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September 1, 2009 BCMA - It’s All About You! Welcome to the latest issue of BCMA News! 1. Conducting Quality Performance Reviews of Your Collectors 2. Payment Terms for Potentially Insolvent Customers 3. Strategies for Recovering Unearned Discounts
1. Conducting Quality
Performance Reviews of Your Collectors “The most unfair and uncomfortable reviews,” he says, “tend to be those in which the supervisor or manager failed to take the time and follow the steps to prepare in a thorough way.” Beyond thorough preparation, Huyler offers these six suggestions: One: Maintain a file of “kudos and bruises.” “A common problem managers have when conducting performance reviews is thinking primarily of how the collectors have behaved during the few days just before the review,” he explains. This “recency effect” often provides a very biased and narrow view of employee behavior over the past year. “If they did something great or something wrong a day or two before a review, that can have an effect on the rating you give them for the whole year.” To eliminate this problem, Huyler maintains what he calls a file of “kudos and bruises” over the course of the year. Here’s how it works: • When an employee does something particularly positive, it can generate a formal recognition event. This information goes in the employee’s file so that Huyler will have access to it as he is planning that employee’s annual review. • Conversely, when an employee does something particularly negative, it can generate a discipline meeting. This, too, is filed in the employee’s file. • However, Huyler keeps track of other behaviors employees engage in - behaviors that are positive and negative, but not so much so that they warrant either formal recognition or discipline. He records these events on slips of paper and also files them in the employees’ personal files. When it is time for a review, Huyler has immediate access to a year’s worth of notes related to positive and negative behaviors that he can use to create his review and in discussions with the employee. Two: Schedule a specific time and place for the review. Tell the collector when and where the review will take place. This gives the collector time to make a list of any questions, problems, concerns, or opportunities he or she may want to discuss during the session. “It allows the employee time to adequately prepare,” explains Huyler. Should you encourage collectors to review themselves prior to the session, and combine that perspective with yours? Huyler is familiar with this concept, which many other companies practice. While he believes it can have benefits, he cautions managers who want to consider using it. “From what I’ve seen, some managers allow employees to evaluate themselves as a way to get out of developing their own evaluations of their employees,” he cautions. In sum, if you plan to ask employees to evaluate themselves, don’t short-change the employee. Spend just as much time developing your own evaluation as you would if the employee were not evaluating himself or herself. Three: Don’t ignore unsatisfactory performance. Using what is called the “central tendency effect,” many managers tend to rate all their employees about equally (usually “slightly above average,” with a few “above average” and a few “average”). If you want performance reviews to have real meaning, according to Huyler, you need to take into account all of the significant differences among collectors. Furthermore, if you are concerned that you might have to terminate an employee at some point in the future, an “acceptable” performance review may be an important document for that employee in bringing a wrongful termination suit in court. “You’re doing no one a favor by ignoring problems during a performance review,” argues Huyler. “You don’t have to ‘kill’ a person during the discussion, but you do need to identify specific problems and agree on some ways to solve them.” Four: Isolate and identify specific events and behaviors. Generalizations have little or no place in performance evaluations. You want to be able to back up each and every statement and rating with specific incidents to which you can refer. This serves at least two purposes: • It helps the collector understand that you are really providing a fair review. • It helps you overcome the tendency to generalize, which may be inaccurate. “Some employees give the impression of being very efficient and fast workers,” says Huyler. “Others give the impression of being inefficient and slow. Yet, with some investigation into details and actual measurements, you may find out that they are actually equal performers. The quantity and quality of their work may be exactly the same.” Five: Prepare for the next review. The time to prepare for the next performance review is during the current review. “A good performance review focuses as much on the future as it does the past or more so,” suggests Huyler. “That is, it should report on the past, but primarily be a guidepost for the future.” Huyler recommends setting specific performance objectives for the collector for the coming year, broken down quarterly if possible and stated in meaningful terms. “Always start performance objectives with verbs—such as ‘prepare,’ ‘assess,’ ‘implement.’ You might, for example, set an objective to ‘Assess some new skip-tracing tools by the end of the first quarter that we might use to take the place of the costly one we currently use.’” Six: Schedule a follow-up. It is your responsibility to provide an accurate and comprehensive performance review. It is then the collector’s responsibility to begin carrying out the recommendations and goals to which you both agreed. However, it is then your responsibility to schedule a follow-up session (roughly two months later) to discuss progress and any roadblocks the collector might be experiencing related to the projects assigned, as well as to assess improvement n any problems areas that were discussed. olvent Customers Maybe your hands are tied when a major customer you can’t afford to lose unilaterally doubles or even—as in the AB In-Bev case—quadruples payment time. And, at the other end of the risk spectrum, you may have no choice but to cut off a customer who has clearly lost the ability to pay. But what about customers who are solvent and paying on time but whom you have good reason to suspect won’t be solvent for long? Credit Manager Jim Elliott of Dietrich Industries, Inc., posed this problem on Credit Today’s ListServ. He wanted to cap his exposure at a certain dollar level with certain customers and was pondering two options: He could either switch them to cash in advance until the next due date when they reached the limit, or he could require that they pay the open balance down immediately to lower the exposure. Replies on the ListServ overwhelmingly favored the second option, and some went on to point out that this situation can offer some opportunities. Lisa Childress of Bison Building Materials, LLC noted that when her customers reach their limits, any new orders have to be released manually and they seldom are. But she added that an over-limit order is her chance to go after financial statements and/or additional personal guarantees. “We almost never get financial statements from builders,” she says, “but we know they have to have them for their banks. So I ask for a business statement or a personal statement, or both.” Bison requires personal guarantees with its credit applications, but