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From tug-of-war to teammates: credit and sales professionals are learning to stop sparring over delinquent accounts and disputed invoices and to work together to make money for their employers.

In spite of recent improvements, credit and sales staffs still spend too much time jabbing at each other with their oars instead of rowing together to propel the corporate boat forward. Companies need to bring sales and credit together for "Smokey the Bear" campaigns to prevent forest fires rather than fight them after they break out, suggests Davy Tyburski, founder and president of ( If sales delivers the booked revenue and credit and collections delivers the cash, when they work together to maximize both, companies make more profit, he argues.

One critical area where cooperation between credit and sales is needed--the prompt resolution of disputed invoices and unauthorized deductions--is taking on new urgency in the post-Enron, Sarbanes-Oxley era, notes Michael Meerman, CCE, executive director of Creditors Service Corp., Osprey, FL.

Not only is an unresolved deduction missing money that hurts the company's cash flow; it could be an overstated asset if it's carried on the books as a delinquent receivable when it will prove, in most cases, to be a legitimate deduction and not collectible at all, Meerman explains. If the amount is large enough to be material, the company could get in real trouble now that Sarbanes-Oxley is law and the SEC is taking a hard line on public-company reporting distortions.

"Outside auditors are taking a more aggressive posture about how deductions are reported. They want companies to get rid of them or explain them in a footnote," Meerman reports. A variety of studies show that between 80 percent and 85 percent of all claimed deductions are legitimate. "It's certainly not a best practice to keep them on the books, degrading the performance of the receivables portfolio and overstating receivables when they are not truly collectible. The pressure is on to recognize those unrecoverable dollars sooner, rather than later," he says.

Technology Tools

Help is on the way tot resolving deductions and disputes quickly--it's new, improved technology that makes it easy to share information across departmental lines. "Disputes are being resolved quicker as a result of distributed workflow initiatives," Meerman reports, "Images of the disputed invoice and relevant order, shipping and remittance documents can be routed automatically to cooperative advertising if that is where the deduction lies. They can go to the appropriate salesman if the customer is claiming a price discount. Document images can go to logistics when it's a shipping problem. Credit doesn't have to track down the people who could resolve the dispute, using phone calls, shoe leather and paper. Smart systems can expedite the process." For example, GetPaid has good software for distributive processing of disputes, Meerman reports, and a new web-based service offers online storage for documents related to deductions. (See

Furthermore, advanced lockbox operations make the job even quicker and easier, Meerman points out. Not only can a credit or A/R manager or cash application clerk view incoming checks and remittance documents on a bank's web site the same day they arrive, these workers can download the documents in electronic form and attach them to e mail sent to people in their company or the customer's staff who can resolve short-pays, he notes. "Everything they need to see, book and resolve the deduction is right there," he says.

Graybar Electric Co., St. Louis, uses a fully imaged bank lockbox service tot its receivables, and the ability to download and transmit documents electronically instead of having to find and photocopy them and send them physically makes it both quicker and easier to resolve disputes and deductions, reports Martin J. Beagen, assistant treasurer.

Credit and collections are part of finance at Graybar, but disputes and deductions are routed to sales and customer service for resolution. Performance has improved now that systems generate reports automatically and management can see exactly what has and has not been done. "The more visible the information about account status is, the better things work at all levels," Beagen says.

A growing number of disputes with reason codes now need to he routed to IT, since these disputes are not about money or merchandise, but about flaws in electronic formats used in EDI (electronic data interchange) and other forms of electronic communication that continue to grow in the quest for paperless processing, Meerman notes.

But technology enables change; it doesn't cause it. Sharing information through high-tech channels is useless unless complaints have policies and procedures that require cooperation and spell out who does what and when, Tyburski says. The key is to get the vice president in charge of sales together with the vice president responsible for credit and collections, and gel them to adopt cooperative policies and even joint contests to get the two teams to help each other, he points out.

Making Sales Accountable

In ways both large and small, companies are making progress at improving cooperation across department lines and speeding up the resolution of disputes. The change at Bell Microproducts Inc., San Jose, CA, has been between "night and day," reports David Uranga, director of financial services. The savior has been technology, which has made information easily accessible. "Before, we were hit or miss. Now every deduction claimed is addressed the first week it hits the books," he explains.

And with visibility has come accountability. "We're more sophisticated today. The responsible area has to resolve deductions. In many cases, that's the sales staff. They either resolve it, or they get dinged. Before, they weren't accountable. Now they are." A series of escalating e-mails enforces the accountability; each week a deduction remains unresolved, an e-mail is sent to a successively higher manager, he explains. Once a dispute remains unresolved for 90 days, the salesperson loses his or her commission, he adds.

The payoff: DSO (days sales outstanding) has been cut by at least 10 days in the past year and a half, Uranga reports.

Such change didn't come easily, Uranga concedes. "It took a while. We heard a lot of complaints from the sales guys in the field at first, but senior management backed the change, and now it's accepted and nobody complains," he says. A "horrible nightmare" is over at Bell Microproducts, but it still plagues some consumer products manufacturers, he observes. "The salespeople were kings and queens. They got whatever they wanted. That was 20 years ago. You don't find that so much any more."

