By Abe Walkingbear Sanchez
Bread men are delivery guys who pick up a truckload of fresh bread each morning and then drive from customer to customer filling store shelves. If there’s an empty slot they fill it. All they need to give care to is that the right bread goes in the right slot.
When salespeople start thinking like bread men, a company is in big trouble.
I was working with a large regional distributor whose market share was shrinking. The sole source provider of a high-end home construction product in an area of the country where the population doubled and then doubled again during the prior 30 years, this company had seen both its sales and profitability grow during that time.
And then the manufacturer’s patent expired and the product began to be made in China and imported into the U.S. While this company still maintained the largest percent age share of the market, competitors were able to undercut their price by 30 percent or more, and the company’s sales were dropping off.
During an afternoon working session with the company’s VPs, we were looking for ways to turn things around when the sales VP said something that literally left me dumbstruck, “I know we are losing market share, but we still make good money so I’m not worried.”
I was in the Navy, so I know that when a ship takes on water it’s not a good sign. And just because your head is still above the water line doesn’t mean there’s nothing to worry about; just the opposite. You better be more than worried; you should be manning the pumps and fixing the source of the leak while you are still above water.
At that point I turned to the credit manager, who was there with his boss, the finance VP, and asked him how many new customer credit applications or, better still, new customer information forms, he processed each month? He wasn’t real sure because he didn’t track them, but he guessed at about 10 a month. I then asked the sales VP how many salespeople he had in their six-state area. To his credit he knew and didn’t have to guess; it was 26. I then said something to the effect that 10 new potential credit customers a month by 26 salespeople meant that on average each salesperson was bringing in a potential new customer every 90 days or so. “No,” said the credit manager, “it’s only five or six of the salespeople who ever turn in a new customer request for credit.”
A good profit-focused credit man ager, just like the sales manager, should know and should be reporting on how many new customer requests for a credit line are being submitted by sales and processed by credit. They need to know and report on who is bringing in the new business, what type of business/market segment these new customers fall into, the amount of credit applied for vs. the amount of credit approved and, of course, they need to report on how long it took them to process these new pending sales. And if a potential new customer is not approved, it’s important for everyone to know why.
Thirty years of profitable growth without having to compete is not a good thing, especially when things change. The salespeople in this company had become bread men. They had long ago forgotten how to sell.
Monitor B2B Credit Sales and A/R Vital Signs
•Ninety percent or more of all B2B sales involve payment at a later date; credit terms are extended.
•Accounts receivable (A/R) short-term money due from the sale of products or services based on payment at a later date is often one of the largest assets many companies have. As a rule, A/R is the single greatest source of working capital. Cash is a tool of all businesses, and if you run out of cash you are out of business.
•In the course of approving credit sales and then managing the resulting A/R, the credit sales and A/R management function interfaces with customers, sales, marketing, accounting, operations, the warehouse, service, vendors/suppliers, attorneys, transportation and many others involved with the supply/production chain.
The credit sales and A/R area of business has access to much valuable information and knowledge that often is not shared or utilized to its fullest profit potential.
In medicine, basic vital signs include temperature, pulse rate, blood pressure and pain level; measurements taken in order to assess critical body functions. Vital signs are an essential part of the communication between doctors, pharmacists, nurses, therapists, nutritionists and others regarding a patient’s state of being.
Vital signs for critical business functions are credit sales and A/R management, and a company’s state of health. A business must establish clearly understood and best goals for the different business functions within an organization and then it must establish the means by which to monitor the progress or lack of progress being made toward those goals.
A business must employ the right people capable of carrying out the tasks and then give them the training and support needed to achieve the goals. They must have reliable information/reports by which to monitor the execution of plans and measure performance against the established goals, key performance indicators (KPI) and goal-focused performance measurements.
Last, but most important, the management team must constantly work on everyone’s understanding of the goals and on ensuring that all areas of the business are working together toward the goals.
