Balancing Act

A few years ago, a good friend of mine who worked in the automotive aftermarket industry lost his job as a credit manager as a direct result of his management of bad debt losses and DSO.  More specifically, he was fired because, under his guidance, the credit department had not written off any bad debts for three years.  Sales had complained that the credit decisions being made were far too conservative and way too risk averse.  The company’s senior management eventually looked at the information about losses and concluded that sales management was correct.

Credit decision-making is a balancing act with unexpected and unbudgeted losses on one side and lost sales and lost profits from overly conservative credit risk management decisions on the other side.

Is it common that a credit manager loses their job because they are too risk averse?  I think it is more likely that the opposite is true meaning that credit professionals lose their jobs because they accept too much risk resulting in higher DSO or higher bad debt write offs.

Michael Dennis, MBA, CBF, LCM

However, the fact that my friend was fired is a good reminder that credit professionals are expected to manage credit risk according to their employer’s expectations.  They are not expected or required to eliminate the risk of slow payment or nonpayment.  What do you think?

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com. 

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

• CMA Credit Executive of the Year
• CMA Instructor of the Year
• CMA Mentor of the Year
• CBA Designation of Excellence
• CBF Designation of Excellence
• CCE Designation of Excellence

This is an opportunity for you to recognize those Credit Professionals who have demonstrated outstanding leadership, exemplary commitment to the Credit Profession, and who have inspired or have worked to promote the advancement of the Profession.  Any nominations received by March 1, 2012 will be considered.  The recipients will be awarded at CMA’s Annual Meeting on April 12, 2012 held at the Disneyland Hotel in Anaheim, California. 

Nominees will be judged on the basis of professional experience, education, leadership ability and participation in CMA groups, committees and activities.

Download the nomination forms (21) Submit your nominations by March 1, 2012 to:

Kim Lamberty CAE
Credit Management Association
Fax: (818) 972-5301
E-mail: klamberty@emailcma.org

Survey Results Questions 1 and 2

CMA Members report orders and payment increasing, and they predict that payment will be on time for the coming quarter.

Survey Results Questions 3-5

While some are continuing to tighten their credit policy, most predict no change for this coming quarter. The use of credit hold has increased and there has been a stabilization in the amount of accounts sent to collections and NSF checks received.

Some members are extremely confident about payment in Q1 2012 with 49% reporting a confidence score of 8 or more.

Survey Results Question 6

No FREE Lunch

Years ago, I worked for a division of a Fortune 500 company with sales in excess of $1 billion a year.  One day, the CFO told me that she wanted DSO reduced by 15% within three months.   I responded that I would begin work immediately and report back within 24 hours.  I returned to my office and outlined the plan for achieving the 15% reduction in DSO.  It involved, among other things:

1. Rejecting new credit applicants I considered to be high risk
2. Lowering or withdrawing open account terms on all accounts that could be classified as marginal risks
3. Holding orders as soon as a customer became more than 15 days past due (without justification)
4. Withdrawing open account terms to customers that became more than 30 days past due (without a valid reason for doing so such as we acknowledged that we owed them more than they owed us)
5. Placing customers on hold immediately if they took deductions without providing supporting documentation
6. Requiring the CFO to give me the authority to veto any request for extended terms proposed by sales
7. Requiring updated quarterly financial statements from all active customers as a condition for continuing to extend credit
8. Requiring all active customers to provide audited financial statements at least annually

The CFO review the email containing this list and scheduled a meeting.  In that meeting, I said that reducing DSO was easy but when the ‘costs’ associated with reducing DSO were examined, many companies were unwilling to accept the trade offs.  If my goal remained a 15% DSO reduction, “all” the CFO needed to do was to support these 7 proposals and deal with the inevitable collateral damage.  She declined to accept this list and I suggested a less rapid and less radical approach to DSO reduction.
The lesson here is that there is no Free Lunch.  A company can have whatever DSO it wants as long as it is willing to accept the trade offs.

Michael Dennis, MBA, CBF, LCM

What strategies do you use to reduce DSO?

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com. 

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

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