Credit and Collections Strategies: In a Word – Proactive

July 1, 2005 By    

A problem in the propane industry today is that a lot of companies are struggling financially because prices are increasing, leading to higher accounts receivable balances.

“This can lead to problems with banks, because a lot of loans are based on A/R balances,” says John Redmond, vice president of product strategy for ADD Systems in Flanders, N.J., which offers A/R software to propane dealers. “[Propane companies] may not be having more difficulty collecting, but their A/R balances will be higher because of the higher prices.”

Thus, it becomes necessary to get A/R balances lower. Luckily, there are strategies companies can use to better manage credit and collections and to keep receivables more in line with the demands of today’s business.

The role of credit is to sell

The first step is to reformulate beliefs about the roles of the credit department. “Too many companies still think of credit as primarily a risk management function,” says Abe WalkingBear Sanchez, president of credit and collections consulting firm A/R Management Group in Canon City, Colo. “They are missing the boat.”

The primary role of credit, according to Sanchez, is sales support. As such, credit is primarily a communications job, not an accounting job. “In fact, the only reason a company should even have a credit department is to support sales,” he says. The only reason a company should incur A/R carrying costs and potentially bad debts and write-offs is to generate sales that would otherwise be lost. “I can’t count the number of successful business people I’ve talked with over the years who still refuse to do business with a certain supplier today that turned them down for credit ten or even 25 years ago,” says Sanchez.

The role of a credit manager is to manage receivables. Companies need to approve credit on marginal accounts, and then find ways to make those receivables perform. In general, about 55 percent of accounts are going to be good and 10 percent are going to be bad, so it’s the 35 percent in the middle that represent the “opportunity dollars.” These are the ones that need to be focused on.

In order to sell, it is important to be creative. One way is to set up long-term deals with customers. One example is a booking contract, a contract to purchase so much fuel within a certain timeframe at a certain price. Another option is a prepaid contract, which is one where the customer puts dollars up front, thus avoiding a receivables issue.

“Some distributors set up some customers on credit cards,” says Bruce Ringrose, vice president, sales and marketing, for Summit Software in Ft. Wayne, Ind., which offers accounts receivable software for petroleum and LP gas distributors. “Most distributors don’t like this, though, because of the high fees.” A better alternative, according to Ringrose, and one that is becoming more popular, is the automatic bank draft or EFT from a customer’s account. Based on their balance at the end of the month or based on certain invoices, the distributor can withdraw money from the customer’s bank.

Some distributors offer a payment discount to customers that pay on time. “Conversely, make sure your finance charges are high enough that if a customer has a cash flow problem at the end of the month and has to decide whether to pay you or someone else, they will make the decision to pay you,” says Ringrose.

You can also put customers on a budget. Based on the cost of the fuel and the anticipated monthly delivery, estimate the total annual cost, then divide that up by 12 months. The customer pays this amount each month, and then around May, the difference gets settled.

Dealing with delinquencies

According to Ringrose, it is very important to follow up with customers when they are delinquent. “If customers don’t hear from you, they assume you don’t care whether you get your money or not,” he says.

If you set an expectation and make it clear to them, in a nice way, that you do expect to get paid, most of them will take that into consideration when they have to short someone. If a customer is late and is scheduled for another delivery, call the customer and explain that they will need to have a check ready to hand to the driver when he arrives with the next delivery.

“My primary responsibility is to keep my customers within the established terms,” says Vince McDaniel, credit manager for Scott Petroleum Corp. in Itta Bena, Miss. “You can’t let customers slide. The quicker you realize you have a problem, the quicker you can address it, and the better the outcome.”

Initial contact should be to identify the cause of the problem. It could be something as simple as a missing invoice, incorrect address, or a problem with the service. If all is well, move on to the next step. With a commercial customer, McDaniel starts with accounts payable to resolve any problem they might have. “If we still can’t resolve it, then I talk with their management,” he says. “Finally, I might end up needing to talk with ownership.”