Defeating Past-Dues

"I'm seeing closer cooperation between sales and credit," reports Val Venable, CCE, credit manager at GE Plastic Americas, Huntersville, NC. "It's essential. As our customers' finances get tight, they take more deductions and dispute more invoices. If we're going to continue to reduce past-dues, we have to work closely with sales to validate or reject those claims so we get paid. We've seen a big improvement in the past few years."

Reducing past-dues is a battle GE Plastics is winning. Delinquencies have dropped from the mid-30-percent range toward single-digit territory. "We're shooting for 8 percent this year, but we'll probably be closer to 10 percent," Venable estimates. "We've picked the low-hanging fruit and are going after customers who chronically stretch their payments by a few days. If we're going to convince them that 30 days means 30 days, we need sales on our side. When customers complain to their sales rep, we want that sales rep to be aware of the facts and support us, not the customer."

Cooperation is definitely a two-way street at GE Plastics. Credit wants sales to enforce terms, but sales wants credit to approve sensitive accounts quickly, to have room to negotiate terms with key accounts and to get a little help with marginal accounts, Venable explains. "In this very competitive market, we know sales has to capitalize on every opportunity. We work together up-front, setting up a file for quick approval and working out how much wiggle room the salesperson will have going into negotiations."

Cooperation has meant communication at GE Plastics. "We have regular bi-weekly conference calls with the sales teams about accounts in their regions. We just sent a credit representative to a regional sales meeting. We want to educate sales about how credit works. We want to listen to them to be sure our policies don't hurt their efforts and vice versa," Venable explains.

Compensation is not a problem at GE Plastics. "Our salesmen don't earn commissions on their sales, "Venable reports." They are paid a salary, and their bonuses are based on their overall performance, with past-due numbers playing a big role in that evaluation. Our whole effort is top-down driven. We all feel like we're part of the same team."

GE Plastics is still working on its process for resolving disputes. When a deduction is claimed, credit handles it first and does the initial research. If it's over price, the account is sent to a special pricing team. If it's a customer service or supply-chain issue, it goes to those areas. "When we don't discover that the customer is right, the case goes back to the sales rep," Venable explains. "When both sides are adamant, it's up to the sales rep to work it out. We don't want to referee a he said/she-said argument. Since disputes go into the past-due column and count against the sales rep's performance, they're motivated to resolve them quickly," she explains.

To Venable, it doesn't make sense to get rid of the dispute headache by outsourcing it. "There's a whole industry out there selling dispute resolution services, but they would have to find out things we already know, so why pay an outsider to come in and learn the facts and then help resolve the dispute," she says. "We'd rather do that ourselves."

Educating Customers

Tech Data Corp., Clearwater, FL, is attacking disputes and collection problems with aggressive education, reports Scott Tilleson, CCE, director of regional credit. It sponsors credit seminars for customers, using its credit pros as instructors. Paying bills on time is part of a larger curriculum that includes cash flow management and business financing. The training is welcomed by small companies that don't have professional treasury or credit staffs of their own, but it's also useful to larger, public companies that don't know how their practices stack up against their peers and competitors. "We can talk as one supplier who sees the A/P, cash flow and treasury practices of thousands of companies. That gives us credibility," Tilleson claims. "People want to know how credit and collection processes work and how businesses are financed," he adds.

Now Tech Data is taking an even more active approach, Tilleson reveals. "Partnering with sales, we will pick a spot, usually a city where we have quite a few important customers. We'll rent a small meeting room at a hotel that's easy to find, and we'll schedule 45-minute customer meetings an hour apart. Sales and credit will jointly host the meetings, and they will be all about process. We'll ask them how we can make their processes work better, and we'll tell them how they can make our processes work better. Customers always want more credit, so that's the carrot that brings them to the meetings."

"In two days, we can have 15 or 16 customer meetings. That's greater productivity than we get with any other travel arrangement," Tilleson notes. "Sales loves it so much that they fund it out of their budget. And feedback from customers has been very positive. Often we can grant some of their credit requests on the spot."

As a pure distributor, Tech Data has a relatively simple dispute resolution process: Argue with the manufacturer. Returns have to be prompt, since high-tech obsolescence is rapid. Either an item was DOA (dead-on-arrival--it didn't work), in which case the return is accepted, or the returned item has to come back with an RMA (return materials authorization) code provided by Tech Data. "They know they can't return an order without an RMA code from us," Tilleson says.

What Works

Progress at Black & Decker, Towson, MD, has come from using technology to resolve disputes faster and from meetings with the financial analysts on the sales staff who administer budgets and are easier to work with than the sales reps themselves, reports Karen Bath, credit administration officer In three years, from year-end 2000 to year-end 2003, Black & Decker cut the average amount of time required to resolve disputes from 83 to 50 days, she notes.

