Have you changed your credit terms in this difficult economy? If so, what did you do? How are you protecting your company from future bad debts?
— Ken MacDonald, president, M&G Materials Handling Co. (East Providence, RI)
Duncan Murphy: The prevailing atmosphere has firms that are solid and flush with cash sending checks more slowly and perusing invoices in greater detail, which slows down receivables. With revenues shrinking, every order is needed and buyers know that. Margin pressures and low interest rates remove cash discounts as a strategy for us; an extra 90 days costs only 1 percent in interest.
Our strategy is to be very proactive in collections. We rewrote our credit policy and strictly enforce it. No one gets credit until an application is completed and approved. A bank card or a check with the order are the only alternatives until the evaluation is completed. We also have a notification process for capital purchases of size as the order is being placed, no one is surprised when the product is shipped and a big invoice appears. This was due to setting credit limits to cover the normal flow of smaller invoices to better control balances.
Finally, we have restructured our collection procedures with clear responsibility. A timeline with appropriate actions tied to it is a key part of the process. All these steps began early last year, and we are as clean as we ever have been. Our entire team is determined to maintain this performance in 2009.
Richard Donnelly: Our credit terms are 30 days, and we will not make any changes. Our credit department works very closely with the operating group to stay current on a customer’s financial situation, and we are very proactive on handling customer disputes. Each month, department managers meet as a team to review receivables and determine what actions we will take on specific accounts. If the customer is slow to pay, then the credit department contacts the area that issued the invoice to assist with the collection. Historically, we waited six to eight weeks to suspend credit on an unresolved account. Now, we wait two to four.
Chuck Frank: We are now collecting 35 percent to 40 percent upfront as a down payment. We are working with our customers on invoicing schedules that complement the cash flow of the project. We are educating them on the need for us to have their monies in our account to pay their bills prior to their bills coming due. We are following up on outstanding invoices 10 days prior to the due date, making sure the customer has our invoice and it is approved to pay. At the slightest bit of concern, other team members, including senior management, may step in. We have threatened to put projects on hold to ensure payments are made on time. While this is not our culture, some customers have forced us to take such drastic measures.
Also, we will not process an order from a new customer without the appropriate credit references. We are now collecting a down payment for projects with a value greater than $30,000 (down from $50,000). We are charging an internal finance charge on invoices past due, which provides additional incentive for our account owners and engineering teams to get involved with collections. The finance charge is taken right out of the gross profit in the project, which affects commissions and bonus programs. We are also monitoring the financial health of our larger customers and strengthening our relationships with the executive team to give us easier access to the decision-makers and minimize delays and stall tactics when chasing receivables.
Brad Baker: We always have had a strong internal credit policy, so internally we have not made many changes. Once each week, we meet with all managers and discuss all past due accounts. The accounting department is expected to make the first line of contact and resolve all paperwork issues before that meeting. The department managers are then advised of any problems and are expected to have them resolved by the next week.
One change we have made is to use a local credit agency as opposed to Dun & Bradstreet when establishing new accounts or processing large orders. Not only does this save money, but there is also more local and current information available.
John Faulkner: Credit terms start with the salesperson. The largest part of most dealership receivables are in machine sales or allied products. At FMH, we require net 10-day terms for everyone (even from the big boys). You can get net 10-day terms if you ask for them, and a lot of your receivables problems go away.
We are net 10 days on parts, rental and service also. We fight to keep our terms at 10 by explaining to the customer that we are a cash business with labor being paid weekly, and all our parts vendors want to be paid in 30 days or we don’t get any more parts.
Scott Hennie: We always have been diligent with our terms as well as checking the credit and payment history of new clients. We question the current financial status of existing customers. Has their creditworthiness changed since we last checked them out? We also look into the current financial status of vendors to whom we send down payments. Are they at risk of going out of business before delivering the order?
We have also implemented a “cancellation policy” to our terms on larger systems orders. If the customer cancels an order after an elapsed amount of time from when the order was placed, there is a penalty equal to any costs incurred by us and a percentage of the contract amount. This percentage increases as the time from order placement increases. We will continue to be diligent in collecting open invoices, but we have also opened our eyes to some of the other financial risks that we may be exposed to from the time an order is accepted to the time product is delivered to the end-user.
Kevin Katona: We have not changed our credit terms. We have always had policies in place that are very conservative. We have always done credit reports for larger sales and continue to do so. With shaky customers, we require either cash in advance or a credit card. For new customers, we start with small credit limits to watch their pay habits, and the amount of credit extended is usually limited to the profit on the order. Based on lessons learned the hard way, we always walk away from sales that look too risky.
Mark Milovich: We have not yet changed our terms but have become very careful to whom we issue credit. Our terms have always been net 10 days on new equipment, net upon delivery for used equipment and net 30 days on everything else. One policy we put in place is to not accept cash or check for COD sales from a company with whom we have no history. There will be many companies placed on hold or COD with my competitors that will come looking for service or parts. We require a credit card account up front. Once approved, we will do the work and bill their credit card immediately upon completion. We are also very wary of new accounts. Some companies will go on a spending spree knowing that the company intends to file bankruptcy and then the vendor will be out a great deal of cash. We are considering tightening our credit terms to net upon delivery for all equipment and offering 2/10, net 30 for other sales.
Jerry Weidmann: We have not changed our terms of net 10 days for equipment sales and 1/10, net 30 for all other sales.
To prevent future bad debts, we require new customers to submit a signed credit application that includes trade and bank references. We use the Internet to confirm that information and Dun & Bradstreet as part of our risk evaluation process.
For existing customers, we closely monitor account balances compared to their approved credit limits. Credit limits are established to provide a customer with adequate open account availability for “normal” business volume. If a customer exceeds the credit limit, an account review is required before additional orders can be released. If the customer is not current in its payments, a call is made to discuss the situation before additional orders are released.
Due to the current economy, I review customer agings weekly, focusing on significant past due balances and large “current” balances that are coming due. Collection notes are reviewed to ensure customers provide “positive” responses with respect to timely payment. A strategy is developed to manage accounts that do not provide a “positive” response.