a customer looking to buy over their limit can be required to come up with a guarantee from business partners, family members, or anyone else with enough assets to provide meaningful security. Looking Ahead Financial Services Director Bob Randall of Arrow Electronics, Inc., noted that the biggest question when this type of customer is over the limit is how you should manage the credit line for the foreseeable future. He suggested having bi-weekly or monthly discussions with the customer to get updates on their financial performance, including revenue generation, expense control, short-term liquidity position, debt structure and bank position. “These will be the most essential in assessing their financial wherewithal in determining if you can maintain your ‘cap’ or if you need to take action and reduce it accordingly.” There’s one more thing you might consider when customers ask for credit above the limits you’ve set: They themselves may have new opportunities—opportunities that have developed in the time interval since you set the limit. That’s most likely a stretch in today’s economy, but, unless you have more sales than you can handle, it’s worth a look. How much time would it take you to call or sit down with them to find out what may have changed? If a customer does indeed have new opportunities, Bob Randall’s review list would be a good guide to determine whether you can afford to risk an increase in their credit limit. Problems with customers taking unearned discounts? Here are six strategies to prevent customers from paying late and taking the discount: One: Dispel the standard practice myth. Some customers believe unearned discounts are standard industry practice. Contact trade associations and find out if this is true. If not, tell customers and insist they stop taking unearned discounts. If discounts are standard practice, and you want to discourage them, try one or more of the remaining strategies.Two: Explain how your product or service is better than the competition. If you stop allowing customers to take unearned discounts, you run the risk of losing their business. So you need to remind customers just what they would be losing by switching to the competition.Three: Explain policy changes. If you have accepted unearned discounts in the past, you’ll have to explain why you allowed them and why it is no longer acceptable. Part of your explanation should imply that if the customer continues to take unearned discounts, it will risk its position with your organization. You might say, We will be introducing a revolutionary new product line in the future, and we will be giving preferential and early sales to our customers who are in good standing.Four: Let them set the terms. If you allow customers to set their own terms, they will be more likely to adhere to them. Let’s say your terms are net 30, 1% 10 days. However, a customer wants net 30, 1% 15 days. If you agree, you not only have the sale, but the customer is less likely to try to take unearned discounts when paying after 15 days.Five: Make your forms clear. Put your credit terms on your company’s proposals, order acceptance forms, and invoices, including the fact that you do not allow unearned discounts. You may even want to add that if customers do take unearned discounts, it may lead to intercession by a third party.Six: Refuse to sell to customers that take unearned discounts. You run the risk of losing these customers but, if handled properly, they will return with new loyalty—willing to follow your stated terms.Thanks to James T. Herst, President, Performance Source, Inc.
4. Busting Up
Bustouts Step one: “When talking with an credit applicant’s trade and bank references, listen carefully to the responses without hearing what you want to hear,” Says Zurcher, “Too often, credit managers, in an effort to approve new accounts, overlook or gloss over important information. The responses to your standard questions may warrant asking more questions, especially if the trade references given are completely foreign to you.”Among the questions that Zurcher recommends you ask the trade references of new credit applicants are: • “Have you noticed any change in payment patterns recently?” • “Have you had to call this account for payment?” • “Has it returned your calls?” • “Do you know what this account does for business?” • “Can you disclose what you have supplied to this account?” • “Has it purchased regularly?” • “Are you acquainted with the principals or management, and have they supplied financials?’ “The answers to many of these questions will let you know how well acquainted those extending credit are with the account and the weight you can give to their responses. They may also show some abnormality that should prompt more investigation. Step two: “The bustout generally operates under the premise that those extending credit grant credit based solely upon the experience of others,” says Zurcher. “It is well to take an independent approach. For instance, if two or three suppliers (references) that are unfamiliar to us grant credit for $25,000, we will not necessarily grant credit without further investigation. Our policies include requesting financial statements. Without financials, we would likely limit the amount of credit extended.“In the absence of financials,” notes Zurcher, “we will try to get detailed information about the banking relationship. Again, without solid information from a reputable bank source, we would limit credit extended. One possible bustout sign to watch for here is a bank reference that won’t respond or that will say that the account is ‘too new to rate.’ Step three: Zurcher’s policy is to contact each new account personally on the phone and establish a relationship with a key individual within the company, such as an owner, manager, controller, purchasing manager, etc. “I ask about the company, the owners of the company, and their background. “I also ask about the nature of their business. This process discloses a lot about the company, its owners, and the management of the company. Knowledge about our industry and general economy provides a basis to evaluate whether the business is viable or a possible scam. If I am unable to establish contact with someone, especially in smaller companies, I will generally not grant credit.”Policy in Action Zurcher mentions two instances where his bustout policy saved his company from disaster. “The first was an account that was denied credit because the trade references and bank references gave us very limited or sketchy information. Also, no one at the applicant’s company would respond to phone calls when I attempted to obtain additional information. It was not until about six months to one year later, when we received a call from a sheriff’s department asking if the particular account had applied for credit, that we learned it was a bustout operation. “The second account was a little more unique. While checking the trade references I noticed that the trade experience reported by two of the references was exactly the same. I then called one of the references to ask if there was a direct relationship between the other reference given or if they were part of the same company. To learn more about subscribing to Credit Today, check out our web site at http://www.credittoday.com/ Benchmarking Survey- Outsourcing Acceptance Grows Among Users- Part 1 Benchmarking Survey- Outsourcing Acceptance Grows Among Users- Part 2 Collection Benchmarking Survey, Part 2 - Primary Collection Challenges or Obstacles |
