“PROFIT CENTER” – A Team Environment

Is your company REALLY in the 21st century? Even in the 20th century? It is time for all companies to do a reality check, and enter into the 21st century . . . in knowledge, respect and understanding of the credit department. Likewise, the credit department must understand the need of being a manager of the company’s cash flow in a manner to provide the maximum in sales volume, and not just be a collection department. How does your company view their credit department and the responsibility that it has been given as a part of a great team? How do YOU, as a credit person, view your department and your role in that department?
Credit -- for many, many years has been thought of as a necessary evil in the business cycle. It has carried a myriad of labels including the old stand-by, which makes real credit managers cringe, ‘Sales Prevention Department’. In most instances the credit department is considered to be a cost center by upper management. Perhaps this is because the Credit Department is – in most companies – a function of the Accounting or Treasury section of the company, and is not viewed as the provider of cash for the company. No matter what part of the infra-structure it is, the negative attitude trickles down to middle management and other areas of the labor system until the Credit Department worker is looked down on by fellow employees – usually from the sales side. But, is the credit department really a cost center? Let’s take a look at what credit people do, and how they fit into the business cycle.
To start this adventure, we must ask, “What is the purpose of having a credit department?” “Why am I (the credit employee) employed here?” Is it only to collect the money for goods sold by the sales department? Is the purpose to limit the number and amount of bad debts the company experiences? These two items alone sound like very important reasons to support the need for a credit department. Where would your company be without a positive cash flow? If a lot of the salespeople’s efforts resulted in their sales being written off as bad debt, how would you have sufficient cash flow to purchase more products to sell – or to pay the employees of the company? Poor cash flow prohibits you from making your payroll and purchasing additional goods – without the added cost for interest on borrowed money. Bad debts come off the bottom line of your profit picture. If a company is operating on a 35% profit margin (before General, Sales, and Administrative costs), how many additional dollars of new orders would you need to obtain – sales you would not have received anyhow – in order to make up $10,000 of bad debt? Look at that previous question again, carefully. It said, “new orders you would not have received in the first place”. If you obtain enough ‘new’ orders – orders you would not have had if you didn’t try to make up for a bad debt – I think you need to ask yourself, “WHY, why didn’t we have these orders before?” Better yet, someone needs to ask the Sales & Marketing Managers, “Why.” Could you get those extra orders if you were not trying to make up a bad debt write-off? Looking past this phenomenon, it would take an additional $28,571.50 of ‘new’ orders to offset a $10,000 bad debt. So the thought of getting orders you wouldn’t have received, is it just an expression – a figment of the imagination?
A Profit Team
The above briefly outlines a definite need for a company credit policy, and a credit department. Regardless of the company’s credit policy, Credit -- a long time feared obstacle to sales people -- is, in actuality, a partner with sales. Take a real look at the picture. When you have a football team there are 2 distinct roles to be played – and offense and a defense. Sales people obtain an order from a customer and the order is shipped – this could be termed the “offense”. With the sale of the product, are you now in receipt of cash to make payroll, pay overhead costs, or pay for additional goods? Basic knowledge tells you of the need to convert that shipped order into cash funds in order to make your payments. Who is it that makes sure the customer fits safely within your company’s corporate policy guidelines before the order is ever shipped? Who makes certain, through close monitoring and using professional acumen, the money is received close to the terms given? The answer seems obvious . . . the Credit Department – which is the “defense” side of the team. When the money is in the bank, you finally realize the profit of the order. Until then, you have donated to the customers’ profitability. This is team work . . . a “Profit” Team.
An age-old terminology is, “the sales people are the eyes and ears of the credit department.” Exactly what does this mean? Most companies have such a large customer base that it is virtually impossible for the Credit Manager to visit and see what is transpiring at each of the company’s customer locations. Is the attitude in the customers office good, or are there many unhappy employees complaining about working for the company. Are the premises neat and orderly, especially in the office -- where it is apparent things are organized/controlled and not in total chaos. These, along with other factors, can show if a customer is going to be one that will enable your company to realize the profit that is expected, or will the cost to monitor and collect money due you be such to diminish the expected profit. This is just another place where the Team concept comes into play.
When one steps out of the picture and looks at it as a whole, a profitable business requires sales and credit to be Teammates (partners)! As teammates, it would be beneficial for all to have a single focus. This single focus is on making money for the company (which should eventually provide more money for the individual team members). Don’t misunderstand, sales people are extremely important. They are the offense – make a score by getting that order for your product instead of a competitor getting it. If the cycle was to stop there, and every order was paid when it was due and with no deductions, the Sales function could (should) be termed a “profit center.” Getting back to reality, even the most naive of managers (business people) realize there is a severe problem with some customers not paying within the terms given by your company, and taking unauthorized deductions. (Deductions – that is another topic for another time.) Some of those invoices need a lot of time and effort invested into getting the money to pay them. Hence, the need for the defense – credit department – to make sure the score by the sales department remains good in order to create a company profit.
So, you see, sales alone does not a profit make. Who is better qualified to be the sales persons teammate than the Credit Manager? Sales obtains the order - through a lot of work and effort – and the credit department makes sure the purchaser is qualified to handle such a balance. Credit may even have to ‘hold’ orders because the customer is past due or over their credit line. When this is necessary, it is imperative that the Credit Manager (or person responsible for that customer) takes the necessary steps to communicate with the salesperson regarding the customer and his account. Communicate so the salesperson is fully aware of the financial condition – payment trends – of the customer. Make them aware the order is not being processed, and what remedy the customer needs to make to get the order released for shipment. Lack of communication with the sales associate is extremely important. Do not allow the sales person be torpedoed by the customer because he is not aware an order is being held for credit reasons.
Associations
There are two types of industry Trade Associations – one the Sales side of the company is familiar with, and the other is familiar to the Credit Department. Each Association – taking different roads – is available to help the manufacturers, wholesalers, and dealers increase their bottom line.
While the Association most familiar to the sales professional stresses ways to market your product and provide you with new techniques in getting your product to market, the Association available to the credit professional helps them learn new ways to make proper credit decisions to benefit their company.
Very few Associations are equipped to provide the expertise to both Sales and Credit. One Association that provides the Credit personnel with the ability to evaluate the credit worthiness of present and potential customers through an online reporting system is BPCA. Utilizing the reports to see how other manufacturers and wholesalers in the industry are being paid can assist the credit person to make a proper and quick credit determination. The quicker a decision is made, the quicker the order can be shipped and the cash realized. Payment / credit information has not been available to the Sales side of business.
As I conclude this article, I think everyone agrees that Sales and Credit need to work together as a team – a team creating a true Profit Center.
BPCA, with the information they are able to provide to the credit professional, is able to assist the Profit Team of the manufacturer and wholesaler. Not only does BPCA provide the credit professional with payment experience of a customer, but through education and the ability to network with their peers in the same industry they are able to learn of ways to make the sale to borderline companies, companies with less than the best payment record. How about it, does your company belong to BPCA, so your Credit Department is in tune to necessary credit techniques and information to be a member of your Profit Team?