.
By doing this, the collectors maximized the ill-will felt against the organisation, (by both the debtor and the employer) and in many cases, of course, left the debtor in a perilous situation, unable to meet other commitments. When I ran the seminar, I explained that best practice was to minimise the number of debtors for whom they had to take this hard action.
There was an uproar amongst the collectors; my involvement ceased at the end of the seminar and I think it was decided that it was more important to keep the staff happy than the debtors.
At the heart of the collection role is this conundrum: lots of people pay when you put pressure on them, but in putting pressure on them, you risk losing their future business (in the case of a commercial organisation) and creating ill-will.
Every business has some tool for increasing the pressure on non-paying customers. Even if you think your business doesn't have such a tool, you're wrong, it does. In some cases it's taking goods back (e.g. repossessing a car, or selling a house by mortgagee sale) or sending debts to debt collectors. But for most, the major tool is to stop supply (also known as "stop credit"). But all these tools lose customers.
If Placemakers, say, puts a customer on stop credit, he probably goes down the road and buys at Bunnings. Of course, they never know how much business they could have retained, had they worked harder to collect the debt before taking the hard action. Many consumer finance companies, for example, have tended to be cavalier in this way.
Clearly, once you've decided you never want to do business again with a particular customer, this conundrum - the trade-off of debts paid for customers lost - largely disappears. However, there may still be PR implications. If you doubt the potential for credit management to damage a business's reputation, talk to someone at Mercury Energy about the downside of cutting off the power to the Muliaga household in 2007.
How do you manage this conundrum?
Well, you start by measuring it. Most businesses judge credit management by looking at measures of unpaid debt - DSO or "Days Sales Outstanding" is the best known of these. Very few businesses measure the number of hard actions carried out. For most businesses this means the number of stop credits. This is a proxy for the number of customers credit staff upset in order to collect overdue accounts. Boards of directors should give this at least as much attention as DSO.
The hard action is often the easy option, as in my government department story. Once you focus attention on the number of stop credits, credit staff will try harder to collect by persuasion and negotiation.
A business that doesn't track the number of stop credits (or cars repossessed, or customers whose power was cut off, or wage grabs made, or whatever is appropriate for that business) clearly doesn't understand the fundamentals of credit management. Credit management isn't just about collecting money, it's about keeping customers.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com. This article is not legal advice.
Credit management is a competition between creditors for a limited amount of money. If a customer doesn't have enough money, which creditors will get paid? How do you influence that decision?
One of the more obvious influences is threats. The creditor who is threatening action may get paid, while others miss out. Credit staff are among the few people who, within the law, spend their working lives threatening people, "upping the ante" until the debtor decides to pay their business rather than their other creditors. We teach them to "explain consequences" but to some degree, this is semantics. The bottom line is that if payment isn't made, the creditor will do something that the debtor would prefer didn't happen.
Every business has some tool for increasing the pressure on non-paying customers. For most, the major tool is to stop supply of whatever they are selling them (also known as "stop credit".) In other cases it's taking goods back (e.g. repossessing a car). Even if you think your business doesn't have such a tool, you're wrong, it does.
Threats don't work with every debtor, every time, but they work pretty well. However, there is a cost. At the heart of the credit management role is this conundrum: lots of people pay when you put pressure on them, but in putting pressure on them, you risk losing their future business. If Placemakers, say, puts a customer on stop credit, he probably goes down the road to Bunnings.
Then there are the PR implications. If you doubt the potential for credit management to damage a business's reputation, talk to someone at Mercury Energy about the downside of cutting off the power to the Muliaga household in 2007.
Many businesses achieve good (or at least better) credit management results by treating customers harshly, at the cost of repeat business. Consumer finance companies, for example, have always tended to be cavalier in this way.
Clearly, once you've decided you never want to do business again with a particular customer, this conundrum - the trade-off of debts paid for customers lost - largely disappears. (That's why you should be cautious of credit management advice from debt collectors and liquidators: collecting hard debts and collecting debts for businesses that are closing down is not like real credit management for a company that wants repeat business from its customers.)
How do you manage this conundrum?
Well, you start by measuring it. Most businesses judge credit management by looking at measures of unpaid debt - DSO or "Days Sales Outstanding" is the best known of these. Very few businesses measure the number of threats carried out - that is, stop credits. This is a proxy for the number of customers your credit staff upset in order to collect your business's overdue accounts. By minimizing stop credits, you minimize customers upset or lost by this process. You push credit staff to collect without resorting to stop credit, which is often the easy option. Most businesses should measure the number of stop credits and give this at least as much senior management attention as DSO.
A business that doesn't track the number of stop credits (or cars repossessed, or customers whose power was cut off, or whatever is appropriate for that business) clearly doesn't understand the fundamentals of credit management.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com. This article is not legal advice.