With the advent of just in time delivery, many suppliers perform an essential customer service by ordering or manufacturing, in advance, products specifically required by the customer. If these products are customer specific, they will ultimately have to be written down as obsolete or sold at considerably less than market value. This is often accounted for differently and never really tagged as part of the bad debt, although it arguably could be.

Annual budgets look ahead and sales forecasts cascade down to individual customers. Product sales and margins are predicated on the retention and growth of these identified customers. A bad debt removes this opportunity from the mix and the void must be filled from among the existing accounts or a concerted prospecting effort must be undertaken to find a volume/margin replacement. If neither is found, these lost sales become very measurable.

If the bad debt is significant, it might induce a sales territory realignment to balance out the lost revenue among all of the sales representatives. This would make sense if the bad debt were a disproportionate contributor to one’s individual sales budget. Matching customers with new sales representatives could be disruptive to some relationships and actually inhibit sales growth in the budget year. Again, there is potentially a bottom-line impact stemming from this business failure.

Bad debts are financed out of a bank line. The reduction of bank availability because of this loss would mean funding for specific projects, like new product development. Programs may have to be curtailed. Companies need to continue to advance and remain competitive. The impact of not having access to these resources will have a much longer term effect on the overall business.

Depending upon whether it’s the size of the bad debt or just the number of bad debts incurred during the course of a fiscal year, there will likely be a philosophical adjustment internally that could also affect business. If the credit department reacts by “tightening up” on credit granting, sales growth opportunities could be missed for all the wrong reasons. If a similar attitude is applied to collections, customer goodwill could become an issue with many simply moving their business elsewhere. Again the notion of losing existing or anticipated sales becomes a significant one with a negative effect on profitability.

All of these considerations and the impact on current business are often not linked to the actual bad debt “principal” loss. Conventional accounting provides no basis for doing so and therefore any tabulation of these costs, real or otherwise, would likely have to be booked informally.

While bad debts typically fall within the domain of the credit department, the true cost of losing a customer has both short and long-term consequences for the company. Therefore, recording the principal loss is in reality an understatement, if these others factors are not recognized in some form or another.

To find out more about how credit insurance can help you safely expand your export business, give us a call.

If you take steps to manage your receivables by applying the right kind of pressure at the right time, the beast can be tamed. Following are seven steps:

The First Rule: Those who expect to get paid – get paid
In the administration and control of receivables, attitude counts. We’ve discovered that if you expect to get paid, and the other party knows it, and knows you’ll take action if you are not paid, you will get paid.

It’s simple: If you take it seriously, they’ll take it seriously. On the other hand, if you treat receivables lightly, and allow your customers to take advantage of you, they will. What does “taking it seriously,” mean? It means:

• Establishing policies and procedures that will help you make decisions as and easier.
• Making a commitment to properly train yourself and your employees in how to manage and collect receivables.
• Being certain your customers understand your terms and intentions.
• Understanding and using the tools and services that are available to you.

The Second Rule: Do Something Every Twenty Days
Nothing is more effective than a systematic, controlled approach to receivable management. Step-by-step procedures are the key:

We have had great results with a process we call the “Twenty Day Diary.” Here’s how it works:

• Day one, you make a sale, deliver products, and issue an invoice with terms set at NET 30 days.
• Twenty days later – ten days before the receivable is due – you call the customer. This is a pre-collection call that doubles as a service call.
• You ask if the order was received, if everything was satisfactory, if they have the invoice, and if they understand the terms.
• If there is a problem, you have a chance to fix it before the due date, and everybody is happy. If there is no problem, you know the customer is satisfied and is likely to pay on time, and the customer knows you care.
• The next call (if necessary) is then scheduled for twenty days after that – ten days after the due date. If a genuine problem has arisen, it’s early enough to deal with it efficiently. But if your being stalled, you’ll know that, too, and you can act accordingly.

The secret is to be systematic and organized. We call it the “Twenty Day Diary” because to make it work, you have to keep track. Write down what was said, when, by whom, every step of the way, and you can’t go wrong.

The Third Rule: Don’t Turn Your Back on Them
Extending credit to another company involves risk. Of course, in most cases, the risk is part of the cost of doing business, and it is acceptable…so long as it is managed properly.

Even if you were not able to apply any other Rules to your business, we urge you to apply this one. Why? Because untended receivables can get out of control in the blink of an eye. And out of control is the first step towards being out of business. Here are some danger signals you can watch for:

• Slow payments or a change in payment habits
• Broken promises of payment
• Unreturned messages
• Postdated or NSF checks
• Refinancing or changing banks
• Unauthorized return of merchandise
• Selling at unusually low prices
• Radical changes in buying patterns
• Too rapid growth

The Forth Rule: Don’t Show them any Weakness
It’s called “sticking to your guns”. When you set terms, be determined to communicate them and to stick to them, no matter what. Remember, a deal is a deal. You’ve fulfilled your obligations, now it’s their turn.