Common causes of slow payment are cash flow struggles or low commodity prices, or it may be a situation where farmers can’t sell their crops until the following year for tax and accounting reasons. With residential customers, the most common reason for not paying occurs when the weather warms up, and they don’t need the propane. Paying becomes less of a priority to them.

“They ride you until it gets cooler or until they run out of hot water,” says McDaniel.

One way McDaniel gets customers to pay in a timely manner is the company’s route delivery program. If customers keep their account current, and the company can work them into one of its regular routes, they can get savings of ten to fifteen cents per gallon.

With residential and commercial, McDaniel realizes that each case is unique in terms of how you handle it. For example, if you have a good relationship with the customer over a number of years, and you know their situation, you know that they will pay you when their money comes in. “There may be situations, though, where you have to cut them off until they pay,” he says.

All Star Gas Corp. in Lebanon, Mo. takes a firm approach with delinquencies. “Consistency is the key,” says Regina Anderson, credit manager. “We have a policy, and we stick to it.” The company gives its accounts 30 days to pay. After that time, it assesses a service charge. After 60 days, there may be a threat for further action, as well as a discontinuation of service. “In certain instances, though, we will work out payment arrangements with customers,” she says. “The main thing is to provide balance. That is, while we will work with customers, we won’t let customers dig themselves into a deeper hole.”

Credit-sales teamwork

One of the most important keys to success in credit and collections efforts is to create and maintain a strong, cooperative working relationship with the sales department. Credit managers may expect sales managers to communicate more with them, but it is the responsibility of the credit managers to initiate the communication.

First, you need to build and maintain the respect of everyone in sales. They have to believe that you want to do everything you can to help them.

Second, you need a mutual awareness of each other’s responsibilities. You need to do everything you can to help salespeople be as productive and profitable as possible. Conversely, sales needs to realize that profitability doesn’t occur until the company receives payment from a customer so it can write a deposit slip for the bank. Ultimately, you need to build relationships that demonstrate to salespeople that it is in their best interests to do things to help you.

One way to build teamwork is cross training. Credit and collections people don’t understand the sales process and everything that salespeople go through, and salespeople don’t understand the credit and collections process and what credit people go through. Consider having credit people spend time with salespeople, and vice versa. When you make it clear to sales that you’re there to help them, they will help you. For example, if someone in credit mentions to sales that they are having trouble collecting from a certain customer, the salesperson may mention that he noticed certain things at the customer’s place of business that can provide some insight into the problem.

“I work very closely with sales,” says McDaniel. “They are some of my first ‘go to’ people when there is a problem.”

Scott Petroleum has 15 bulk plants in three states. If McDaniel has a problem with a customer, he contacts the branch manager first, who will talk to the salesperson.

“Then, they will get back to me with the feedback I need,” he says. “With that information, I can act accordingly.”

Anderson also works closely with sales. The first time is when an account is set up and pricing is determined. “We might also set up different payment terms, such as if a customer has a home office in another state where it would take longer for us to get invoices to them,” she says.

Customer visits

One of the most effective strategies to ensure successful credit and collections efforts is a customer visit program. Such a visit can turn a collection failure into a collection success, for more reasons than one.

Besides helping collect delinquent accounts, customer visits can be useful business tools because they help companies create personal rapport with customers, get financial information that customers don’t want to give via phone or e-mail, explain their credit policy and expectations, get to know their customers’ operations, stay abreast of customer changes, get the opportunity to say “Thank you” in person, and check up on slow pays.

“When you visit a customer’s property, you can see what kind of business he runs,” says McDaniel. “If it is neat, organized, clean and well-kept, it gives you a good impression of the customer. However, if you visit a site overgrown with weeds and the windows broken out, it gives you a different impression.”

McDaniel has also found that nothing beats face-to-face communication.

“I have been on several personal visits that have resulted in at least a partial payment and an agreement for the rest,” he says. “The reason is that, when someone sees and talks with you face-to-face, they are more likely to honor their promise than if they just make the promise over the phone.”

Staying on top

A final strategy for effective credit and collections is to monitor accounts on a regular basis, especially large ones.

