ESSENTIALS of Credit, Collections, and Accounts Receivable Mary S. Schaeffer
ESSENTIALS of Credit, Collections, and Accounts Receivable
Essentials Series The Essentials Series was created for busy business advisory and corporate professionals.the books in this series were designed so that these busy professionals can quickly acquire knowledge and skills in core business areas. Each book provides need-to-have fundamentals for those professionals who must: Get up to speed quickly, because they have been promoted to a new position or have broadened their responsibility scope Manage a new functional area Brush up on new developments in their area of responsibility Add more value to their company or clients Other books in this series include: Essentials of Accounts Payable, by Mary S. Schaeffer Essentials of Capacity Management, by Reginald Tomas Yu-Lee Essentials of CRM: A Guide to Customer Relationship Management, by Bryan Bergeron Essentials of Intellectual Property, by Alexander I. Poltorak and Paul J. Lerner Essentials of Trademarks and Unfair Competition, by Dana Shilling Essentials of Corporate Performance Measurement, by George T. Friedlob, Lydia L.F. Schleifer and Franklin J. Plewa, Jr. For more information on any of the above titles, please visit www.wiley.com.
ESSENTIALS of Credit, Collections, and Accounts Receivable Mary S. Schaeffer
This book is printed on acid-free paper. Copyright 2002 by Mary S. Schaeffer and the Institute of Management and Administration. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com. Limit of Liability/Disclaimer of Warranty:While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Schaeffer, Mary S. Essentials of credit, collections, and accounts receivable / Mary S. Schaeffer. p. cm. ISBN 0-471-22074-4 (pbk : alk. paper) 1. Credit Management. I. Title. HG3751.S334 2002 658.8 8 dc21 2002005070 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1
For my princess, Larissa Mary Noelle Ludwig, my wonderful, beautiful, gifted daughter
Contents 1 The First Step: Approving the Credit 1 2 The Second Step: Billing 29 3 The Third Step: Collecting the Money 49 4 Accounts Receivable Issues 81 5 Handling Deduction Issues 103 6 Interacting with Sales and Marketing 115 7 Customer Relations and Customer Visits 133 8 Letters of Credit and Other Security Interests 147 9 Legal Considerations Surrounding Credit 163 10 Bankruptcy 183 11 Technology in the Credit and Collections Department 215 12 Professionalism and the Future of the Credit Profession 241 Index 253 vii
Preface Credit is part science, part art, and part gut-feel. The trick is to get the right mix.while there is no one absolute right way to handle the credit, collections, and accounts receivable functions, there are a few that are totally and irrefutably wrong. It is the mission of this book to identify both for the reader. For the last eight plus years, I have been lucky enough to spend my days talking to credit professionals and writing about their successes and achievements, their trials and tribulations, and occasionally their catastrophes as a newsletter editor for IOMA s Report on Managing Credit Receivables and Collections. Much of what they have told me is reflected in this book. Thus, the suggestions and recommendations are not pie-in-the-sky advice but rather practical guidance based on real life accomplishments and failures. Before reviewing what is covered in the book, I d like to point out that there are many ways these functions can be handled. Often what works at one company will not at the next. This can be because the second company doesn t have the technology of the first, and because the corporate culture is very different or can be simply due to differing industry requirements.thus, many of the topics in the Tips & Techniques will cover a variety of approaches some applicable to more sophisticated companies and some to the less advanced. The book starts with a look at approving credit.this should be the first step for companies before they begin a relationship with a new customer although as many reading this are only too well aware, it occasionally ix
Preface occurs after the fact, after the salesperson has taken the order. Chapter 1 begins with an explanation of why business credit is so important, verifies that a business does exist, and examines financial statements in detail.the chapter takes a look at the way companies evaluate credit, the information many require on their credit applications, and the references many require. Ratio analysis, how companies evaluate new customers, and what documentation should be in the credit file are also examined. Many companies overlook the importance of their billing practices in the credit and collection process. An invoice mailed late will get a payment posted even later. Chapter 2 takes an in-depth look at invoices, the best way to design an invoice and best billing practices. An outsider might not realize that there are many things companies can and should do to their invoices to improve their ability to collect in the most timely and efficient manner and ultimately the company s bottom line. Electronic invoicing is one of the hottest topics in the credit arena today. Chapter 2 takes a look at the practice and also offers details about five of the products on the market today. Electronic invoicing is likely