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    July 1, 2010

    BCMA - It’s All About You!

    Welcome to the latest issue of BCMA News!

    This month’s topics…

    1. Do You Have Unclaimed Property in Your Accounts Receivable?

    2. Secrets for Getting Financial Statements 

    3. Making Accounts Payable Feel Appreciated

    4. Steps to Protect Your Company From a Bustout

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    1. Do You Have Unclaimed Property in Your Accounts Receivable?

    Cash strapped states are aggressively targeting unclaimed property collections as a significant source of revenue, and old receivables balances that haven't been returned to customers are a favorite target. Depending on the state, a receivables balance becomes unclaimed after you have had no contact with the owner for three to five years. At that point you have a due diligence responsibility to attempt to contact the customer. If there's no response after 30 days, the balance must be turned over to the state.

    Failure to comply can result in penalties and interest charges, not to mention the time, expense and aggravation of an audit through your financial records.

    "Unclaimed property, which can amount to tens of billions of dollars, provides many states with the working capital that would otherwise have to be raised through taxes," said Noel E. Hall, Jr., principal and practice leader for the unclaimed and abandoned property service line at Ryan, a major tax services firm. "Today, both the largest companies and also smaller companies are increasingly being targeted for aggressive collections efforts."

    When you identify an unclaimed receivable balance, he says, you should remove the item from the AR aging ledger, shift it to unclaimed property and hold it until it's time to report. If the state fiscal year ends June 30, as 80 percent are, it must be reported by November 1.

    Send a letter to the customer at their last known address indicating that your books and records show an item of question, giving the date and amount and stating that if they fail to reply within 30 days, according to state law, you will be required to turn funds over to the state.

    "At one time you could relax on this due diligence, but not anymore," says Hall. "The states are now aggressive in enforcing that rule. Unlike some other forms of unclaimed property, the receivables issue is very, very contentious because the burden of proof falls on the shoulders of the holder of the property to show that the item truly is not unclaimed."

    Incorporated in Delaware? WATCH OUT!

    A company incorporated in Delaware is particularly vulnerable, since the state has a look-back period going back to 1981. "No company that I'm aware of maintains detailed records going back to 1981," he continues, "so if you're identified as an audit target, this allows Delaware auditors to extrapolate an exposure number, which could run into the millions."

    What he is most concerned about are those credit managers who routinely write off these items as income. Many, he says, still have that policy of small-balance write-offs today. The problem is that, with unclaimed property, there is no de minimus rule. Even if it's a penny, it's separate and still reportable to the state.

    "A lot of companies take the position that they're not going to research any overages or underages at a certain threshold," he says. "It could be $50 or $1,000. That doesn't make these funds unclaimed property. It's just that you've made an executive decision that you're not going to research or do any work on it.

    "Typically a company may have hundreds of transactions with a customer, and there may be underages and overages. The first thing you do to total them up to find a net balance. If that's a net credit balance, the state's position is that they're going to take possession of that money and hold it for the owner."

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    2. Secrets for Getting Financial Statements 

    When credit applications are submitted it’s a good time to get financial statements. They provide critical insights about customer creditworthiness. But they're often difficult to obtain. While a majority of Credit Today  readers do ask for financial statements, only one out of five say they are aggressive about obtaining them. One out of seven don't even ask for financials as part of their credit application process."

    The problem is that most potential customers know they can get credit without providing financial details in many, if not most, situations. James Albert, senior credit manager at Gensco, Inc. (Vancouver, WA ), provides a good example of marketplace tendencies when he observes that it is not common practice in the HVAC and Plumbing Wholesalers industry to ask for tax returns and financial statements even from customers wanting large amounts of unsecured credit. "Most of our competitors don't ask for financials. They believe using construction lien laws is more effective than understanding whether the customer is profitable and capitalized," he concludes.

    Nonetheless, those that make an extra effort to obtain financials generally feel the effort is worth the reward. Here are some of the ways they leverage the data from applicants

    Personal Contact and Specific Questions
    "If we cannot get financial statements, we attempt to reach out to the principals of the company to discuss specific questions concerning liquidity (line of credit, expiration date, covenants) and sales/ profit trends." - Linda Morich, Corporate Credit Manager, U.S. Corrugated, Inc.

    Sign a Non-Disclosure Agreement (NDA)
    "Getting the audited financial statements is not an easy process, and it takes a long time to get them if we ever do. We tell the prospective customer that we can sign a Confidentiality Agreement if that makes them feel more comfortable about releasing the financials." - Minnie Morrison, Credit Manager, CompuCon Systems, Inc.

    Refuse Open Credit
    "Financial statements are a requirement for all credit limits above $25K. Although some customers challenge this requirement, the alternative of payment in advance terms normally helps them see the light." - Dan Clayton, Director, Credit and Collections, NetScout Systems, Inc.

    There is also a tendency among the larger firms in terms of revenue and AR outstanding to put more reliance on obtaining financial statements. This tendency also applied to departments with at least five people on staff, but it was less pronounced. Interestingly, the number of customers or invoice volumes showed seemed to have little, if any, effect on attitudes toward financial statements. The key findings were:

    • Only one percent of firms with revenue over $500 million and two percent with AR balances in excess of $50 million do not ask for financial statements from any applicants verses 14 percent for all companies. Correspondingly, smaller firms were more likely to forego financial statements altogether.
    • Firms with AR Balances in excess of $50 million are more likely to claim they work hard to obtain financial statement than their smaller counterparts (23 to 14%).
    • Large firms are much more likely to ask for financial statements above a specified threshold. We suspect this tendency might have something to do with resources. In addition, SOX compliance issues probably provide a catalyst for public companies to have more aggressive, standardized policies for obtaining customer financial statements.

