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February 1, 2011 BCMA - It’s All About You! Welcome to the latest issue of BCMA News! This month’s topics… 1. Better Pay, Convenient Hours 2. Frequent Shipment of Small Orders Means Frequent Prompt Pays. Low DSO 3. Four Common Financial Mistakes Made By Small Businesses 4. Saying "Goodbye" to Problem Customers 1. 1. Better Pay, Convenient Hours Finding good collectors who can supplement your experienced staff during crunch periods can be a challenge. Debra Ciskey found some great candidates right down the street! "We have several colleges and universities nearby, and we've found they're an excellent source of collectors," she says. "We pay more than they can earn on campus jobs, and the work doesn't interfere with their class schedules. We can use them to fill in gaps in our staffing coverage." Enthusiasm, she acknowledges, can sometimes be difficult to maintain in collection work. In selecting collector candidates--often through referrals from current employees--she looks for maturity, stability, and the ability to learn and to work a flexible schedule. She tends to be wary of previous collections experience. "It's not always the best; old habits are hard to break. New hires go through a two-week training program that concentrates on compliance issues, computer processes, service, and negotiations. Compliance, particularly with the Fair Debt Collections Practices Act is absolutely critical, but she has found that younger people today do not even know about the old, hard-nosed, threatening collection tactics prohibited by the Act. Promotion opportunities are posted regularly. "Some very good employees reach a point where they just have to get away from the phone," she says. "That's why it's so important to talk about other opportunities that are available in the company when you have them." 2. Frequent Shipment of Small Orders Means Frequent Prompt Pays. Low DSO Manager Mary Jo Dever of Bills Khakis does an in-house credit check when granting credit to a new account, using the usual resources. Like collections, credit approval is made easier because of how the company operates and what it produces. "We produce pants and shorts, which we sell to 600 upscale, high-end, men's specialty stores," Dever explains. "From time to time, we introduce a new style, but that's an addition, not a replacement. Retail customers rely on the fact that they can buy the same Bills Khakis that they have always bought, the basic four models, in khaki, twill, corduroy, or summer poplin in six color choices. "Customers come into the stores looking for Bills Khakis, so we have that edge. If we don't supply product, the store's customers will be unhappy." Dever emphasizes that, "Building a brand makes collections much easier; you have consumer demand working for you." Just as important a force is Dever's forging of relationships with Bills Khakis' customers. "I meet with them a lot. A personal relationship is very important. It erases the barriers." 3. Four Common Financial Mistakes Made By Small Businesses "We all know from experience that smaller customers, as a class, are more prone to decline because of financial problems than are the large corporations," observes Harlan Roderick, credit manager for Eastham Industries (Eastham, Mass.). The reasons for these problems, he says, fall mainly into well-established patterns. These separate patterns are interrelated, resembling four upright dominoes. When the first domino falls, with rare exceptions the second, third, and fourth dominoes follow suit. 1. The business is undercapitalized to begin with, and management overinvests in fixed assets. Some small-business people become overoptimistic when business is booming. Many overestimate the boom, failing to realize that it stems, at least in part, from inflation. The urge to "make hay while the sun shines" leads to unwarranted investment in fixed assets. The combination of undercapitalization and overinvestment in fixed assets usually leads to the next phenomenon. 2. Overinvestment in inventory. Having overinvested capital (which was insufficient from the start) in fixed assets, management feels compelled to make the greater-than-needed assets produce commensurate inventory. This inventory is a potential source of revenue through future sales. But when the expected demand for it does not materialize--and since the supply was greater than demand from the start--it becomes a stagnant asset. And generally, the longer it remains unsold, the less it is worth. Meanwhile, the business is further starved for working capital because the inventory cannot be converted into sorely needed cash. The combination of these patterns leads to the next phenomenon. 3. Overinvestment in accounts receivable. When a business finds itself with surplus inventory, it is forced to sell to more and more sub-marginal accounts. Not only does this swell the size of receivables beyond the capacity of the business to "carry" them, but it compounds insufficient inflow by the failure of high-risk marginal customers to make payment at all. The combination of these patterns gives rise to the last phenomenon. 4. Inadequate reserves for depreciation, contingencies, and bad debts. When a business starts out with inadequate working capital, overinvestment in fixed assets, overinvestment in inventory, and overinvestment in accounts receivable, it is almost inevitable that management simply cannot report adequate reserves for depreciation, contingencies, and bad debts. Moreover, in light of the lack of capital, some small-business people cannot afford to buy--or to buy adequate--insurance against storm, fire, and flood. Should any of these perils occur, the company is forced out of business, leaving its creditors high and dry. "Analysis of the above factors determines to a great extent the quality of profits reported by your customer," Roderick concludes. "Inadequate provision for depreciation, contingencies, and bad debts reflects perhaps the most glaring danger in the operation of a business." 4. Saying "Goodbye" to Problem Customers Saying "goodbye" to a problem customer not only prevents loss from uncollectible debts or from negotiated settlements of overdues, but has several other, often-overlooked, benefits, says Adrian (Ed) Blum, general manager of the service division of A.O. Reed & Co. (San Diego). His division employs 40 persons and contributes $6 million to the $80 million of annual revenues for the mechanical contractor company, which deals only with commercial/industrial accounts. "Everyone knows that 80% of any company's business comes from 20% of its customers," he says. "So, it doesn't make sense to let 2% to 3% of your customers consume the time that could be spent more profitably, servicing that 20% or contacting potential new customers." Blum picked up the phrase "ruthless compassion" several years ago at a seminar, and applies it to the procedure of cutting off a customer. The "divorce" must be total, but it must be done with consideration, no recriminations, no aspersions, nothing to hurt the customer's feelings.