to have a big impact on business in the next few years, and thus it is imperative that credit and collection professionals learn everything they can about it. The book then goes on to take a look at the thankless task of collecting. Many in the collection profession feel that at best they break even. If they do a good job, no one notices, but the moment collections slip, management is watching them like a hawk and complaining. Unfortunately, many who have this complaint are quite accurate. Chapter 3 contains numerous tips that have worked for professionals in the field today. We look at both the old-fashioned letter writing and the more current practices of phoning, e-mailing, faxing, and whatever else innovative collection professionals can dream up to get the money in the bank for their companies. x
Preface Applying cash is another thankless job in corporate America today. However, if the task is not handled correctly it causes problems for other professionals in the company and, in some extreme cases, can tarnish the company s reputation with prized customers. Chapter 4 looks at some effective accounts receivable strategies along with a discussion of the vaunted days sales outstanding (DSO) figures that so many credit and collection professionals are measured against. Unauthorized deductions, along with unearned discounts, cause credit professionals in certain industries (mainly those selling to retailers) more headaches than almost anything else. Chapter 5 examines strategies companies can use to minimize this haunting problem. The chapter also takes a look at techniques to use for timely dispute resolution as a few customers will use a small dispute (some say, imagined) to avoid paying large invoices. A smooth relationship with sales and marketing can make a big difference in the amount of Tylenol a credit professional must buy each year. Some lucky credit professionals have wonderful dealings with their sales force. Chapter 6 discusses the strategies used to either maintain or initiate a warm relationship with sales. Also included are some things the credit department can do to make the sales force s job just a little bit easier. Yes, you read that right if credit goes out of its way to help sales, it will reap the rewards. Most credit professionals insist that customer visits are key to completely and accurately evaluating a customer s financial viability. Unfortunately, some management don t agree. This is unfortunate because when a customer gets into financial difficulty and has a limited amount of money to pay suppliers, after paying key suppliers, it is most likely to pay those it has the best relationship with and inevitably, those are the ones where personal contact has been made with the credit professional. Chapter 7 looks at the best ways to plan and structure xi
Preface a customer visit along with some ways credit pros can squeeze in customer visits so even the stingiest of bosses can t complain. Inevitably, the sales department will eventually (or perhaps immediately) find a potential customer who does not meet the company s credit standards for open account terms. When this happens, the savvy credit pro finds a way to make the sale happen usually by getting some sort of security. Chapter 8 examines some of the techniques that credit professionals can recommend in order to make the sale happen. Some professionals think that credit professionals really need to be lawyers first. There are a number of laws that credit professionals must know about and avoid breaking as part of their job. Chapter 9 takes a look at some of the legal considerations surrounding credit and collection activity. Perhaps one of the most fascinating aspects of credit is bankruptcy. It is a regular part of most credit managers jobs no matter how good they are. Chapter 10 describes the different types of bankruptcies, the rights of creditors, and what creditors should do to secure their positions. It also takes a look at what some consider one of the nastiest aspects of bankruptcy preferences. A preferential situation arises when all creditors in the same class are not treated the same. If one or more has received a payment that the courts deem to be preferential, they are ordered to return it to the bankrupt company s estate. This chapter discusses some of the ways that a creditor hit with a preference claim can fight that claim. Without a doubt, the credit profession has changed more in the last ten years than it did in the previous 20. Many of these changes can be attributed to technology and the things that credit professionals can do as a result of the introduction of many technological advances. Chapter 11 takes an in-depth look at technology currently in use in today s leadingedge credit departments. xii
Preface The credit profession has undergone revolution. This roller coaster change is only at the first curve. The skill set required of the credit professional in the coming years continues to expand. Chapter 12 takes a look at a number of resources credit, collection, and accounts receivable professionals can use in the upcoming years to keep themselves in the credit game. Those who sit still will not succeed, but you ve already taken the first step by purchasing this book. Good luck it will be an exciting adventure for those who choose to participate. xiii