    Conclusion
    Whatever the corporate circumstances, the value of your credit application-- the form it takes and the approval processes associated with it--remains subservient to the competence of your credit staff. Without credit pros, credit applications have little value. It is therefore up to you to maximize the value of your credit applications.

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    3. Making Accounts Payable Feel Appreciated

    In many companies, accounts payable people feel estranged, contends one veteran credit manager we know. "They work hard, and they're rarely given any appreciation by their employers. So they have the potential to bond more closely with suppliers that they talk to every day and that seem to care more about them than their own companies do!"

    This may or may not square with your experience. Either way, her observations and advice are worth pondering. She has found that, eventually, A/P clerks who have bonded with appreciative suppliers begin to divulge information to these suppliers--information that not all suppliers receive.

    "Most people like to do their jobs and do them well," she explains. "However, when they're forced to follow payment policies they don't believe in, they sometimes want to rebel against their employers. They want to help the suppliers."

    How does she get A/P clerks to feel so appreciative? By taking these steps:

    • Being genuinely and sincerely interested in getting to know them. "We get on a first-name basis with the accounts payable people," she says. "We get to know all about them, their families, and their interests."
    • Being thoughtful and fair. "We try not to cause them any more problems than they already have," she continues. That is, rather than call and berate or threaten accounts payable clerks (who are usually hamstrung by their own companies' payment policies anyway), she tries to understand their positions. By getting the clerks to talk openly, she finds that they may say something like, "We're six months behind, I have no help at all, and all our customers are calling and complaining to me. We support them and show that we understand what they're going through," she says. The company's collectors have no "scripts" to follow. They are free to communicate on a person-to-person basis. "We're really interested in what happens to clerks," she says. For example, when she calls and finds an A/P clerk is out sick, she will either fax a note or call the next day to see how the person is doing. "Their own companies often don't care that they were sick," she says, "but we do."
    • Showing appreciation: She also makes an effort to show her appreciation to A/P people whenever the opportunity arises. She thanks them for getting payments out, for looking out for her interests, and for investigating problems that might arise. "People like to be appreciated," she explains. "In many cases, employers don't do this with their people, so we do it. Often, the "thank you" takes place over the phone. Just as often, it's in the form of a short thank-you note. It may read something like, 'Thank you. Every time I call you, you take care of my account. We appreciate so much your efforts."

      It is also not uncommon for her to send thank-you notes to supervisors, complimenting them on their clerks. Certainly, she does not single out clerks in a way that makes their colleagues look bad: 'We got the runaround from everyone else in your department, but this employee got us paid.' Rather, the notes are generic in nature: 'What a great employee you have! She can always answer my questions.'

       
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      4. Steps to Protect Your Company From a Bustout

      You always have to be wary of the customer that sets up a seemingly legitimate business simply to "bust out"--taking goods and disappearing without paying. Here are some specific steps you can take to protect your company from a bustout.

      • Know your salespeople and their performance. In credit, you typically know which sales reps are go-getters and which are not. Either way, that understanding can be helpful in assessing what kind of orders are coming through them. When you receive orders from new customers, identify the salespeople involved. Orders from salespeople whose track records are poor in terms of overall sales performance should be scrutinized carefully. On the other hand, the go-getters are sometimes known to submit anything they possibly can, so that's something to keep in mind as well.
      • Get to know the salespeople personally. Your sales reps can be your "eyes and ears" in the market place and help you if you develop a good working relationship with them and explain what your concerns are about potentially fraudulent accounts. Even though they're paid to sell, most genuinely have your company's overall interest at heart. They will be straightforward if you ask the proper questions. And most will know that an account is bogus, again, if you ask.
      • Seek more information. If, upon conducting a credit investigation on a new customer, you are not completely satisfied, have the courage to seek further information or ask for some form of security. You may even need to turn the order down. Be willing to "take the heat" for doing so.
      • Know your customer base. Certain products are generally sold to certain types of customers. If a customer is ordering a product that seems unusual for its business, get more information on the customer. In addition, conduct some investigation on the customer's customers.
      • Know the geographical preferences for your products. For example: If you typically ship "downtown," but you receive an order from "uptown," investigate further. Visit the site yourself, or ask the salesperson to do so.
      • Talk to accountants. If you find some inconsistencies in a credit agency report on the customer, try to contact the accountant whose name is provided with the report. In addition, contact the American Institute of CPAs to get the accountant's CPA license and phone number. Sometimes you'll find a bogus or non-existent account. Other times you'll find a real accountant who'll shed more information.
      • Independently verify that the references a new customer provides are genuine. One way to do this is to get reports from a credit reporting agency on the references themselves. Another is to visit the references in person. And now with easy search engine access, that's a great way to verify the references.
      • Don't waste time. If a bustout customer somehow slips through all of these steps and you become suspicious after the order has been shipped, call immediately. Don't wait until the end of collection terms to place a call. At least you can get a jump on the problem and prevent future orders from being shipped.

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