“Know your customer, and stay on top of any changes with that customer,” says McDaniel. “There are a lot of customers who are good credit risks at one level, but they can end up outside of their realm of expertise when they jump up to another level.”

Credit and collections software

Summit Software in Ft. Wayne, Ind. offers the Petrolac automated accounting software, which is specifically designed for petroleum marketers and LP gas distributors. “It is a completely integrated package that includes an accounts receivable component,” says Bruce Ringrose, vice president, sales and marketing.

The software helps set up contracts with customers, including booking contracts and prepaid contracts; can set up automatic bank draft or EFT payments, where you withdraw money directly from the customer’s bank; computes finance charges that are applicable if a customer ends up being delinquent; sets up special terms for someone who is slow to pay; computes charges for customers who are on a budget, where you estimate the cost of the fuel and the anticipated monthly delivery volume, estimate the total annual cost, then divided that up by month; and provides a system that lets you follow up with customers when they are delinquent. Also, if a customer is scheduled for another delivery, the system will alert you as to whether they are past due.

The software also allows you to pull up a customer on an inquiry screen, which shows the A/R balance and whether they are past due. “If they call and place an order, you can tell them they are over their limit and then decide whether to accept the order or not,” says Ringrose.

ADD Systems in Flanders, N.J. also offers A/R software for propane dealers. One feature of their software is an on-board billing device installed in the delivery truck, so invoices can be produced at time of delivery. “This gets the invoice to the customer faster and eliminates the need to mail an invoice,” says John Redmond, vice president of product strategy.

The program can also automatically produce a statement on any desired date, either when you want to produce it and send it out, or when the customer wants it. For instance, some commercial accounts may want statements at the end of the month. A residential customer may want his on the 17th of the month. “Besides tailoring this to customer needs, it also eliminates the problems of sending out invoices at the same time,” says Redmond. “One problem with this is that you don’t have a steady cash flow throughout the month.” Another problem is that invoices usually generate phone calls, and if you send everything out on the same day, you will be deluged with calls in the next couple of days.

The system also does true daily aging, rather than bucket aging. As such, it can identify a customer who is past due on the 31st day, rather than the 60th day.

If a customer has a credit limit and exceeds it, the system can automatically put that account on hold to prevent a delivery. Further, it can automatically generate dunning letters. “When you get a promise to pay from a customer, the system will send a letter with a due date,” says Redmond. Then, it will automatically track that account to make sure the account is paid when promised.

Finally, the system can assign a credit score based on a number of variables, so you can identify the most serious problems. This allows collectors to identify the customers they need to call first.

Suburban Software Systems in Bessemer, Ala. offers multiple software packages for the propane industry. One of these is an accounts receivable package that automatically sends out letters of delinquency based on criteria that the distributor can set up.

“For example, you can send letters to customers who are over 60 days past due and haven’t paid you anything in two months,” says Frank Hughes, president. “You can also de-select customers from that list that you don’t want to send the letter to.” After that, the system will keep track of the fact that the letter has been sent, then remind you every two weeks to follow up with that customer until you receive payment. “You can also issue delinquency statements on invoices that are being sent out to customers based on the distributor’s prescribed criteria,” he says.

One company that utilizes software effectively in its credit and collections program is Blossman Gas in Ocean Springs, Miss.

“Our program monitors our aged balances,” says Marty Beech, MIS manager. “We age our receivables monthly.” About two weeks after statements go out, the company sends out past due notices to customers who have not paid. “We also have a collections department that concentrates on accounts past due 90 days or more,” he says. They utilize phone and e-mail. “Our computer system stores all of the notes from the conversations with people who are in the collections process.” The system can also set these people up on payment plans.

Recently, Blossman has gone to actual point-of-sale invoice generation on its trucks. Salespeople have hand-held computers that hold information on customer account balances. The information is updated daily, so it is always current.

“As such, the salespeople can make collections prior to making deliveries,” says Beech. “Customers then pay before getting their next delivery.”

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