You do it by stating your terms and intentions with clarity and firmness. If you are vague and easygoing about your terms, it’s more likely that people you deal with will be vague and easygoing about paying you.

It’s important to develop a set of reasonable terms and condition and it’s important to make them part of your sales contract.

A world of advice: If you don’t actually tell them your terms, you cannot assume that they understand or accept your terms. You cannot assume that the other person is a deadbeat just because the bill wasn’t paid on time. The truth is that many disputes and late payment situations arise through simple misunderstandings.

One more thing. Remember to explain your terms and conditions to your own employees. It’s a common mistake to assume that your own people are well informed about how you conduct business.

The Fifth Rule: Don’t Be Afraid to Escalate
If you find yourself with a collection problem on your hands, the important thing is to get control as fast as possible and keep pushing for results.

The key is to recognize when the process is stalled, and be prepared to use a stronger approach each time you make contact. If you are using the “Twenty Day Diary” (see second rule), you should know after the first or second call whether or not you have a problem. At that point, the receivables is still just a few days overdue, and you already know your customer’s intentions.

If you believe they intend to pay, you can make an arrangement that will satisfy both parties. (Remember to confirm it in writing).

If you believe they will not pay, escalate your actions. Without hesitation.

There are many things you can do to apply increased levels of pressure, ranging from pre-collection letters and demanding notices to full-scale personalized collections and ultimately, legal action.

As you go through the process, remember this: It’s your money. And sometimes you don’t get paid if you don’t push.

The Sixth Rule: Say What you Mean and Mean What you Say
We have already said that in order to prevent problems, it’s important to set terms and stick to them (the Fourth Rule). The Sixth Rule extends that thinking to situations where a problem already exists and your trying to collect.

During the process of making a collection, you should use the call to:

1. Push for a resolution (you get paid) or
2. Establish the next steps to be taken (call back, send a courier to get a check, repossession, legal action, ect.)

To keep your control, you must keep your word. If you say you are going to call back for an answer or a response at 2:00pm on Tuesday, do it. If you tell a debtor that you are going to cut off their credit, do it. If you tell them that the matter is going to a professional collector, send it.

If you keep your word, and do exactly what you promise, you will always have the upper hand, and you will have a better chance of collecting.

The Seventh Rule: Don’t Go Swimming Alone
It is understandable that some people are reluctant to make collection calls. After all, discussions of money can be uncomfortable and nerve-wracking. The “buddy system” is your best defense. The key is to plan your call, and then, if you get nervous, find a buddy and rehearse it. Take a few minutes with a co-worker, organize your facts, discuss what you might want to say, and, most importantly, decide what you want to achieve with the call.

Make a list of objections you might hear, and determine how you will handle them. For example, what if the person you are trying to collect from responds with the classic line, “the check is in the mail”? Most people will feel relieved and say “Great! Thank you very much: and end the call. Big mistake. Your response should be:

• When was the check mailed?
• What was the check number?
• What was the amount on the check?
• Who was the check mailed to?

Keep in mind that your collection won’t succeed if you allow yourself to get stalled. So, when it happens, call in for reinforcements. Use the resources available to you.

For more information, please send us a message. Or, if you prefer, in the United States you may call 1-800-333-6497.

This results in what Dunlop calls unworkable letters of credit. He says that sellers (not the credit manager of course) contribute to the problem because they would rather take the risk of a bad letter of credit then lose the sale. The problem ends up on the desk of the credit manager, who must figure out how to get paid – without the letter of credit.

Unworkable Terms
“An unworkable letter of credit,” says Dunlop, “is one that contains conditions that the beneficiary cannot comply with. The result is a discrepant submittal of negotiable documents and the loss of protection.”

Dunlop is quick to point out that unworkable letters of credit are different from unfavorable ones. Though there maybe conditions in the latter that are not to the beneficiary’s liking, these conditions can be met. With an unworkable letter of credit, meeting the conditions – either because two conditions contradict each other or because of insufficient timing or other impracticalities – becomes physically impossible.

