Dear Thea,
So far 2021 is proving to be as challenging for my credit department as 2020 but for different reasons. Soaring material prices and shortages have thrown my customers’ credit lines out of whack. I have customers that can’t pay for their materials because those cost increases blow their profits out of the water, but they still need material for other jobs. My boss wants to “work” with customers and be “flexible,” extending terms and relaxing credit. I keep trying to warn him, and my sales team, that this is going to bite us. How can I get them to listen?
—No Chicken Little in Chickasaw
Dear No Chicken Little,
What doesn’t kill you gives you a lot of unhealthy coping mechanisms and a really dark sense of humor. If this year does not test your credit coping skills, nothing will. Not always noticeable until it is too late, the biggest cost or impact to businesses encountered this year is dealers not keeping a tight enough rein on their credit granting and collections. The cost sneaks up on you without you even realizing it is happening until it’s too late. Just like swimsuit season.
When sales are going through the roof and money is seemingly flowing like champagne at a bachelorette party, many companies take their eye off their accounts receivable. They allow customers a little “extra time” to pay the account. Before you know it, that “little extra” has creeped out 15-20 days or more past due, eventually creating a cashflow issue for your company.
In any economy, extended terms are another cashflow killer that impacts your business. Your customer asks for a change in the payment terms and you generously allow the extra 30 or 60 days they requested and it ends up playing havoc on your accounts receivable. Unless you are getting the same terms from your supplier you are creating another unintentional cost to your business.
Once you open the barn door for either of those scenarios it is tough to get it back under control. You have to retrain your customers to pay you on time. It is even harder to reel those extended terms back down. Same with increasing credit lines to accommodate price increases with no plan. Put the two together and it goes pear shaped pretty fast.
Take a moment to review your aging and see who is trending slow. Start the reeling in process now. Follow up on commitments and hold your customers accountable. The fear is always (I’ve heard this from every single customer ever) that you will lose their business. You may, but how much is it costing you to carry them, and what happens when money tightens up? Will they have the ability to pay you? When? In all reality, they aren’t going anywhere. They can’t afford to.
Sit down with your boss and come at the conversation from a different angle. Map out the cost associated with the new up-and-away credit policies, along with some statistics on increased lien filings and bankruptcies and see if you can’t get on the same page.
The longer your money is in someone else’s pocket the more opportunity for it to never make it to yours. 2021 is not the year to “let it ride.” Treat your AR with the same set of guidelines regardless of what the economy is doing.
Everyone wants to be supportive and a good partner, especially when there are challenges in the industry, but here is a difference between being supportive and helping someone bury themselves in a mound of debt (at your expense I would like to point out). Someone must raise the alarm, so when it comes to saving the company’s cashflow, it pays to be a little chicken.
With more than 30 years of credit management experience in the LBM industry, Thea Dudley consults with companies on a wide range of credit and financial management issues. Contact Thea at theadudley@charter.net
