Published February 2001

Keep on top of customers’ credit standing

For a business, the slowing economy shows up first on the income statement. Sales growth slows, flattens or even declines, and profit margins get squeezed. Customers demand price discounts and “deals,” while your competitors seem almost eager to cut prices. Fixed costs go up, but, initially at least, workers seem as expensive and as hard to find as ever.

Each of these things has a direct effect on our income statement and deserves management attention. Each must be dealt with to keep the business healthy and profitable. At the same time, though, there is something going on over on the balance sheet that has to be taken care of, too, before it turns around and bites us.

The change affecting the balance sheet isn’t as immediate or as obvious as falling sales or shrinking profit margins, but it is just as dangerous. It’s called credit quality erosion.

Unless you are in a purely retail business where you collect cash at point of sale, an economic turndown brings credit problems along with it. The reason is simple. The same problems you are encountering — squeezed profit margins, sales slowdowns — are affecting your customers in exactly the same way. Their response to the slowdown can affect you and sometimes do substantial damage to your business.

Managing your customers’ credit position with you — usually in the form of your “accounts receivable” — can make the difference between weathering the economic slowdown and becoming a victim of it.

There are several things you can do to head off problems:

Find out what your outstanding credit situation is. With today’s computer systems, it is usually a simple matter to look at your “aged receivables” report weekly, or even daily.

“Aged receivables” refers to a report that places the amounts your customers owe you in categories based on how old the bills are. The “current” category usually includes the bills you have sent over the past month, while the “30-60 days” category shows the bills that are more than a month but less than 2 months old. After that, sad to say, they quickly move toward becoming “collectibles,” but, unlike rookie cards for Michael Jordan and Ken Griffey Jr., these quickly decline in value.

Adopt an active strategy. If your bills come due in 30 days, start calling your customers after two weeks and check up on whether they received the goods or services and, as importantly, received your bill.

Make it personal. When you call a customer to check on a payment, make sure you get the name of the person in charge of writing the checks and they get to know your name. It is easier to stall or stiff an anonymous corporation than it is to deny payment to a person whose name you know and is real to you.

Keep a running record of your contacts and conversations with customers when you call on outstanding bills. You should be prepared to move smoothly from checking on customer satisfaction with current bills to pressing them for specifics on payment, and to do that, you will need to evaluate what the customer has said during past conversations.

Try to limit your exposure by detecting credit problems early. A sudden change in payment patterns can signal cash-flow problems. Specifically, payment of a current invoice while leaving an earlier one open is not a good sign, neither is receiving unsigned checks. Both techniques are used to “buy time” by cash-strapped customers. Also, you should scan all incoming checks for their dates. If you receive a check that is more than a week or 10 days old, you should place the customer on a “watch” list, for that is a technique often used by firms to play accounting games by showing their bills as paid, while the checks are actually buried in a desk drawer.

Lastly, don’t let it get to you. Credit calls can be tiresome, but credit management is really just the flip side of marketing. Convincing people to pay is no bigger challenge than convincing them to buy. It’s all part of business. That’s the beauty, and the fun, of it.

James McCusker, a Bothell economist, educator and small-business consultant, writes "Your Business" in The Herald each Sunday. He can be reached by e-mail to otisrep@aol.com.

Back to the top/February 2001 Main Menu