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March, 2008

Conquering Credit Management

Learn the solutions to these four recurring problems.

By Bill Lee

Managing credit has become a nightmare. The anemic housing market puts considerable pressure on the ability to plan cash flow for not only dealers, but for contractors, as well. Add to that the fact that government regulations have made bankers more demanding while bank mergers have made local bankers increasingly scarce.

While credit is a vital value-added service necessary to attract professional customers, credit must be managed and credit managers must be vigilant.

Problem No. 1: On consulting assignments, credit managers often tell me that they don’t feel empowered. While they are held accountable for holding bad debts to a minimum and keeping average collection days within established parameters, owners or senior managers often override the credit manager’s decisions to support sales and to keep peace with customers.


While these executives are acting out of good intentions, their behavior often creates a “natural hedge” for the credit manager. Their motivation is usually due to a personal relationship they have with the delinquent customer.


To be effective, the credit manager must have the authority to suspend credit privileges and file liens when a customer is not living up to commitments. Without such authority, he or she cannot be held accountable.


Solution: Give your credit manager the authority to make decisions relating to approving credit and establishing credit limits. Establish an incentive plan for your credit manager that includes optimizing average collection days and minimizing bad debt expense. But in so doing, do your best to make sure that your credit manager does not alienate the customers. You do need a sales-oriented credit manager. If you can’t trust your credit manager’s judgment, then you need to hire a new credit manager.


Problem No. 2: Dealers many times fail to fully utilize the capabilities of their computer systems. Most industry-specific systems have the capability to establish firm credit limits, place customers on credit hold, and utilize customer messages on sales terminals to enhance communication and customer service.

Solution: Research your system to determine which accounts receivable features are available but not being utilized. Your software vendor can help. Develop an action plan to begin using these features to enhance both credit management and customer service. It’s management, however, that must develop the discipline not to share passwords with salespeople for overriding credit suspension or raising credit limits. Few salespeople possess all of the information necessary to make quality credit decisions. When non credit personnel are allowed to make credit decisions, you turn your credit manager into a paper tiger. 

Problem No. 3: Because so much business was done in the past on little more than a handshake, credit applications often have never been completed or else they have not been kept up to date. This represents a serious liability when customers encounter hard times.

Solution: If you don’t have credit applications on file for each of your charge customers, immediately initiate a program to do so. Some dealers use their banks as an excuse since accounts receivable is so often used as collateral, making it the bank’s fault for demanding current credit information.


Problem No. 4: Many dealers are reluctant to establish and stick to firm credit limits.

As I mentioned earlier, it’s an equally dangerous policy to allow salespeople to override credit limits, since salespeople’s judgment is so often influenced by compensation programs related to sales volume.

Solution: Based on a customer’s credit history, financial strength, and especially character, a specific credit limit should be established and monitored closely. Make it a firm policy that only the credit manager or the person responsible for credit in the credit manager’s absence is allowed raise a credit limit.  Construction supply businesses that don’t take proactive steps to protect their accounts receivable are extremely vulnerable in 2008. All owners and managers have choices to make. Make yours wisely!


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