Dear Crabby,
I am the credit manager at a small tools manufacturing company and recently, I’ve got the whole company angry at me, especially sales. Let me explain what’s going on.
About six months ago, out of the blue, one of our best customers declared Chapter 11 bankruptcy. There was no warning such as the invoices gradually becoming past due. In fact, just one month before the notification landed on my desk, orders were still coming in and payments were being made timely.
After the shock, we found out that the vice president, the president’s brother, left the country absconding with all of the company’s available cash. It’s a lot more complicated than the last sentence but it left us with an unpaid receivable close to $100K.
Then three months later, another customer declared bankruptcy due to extreme supply chain delay issues. This one was not so bad, leaving us hanging for $20K. Nevertheless, having two customers go belly-up on us within such a short period of time has made me hyper-sensitive towards our credit granting approval protocols.
In view of the unstable economic conditions, I decided to pare down all credit levels by 20%, regardless of the nature of each customer. As a result, a few customers have balked at our new policy and have gone elsewhere. Our sales manager has been very unhappy with my decision, calling me stingy, but I just feel that the unpredictability of our economy is forcing me to become much more conservative across the board.
Signed: Stingy in Minneapolis
Dear Stingy,
Ok — let me tell you a couple of things. First, no credit risk management professional can predict when some criminal activity will transpire at their customer’s place of business. Whether it’s a small family-owned enterprise or a publicly traded corporation, we credit professionals can only make decisions based on the reliable information available to us. Corporate criminal activity is usually well under the radar and is something completely outside of our control.
Secondly, the customer that went bankrupt due to supply chain issues is perhaps one that you could have possibly foreseen coming. However, you didn’t indicate if payments were slowing down or if there were other indicators that this customer was entering a very difficult period. Nevertheless, this is the type of situation that we credit professionals need to grapple with as best as possible.
I don’t see the value in paring down credit by 20% across the board. In other words, instead of evaluating the credit situation for each customer very carefully, you are driving away some customers for no reason, all because you don’t want to incur a credit risk. If you have performed all that is required to properly grant a certain level of credit and you are doing your utmost to monitor each customer, then I believe you have done your job.
My advice is that you change course, talk with your sales team and all others at the company who have a stake in the credit granting and collection process, and get back on track with maximizing your sales safely.
Please let me know how it turns out.
Crabby
Dear Crabby is a credit, collection, and human resources advice column by Nancy Seiverd President CMI Credit Mediators Inc. Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
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