Making the Decision "By prompt contact, I can evaluate the situation and, probably, work out an agreement. We have to get paid, but we can be flexible if it means helping a loyal customer through a temporary problem." Blum only bids farewell to four or five customers a year. This low number of cast-offs is the result of a careful screening of new customers. "We require either (1) a major credit card, or (2) a two-day credit approval process, which involves calling three of the applicant's vendors and checking with the listed bank." Even the major credit card is checked. The Reed company owns a retail plumbing store at its headquarters and can do a trial run, sending through a $500 charge to see if the credit company will accept it (the transaction is then reversed and there is no record of it on the customer's bill). "Any company can do this kind of credit validation," Blum points out.
Red
Flags Usually there are four or five red flags signaling that the customer is destined for jettisoning. The customer routinely complains about the bill; it's always too high. The customer lets the bills pile up and then asks for a negotiated settlement. And, of course, payments are late. Ninety percent of Blum's customers are on maintenance contracts. The best time for following his "ruthless compassion" policy is at the time a contract is about to be renewed. "Then I can say that we are changing the direction of our marketing, and we can't renew your contract." Sometimes customers shout, "But, I'm your best customer!" Blum resists the temptation to say, "You're my worst nightmare," and repeats that this is a change in company policy, a move from one market segment to another. One customer shrewdly asked, "Is this because I am a pain in the neck?" Blum politely responded, "We respect all our customers. Have I ever treated you with disrespect?" He hadn't of course. Blum has cut off an account totaling $25,000. Even a large-volume customer isn't worth the extra time and aggravation caused by an account that is always hoisting red flags. Blum is an expert at recognizing early danger signals: the customer in a hurry, who needs immediate service and assures that his credit is just fine; and the customer who says that money is no object. Blum is tuned to both: "We slow the hurry-up customer down, repeating our credit requirements; and, we know that the customer who says money is no object is speaking the truth--money is no object, because he doesn't intend to pay us anyway!" There are all kinds of customer-dodges, such as the small unauthorized discount, where the customer shaves just a few dollars off the bill, say $778.49 for an $800 invoice. "It's not enough to pursue, but repeated it puts that customer into the 'we don't need you' category." So, what does Blum do with the time saved from writing, calling, and hyperventilating over problems with customers who aren't worthy of the name? "I meet with the good customers, get to know them better, become a 'fellow worker' and a friend. We go to lunch, we play golf; I'm invited to their birthday parties, weddings, and barbecues."
Advice and
Instruction For one customer, Blum conducted a series of classes for property managers, teaching "the ABCs of air conditioning." Time freed from the unprofitable chores involved with problem customers is also used to contact potential customers and new customers. "We recently acquired a new customer who will be spending $75,000 with us. We invited the customer and the person who will be processing invoices to have lunch with my office manager and me. It is an essential point for the payables and receivables people to know each other on a first-name basis." One additional benefit is the reinforcement of company morale. "Employees know that, as a company, we do not accept nonpayment, constant complaints, or bad treatment of them. Sometimes a customer will start venting, swearing as soon as anybody picks up the phone. This is not allowed. I have instructed that the caller be given to me, and I explain that I will not have my people subjected to such abuse. If the customer wants to communicate with us, he or she must call back and apologize to the employee." To learn more about subscribing to Credit Today, check out our web site at http://www.credittoday.com/ Benchmarking Survey on Meetings Looks at the Worst Meeting Experiences - Learn What to Avoid! Credit Executives Sharply Divided on Credit Scoring Benchmarking Extended Terms- Survey Participants Weigh In on the Process With Some Great Advice |
