Credit Department Performance
Please Try Not to Confuse Activity with Progress
By Steven Kozack

One company was concerned about the performance of the credit department, but was unable to specifically identify any problem areas. I was told the department was a "beehive" of activity; that the collectors made a high volume of calls; that a review of the on-line credit notes indicated that delinquent customers were being contacted frequently; that specific processes were in place to evaluate new and existing customers...but delinquencies were growing and bad debts were increasing. When you are presented with inconsistencies such as these as a consultant, you have to approach the situation with an open mind which is what I tried to do.

After spending time in the department, I began to get a sense of what was happening. These were some of the more glaring problems I found:

• As a general statement, the department staff made the fundamental error of confusing activity with progress.

• The collection staff was measured in part on the number of calls they made, not on the payments they were able to secure as a result of these calls.

• There were no specific collection or DSO targets established for individual collectors. These targets existed for the department, which meant that when the department failed reach these goals that everyone was responsible or no one was responsible for the failure.

• Collectors were so anxious to make a high volume of calls that they were willing to accept any payment proposal offered by a delinquent customer as long as the payment commitment was made quickly.

• Collectors were reluctant to take time away from the collection activities to provide customers with the supporting documentation they requested... in effect ignoring the fact that supplying customers with proof of delivery and other documents is an integral part of the commercial debt collection process.

• While it was true that there was a high volume of collection calls being made no one prioritized these calls. For example, one day, I watched as a collector called a customer about a $150 past due invoice - when another customer on the same page of the aging report had a past due balance of over $10,000. When I checked back later in the week, I found that the other customer was not called until the next day.

• There was in fact a detailed program for investigating new accounts... but the key to success lies in the ability to properly evaluate the facts gathered and make an informed credit decision. The "problem" involved the decision making process. Fundamentally, the credit manager and assistant manager were accepting too many marginal accounts... resulting in higher than anticipated bad debt losses.

• The credit manager preferred to hire new collectors with no experience...reasoning that they had no bad habits to break. This approach might have worked well if she had created a comprehensive training program for new collectors. Unfortunately, with only the most basic introduction to their duties, new collectors were assigned a group of accounts and put to work. The credit manager acknowledged that they were forced to learn by "trial and error" - but she failed to understand that the problem with trial and error is the cost to the company of the errors.

• The company made no provision for writing off small deductions taken on customer payments. Every deduction taken became a chargeback, and someone had to investigate each deduction. At that point, a determination was made about whether the company was right or the customer was right. Countless hours were spent gathering documentation and contacting customers to convince them to repay small dollar deductions taken in error. It was time that could have been [and in my opinion should have been] spent on more important issues.

• The credit department had a policy that required every customer to be updated once a year, and this policy was followed to the letter. Upon closer examination, I realized that there were no provisions for evaluating customers except on their anniversary dates. In contrast, many credit departments establish specific policies that require unscheduled updates when certain events occur [such as when a customer's check bounces, or the account becomes seriously delinquent, or the customer makes and then breaks one or more payment commitments].

The good news is that many of these problems were easy to correct. The collectors were given specific performance goals. Reports were generated showing their individual collection performance. An emphasis was placed on the quality rather than the quantity of collection calls made. Collectors were trained on how to negotiate with delinquent debtors. The company agreed with my recommendation to write certain types of small dollar deductions off during the cash application process. The credit manager and CFO agreed to tighten the credit granting criteria for new accounts and to their credit they notified the Vice President of Sales in advance about what changes were being made and why. Last but not least, certain customers were flagged for review when problems were noted... and steps were taken to reduce credit risk when it was appropriate to do so.