To help credit professionals, Dunlop has prepared a list of the most common unworkable terms in tellers of credit. They are as follows:

• Performance conditions. Since the buyer does not wish to tie up its credit for any longer then the minimum amount of time, the latest shipping date, the expiry date, or the presentation date are apt to be inadequate.
• Document requirements. This might include a requirement for documents that the beneficiary cannot produce or procure before shipment – for example, a signed inspection certificate detailing the origin or each component in an assembled product. Even if this information were known, American chambers of commerce will only certify American products, so any product with a foreign component would not be given a certificate, and this requirement would not be met.
• Additional conditions which the beneficiary cannot meet. Dunlop gives the example of a requirement where the applicant asks the beneficiary to supply a copy of the carrier’s insurance policy instead of a certificate of insurance. Such policies are typically umbrella policies to cover the ongoing operations of the carrier and are not available to freight forwarders or their customers.
• Ambiguities. When two contradictory requirements are included in a letter of credit, the beneficiary has no way of complying. Dunlop cites the example of the INCOTERM FOB being used in one place and then a requirement that freight be prepaid to the destination. Other vague terms such as “an original copy” or a “certified fax” make it impossible for the beneficiary to comply.

Minimizing Unworkable Conditions
While completely eliminating these unworkable items is probably impossible, the international credit professional can do many things to make sure these issues are either eliminated or dealt with in a timely fashion. Here’s what you can do:

1. Identify the unworkable issues. Start with Dunlop’s list of common items and add it to ones that recur in your shop.
2. Work with the buyer. Often the buyer is not aware that these conditions exist in the letter of credit. Once the buyer understands the seller’s issues with the letter of credit, it can negotiate with the bank to have them stricken from the letter of credit.
3. Communicate with the buyer about these conditions in writing. In this manner, the new wording can be included, and the buyer can five it directly to the bank. The change will come in the form of an amendment that should reflect the seller’s recommended wording. Dunlop suggests that the letter sent to the buyer should, if at all possible, include references to the letter of credit not conforming to UCP 500. This information will be useful to the buyer if its bank insists on its own language.
4. Provide the buyer with letter-of-credit instructions that spell out the terms and conditions that should be included. If at all possible, make this a standard document that the sales force gives to all customers that are required to provide letters of credit.
5. Review the amendment as soon as it is received from the bank. If is does not conform to what was requested of the buyer, make an assessment of whether accepting the amendment as is or requesting another amendment is worthwhile. Remember in all likelihood, time will be running out.
6. Get your staff up the letter-of-credit learning curve. Not all the letter-of-credit problems originate with the customer. Occasionally those in the credit department make mistakes. Dunlop has put up a letter-of -credit tutorial on his Web site. Anyone can use it at no cost. Insist that your staff go through the various modules. It is available in several languages.

Credit professionals who follow Dunlop’s advice will reduce the number of unworkable conditions that they encounter in letters of credit. John W. Dunlop can be reached at 619-692-9648 or johnwdunlop@avgtsg.com. For more information about letters of credit or handling letters of credit over the Internet, visit AVG Trade Group’s Web site, http://www.avgtsg.com.

DON’T BE AFRAID TO ASK
Look at it in this light. Would a banker ask for financial information if he were extending a loan for this amount to your customer? If yes, you have the right to at least ask for financial statements. They also have a right to tell you they will not provide them. Just don’t be afraid to ask the question.

SEND STANDARD LETTERS AS A MATTER OF CREDIT DEPARTMENT POLICY
Moorhead recommends sending a letter annually to each customer for whom you don’t have financials. The letter should say something like “we are in the process of updating our credit files and find we do not have current financial statements on your company. Please send us your most current annual report so that we may update our records.” This is a very non-threatening request for updated financials. Don’t wait until your customer has payment problems to ask for financials.

PERSISTENCE PAYS: DEVELOP A FOLLOW-UP SYSTEM
Follow up on the above letter in 30 days if you haven’t received a response. Make a copy of the letter and write the current date and “SECOND REQUEST” at the top of the copy, and then flag it again for follow-up. Many customers will ignore the first request, and maybe the second, but by the third request, they may get tired of hearing from you and send the statement. Don’t drop the follow-up ball.

CALL THE CUSTOMER
If your requests go unheeded, simply give them a friendly call. They may tell you their new annual report is due out in another month. If so, tell them you will follow-up in a month and a half and flag it again. If you don’t, they probably won’t remember to send you the new report when issued.

USE THEIR CREDIT LINES AS LEVERAGE
If your company adheres to credit lines and your customer needs orders which will put them over their credit line, tell them you would love to be able to increase their line. But, because of your department’s credit policy, you need to have justification from the financial statements before doing so. Or, better yet, if you feel comfortable doing so, tell them you’ll release their order this time, but will need financial statements before increasing their line on a permanent basis, so you won’t need to be calling them before each order is released. Moorhead says that she has received many statements because the customer didn’t want to hear from her prior to releasing each order.

USE SPECIAL REQUESTS FOR LEVERAGE
If your customer is asking for some special allowances, tell them you would love to grant their request, but you’ll need a financial statement to justify the special allowance. – “Credit Today”