May 25, 2022

Article 4.4


Conventional marketing wisdom is that salespeople should sell and leave the collecting of receivables to the credit department. Although this policy often creates cross-purposes between the two functions, it generally has worked from 1946 on as the US economy grew rapidly. In growth times, competitors race for market share with aggressive, prospecting, and the economy or the banks float most customers enough to enable them to pay their bills.

These conventional practices may not work for the next few years, for a number of reasons:

1. Business bankruptcies and slow-pay practices peak at about six months after a recessionary bottom. When the economy contracts, companies find margin contribution falls faster than cost cutting to cause losses which is a drain on working capital which must also pay the bills. Then, when the economy starts to expand, working capital must finance expanding work-in-process, finished inventory and receivables before a new increment of receivables can be collected to realize profit margin as cash in hand. Many firms must finance this growth on top of their recessionary losses by paying suppliers more slowly. As a supplier, don't think that the beginning of an economic recovery will help customers pay quicker, be cautious for six months or longer.

2. Many industries and customers are players in mature industries with too much supply and a first time ever, post-consumer society, slow-growth demand economy. Conditions are so tough that the weakest 50% are usually terminal cases. Do we want to trade dollars with accounts with no long term viability to eventually get a write-off or should we cut our losses now and look elsewhere?

3. Because of the U.S. banking crisis, banks are tighter on loans. Some cash-short, but viable firms could fail for lack of funds.

4. Interest rates and debt service costs for many leveraged firms will stay high precluding timely supplier payments for two reasons. First, the big U.S. banks need wide spreads between their cost and rates for funds to make big profits to finance huge write-offs, and the Federal Reserve is helping them by keeping rates higher than they should. And secondly, there is a potential global credit crunch pending, because every country needs to borrow money, and too few our currently saving surpluses to lend. This potential problem has kept long-term interest rates and therefore mortgage rates high, which hurts all housing related industries.

In summary, it looks like the next few years might be the toughest and most protracted credit collection times since the depression. We will have plenty of customers demanding longer, softer credit terms and perhaps getting them from some of our desperate competitors. What are we to do?


Recognize that extending another 30 days of trade credit is the equivalent of at least a 2% price cut when we consider the cost of bank financing, credit department costs and write-offs. If sales compensation currently suffers if prices are cut on the front end, then they should suffer at least the same for a price cut via terms on the back end.

Make the salespeople want to work with the credit department instead of against them. Install negative incentives for slow pay accounts and write-offs, but take these steps:

1. Announce the terms of the plan 3 to 6 months before putting them into effect. The intention of the extra charges should not be to harm the salesforce or abruptly squeeze the customers. The lead time, instead, should allow target accounts to be gradually improved and negative incentives to be minimized. But, action steps must start immediately.

2. Pre-identify the few problem accounts in each sales territory, and pre-calculate what the negative incentives would have been for the past few months if the program where in effect. Most salespeople will be relieved to find that the totals are less than what they anxiously imagined.

3. Pre-schedule meetings for the salespeople to visit immediately with the credit department people and profit center managers to discuss team strategy for problem accounts.

4. Perhaps allow the salespeople a one time chance to turn over accounts to the house that appear to be headed for write-offs with no penalty to the salesperson.

5. Some salespeople might have special, huge account problems which will require an exceptional plan.

6. And finally, educate the salesforce on: cash-flow management for a business; all of the firms credit practices, policies and philosophies; how to better target customers who will be long-term, stable growth and pay accounts; how to segment slow-pay accounts into different categories that each need to be sold differently on why and how to become timely payers; how to be a helpful credit collection consultant for customers if appropriate; and who to recommend to cash-squeezed customers in search of cash-flow management help.

Many customers simply can't pay because their customers are not paying them which is a poor excuse. Ask, press and demand that these customers solve their own credit extension practices instead of expecting their poor management to be bankrolled by suppliers. In business, we should try to find needs and fill them on a profitable basis. Many of our customers have a need for better cash

and credit management; how can we diplomatically fill this need directly or indirectly and sell the customer on these changes and on the benefits of prompt payment of receivables.

7. Some salespeople may not be able to learn, adjust and be part of this total program solution. Perhaps they are not geared for selling in tougher, more complicated times and need to be replaced.

Other strategic guidelines include: stop considering every customer a good customer. Today we want to identify the long-term, stable growers and payers who are within our strategic focus and tie them to us with multi-strand ropes. We need to weed our garden of customers with which we cannot obtain a long-term, win-win, strategic fit. This will free our resources to focus on, further penetrate, and better retain the best. If we must be smaller and more profitable, good.

If compelled to match a competitor's extra 30 day term offer, counter with 2% off the upfront price with prompt pay or even more with faster pay. This strategy segments the cash-rich, viable customers from the cash-poor desperate ones. Wal-Mart and the Price Club both pay all suppliers in 15 to 20 days to get the best total deals on the planet. Many of the over-leveraged retail chains pay in 60 to 90 days and play unethical games too. Which type of account would you rather buy big volume from today and try to build a long-term, win-win relationship?



Changing and difficult times require difficult changes in our conventional practices, and the best run firms make tough changes earlier rather than later. If we are looking at a tough credit-collection climate over the next few years, then it is better to have the salesforce be part of the solution instead of part of the problem.








Article 4.4

© Merrifield Consulting Group, Inc. 1991