Before the vital signs for the credit sales and A/R management area of business can be established, explained, monitored and measured, CEOs, business owners and senior managers must know and under stand what the best possible outcome for this business function looks like. Yet many companies misunderstand and underutilize the credit sales and A/R management function.
When all the costs involved with a new sale are considered, often the investment made in getting a new customer to the point where they want to buy exceeds the profit to be earned in the first sales (Profit comes from long-term customers and repeat sales.)
A good thing to know (vital sign) is the number of new customer information forms, (better than preprinted, one size fits all credit applications) that are being submitted by sales to credit.
If the number of submitted new customer information forms is down during key times of the month compared to the prior month and the same month the prior year, salespeople can be incentivized to turn the month around. This can be done by daily contests that include the credit area’s timely processing of the submitted new customer information forms.
Another good thing to know (vital sign) during key times of the month is the total amount of credit that has been applied for versus the percentage of that applied for credit approved by the credit area. A good profit directed credit manager can be worth three or four good salespeople if they view pending sales as their highest priority and focus on finding ways to approve profitable sales while remaining confident of payment.
When salespeople focus on quality customers and credit people focus on both finding a way to make the deal happen and granting a larger credit line (never credit limit) than was requested, the percentage of credit approved should be more than 100 percent of the applied for credit amount.
If during key times of the month the percentage of applied for credit that is approved drops, is it because the quality of the customers is down, the economy is down or the sales force is calling on the wrong market?
Or is it because the credit guy isn’t working hard enough to find ways to make profitable sales happen?
What is Watched Gets Done
Sometimes management sends confusing messages to the credit manager. They’ll stress the need to get pending and profitable sales on the books and then measure the credit area’s performance based on DSO and percentage of bad debt, which in turn leads to the credit area focusing on risk rather than sales and on profit.
Sometimes management itself doesn’t understand or know the proper profit approach to credit approval and therefore can’t provide the credit area with the necessary understanding and training on how to weigh the customer’s profile and past performance with the company’s own product value at the time of sales as to maximize sales and minimize risks.
A/R Management (Not Collections)
The proper management of A/R results in good cash flow, sustained repeat sales and controlled bad debt.
The vital sign that is directly connected is the PDI (payment days index) at the end of the month and the daily payment percentage during key times of the month.
Terms of Sale (for each term of sale)
PDI = Payment Percentage (end of month)
Start with the beginning total A/R balance as of the first of the month. This means all A/Rs, regardless of age. Any new credit sales made during the month will be picked up in the next month’s beginning total A/R balance.
For example let’s say that our total A/R balance as of the first of the month is $1,000. Track payments and credits on those invoices that make up the beginning total A/R balance. During key times of the month (the 10th and the 20th) compute the payment percentage as of that date by dividing the amount paid/credited as of that date by the beginning total A/R balance.
If by the 10th we have been paid/credited $200 of the beginning $1,000 total balance, our payment percentage as of the 10th is 20 percent. We can compare this month’s 10th day payment percentage against last month’s 10th day payment percentage.
If last month’s 10th day payment percentage was 40 per cent and this month’s is 20 percent, it doesn’t necessarily mean that we are doing a poorer job this month than last. If there’s a variation of the payment percentage, it’s not a matter of good or bad, but of why? That’s the question management should be asking.
A lower payment percentage may be due to some thing as simple as the credit and A/R person going on vacation and no one following up on past due A/R.
It may also be a matter of a product/service with a lower product value being sold to someone with less than a perfect payment record.
Or it could be due to the accounts being worked in alphabetical order rather than by largest dollar first.
If by the 20th we’ve been paid $400 of our beginning balance of $1,000, our payment percentage as of the 20th is 40 percent.
By tracking the payment percentage during the month, we can determine if we need to exert greater effort.
An international speaker and trainer, Abe WalkingBear Sanchez is the developer of the copyrighted Profit System of B2B Credit Sales and A/R Management and has worked with many hundreds of business owners, CEOs and senior business managers groups internationally. He can be reached through A/R Management Group, Inc., (719) 2760595, http://www.armgusa.com.