There's also preventive medicine: the company won't ship an order when the price on the order differs from the price in the Black & Decker system. The pricing discrepancy has to be resolved first, so no deduction is ever taken, Bath explains. That job falls to customer service, not credit, she adds.

Pioneer Balloon Co., Wichita, KS, has no unauthorized deductions because it permits no deductions but uses rebates instead, and the rebates are only applied as credits once payment in full has been received, reports Chris Birdwell, credit administration manager. "We're in charge. Any rebate is awarded by us, not taken by the customer. And they get it if we receive payment within 15 days."

If a customer is sent the wrong product, they can return ?? without paying for it, Birdwell says, but if they're smart, they'll pay the bill in time to get the rebate and then return the merchandise to gel the fun credit. "They double-dip us, but that's how the system is set up," he comments.

At Emerson, St. Louis, about 4 percent of accounts receivable used to be entangled in disputes. Now that figure is close to 1 percent, reports David Caldwell, director of customer financial services. The best results are coming from divisions like New Jersey-based Asco Power that have taken a top-down approach. "The president or CFO said disputes will be resolved quickly and here's what credit will do and here's what sales or plant management will do. And they let everyone know that it would be bad if their names were linked to disputes that dragged on and on," he explains.

"Asco nailed it. They made the field person responsible. If the dispute lingers, their budget or their sales commissions are cut. There's a serious stick," Caldwell explains.

"Our charge is to find a way to support any customer sales can find that wants to buy our product," says Suzanne Koch, CCE, corporate credit manager for Foster Poultry Farms, Turlock, CA. With a cooperative customer, there are always ways to settle a sale, including cash in advance and sales secured by letter of credit, she notes.

Disputes are not allowed to linger in the poultry business, where product spoils quickly. Customers are on seven-day terms, so they pay weekly. To expedite payment, Foster's credit people spend time face-to-face with customers, often negotiating electronic payment arrangements, so they have opportunities to discuss other collection issues, Koch reports. "We sit down with their financial people and look for payment arrangements that benefit both sides," she says.

Short-pays used to be handled by credit but now are the responsibility of a special unit that reports to the corporate controller and has offices close to sales in the company's headquarters. Credit, which reports to the treasurer, has been housed in another location but recently moved back to the headquarters, Koch explains.

A few executives have solved the problem of dubious deductions decisively: they have cut off sales to any company they detect abusing deductions, Meerman reports. These are companies that enjoy strong demand for their products and healthy profit margins; but not every company can afford to adopt that solution, he agrees.

Long Way to Go

In spite of sporadic progress, cooperation to resolve disputes remains a troubled area. "Ideally, credit and sales should be proactive and supply each other and the rest of the company with information about the root causes and drivers of disputes and deductions, but that's still the exception," notes Robert S. Shultz, CCE, partner of Quote to Cash Process Consulting (Q2C), Simi Valley, CA.

Shultz, now a consultant, has 30 years experience as a credit manager under his belt, most recently as vice president of corporate credit and financial services for Sony Pictures Entertainment.

However, automation is making information more accessible and helping companies determine the causes of disputes, even when that is not the primary goal of the automation, he reports. "The infrastructure is in place that will let credit provide meaningful information to the rest of the corporation, information that hasn't been available in the past," Shultz notes.

Fixing flawed compensation arrangements can help. Sales compensation is built to motivate and reward salespeople quickly for booked sales. Rarely do companies hold up bonuses until a receivable is collected, but some do take back part of a bonus or commission if an account never pays, Tyburski notes.

Compensation strategies vary across the board, Shultz reports. Some companies want sales to concentrate on selling and be protected from collection issues. But more and more, companies are either not paying commissions on sales until the receivable has been collected, or are charging hack sales reps for bad receivables. "One way or another, sales is being given some skin in the game. It's all part of strategies to manage working capital effectively," he notes.

And some companies are tinkering with their organization charts. Traditionally, collections have been handled by credit, usually part of the finance organization, often reporting to the treasurer, controller or CEO. But we're seeing more cases where collections fall under the VP of operations or the VP of sales. Some companies are making collections totally a sales function, Shultz reports.

There is a small trend toward relocating collections, agrees Terry Callahan, president and staff director of the Credit Research Foundation, Columbia, MD. "The credit manager can't solve shipping problems," he notes. "Some companies are splitting the credit-granting process from collections and assigning collections to customer service or logistics," he points out.

Don't Sweat the Small Stuff

It's critical to keep disputes and deductions in perspective. Embed tolerances in the cash application process so that you don't get bogged down trying to resolve small deductions, Meerman advises. One of his clients had 60,000 deductions on its books at one time, he recalls. "That's crippling," he says. Most companies still set their tolerance for deviations too low, he insists, although he concedes that the A/P chiselers on the other side know how to find the tolerances and claim deductions that get in under the radar.

Of course, credit pros are going up against a knowledgeable enemy when they try to resolve deductions and disputes quicker. For every consultant trying to help companies tighten receivables, there is another trying to show that company's customers how to stretch payables by claiming questionable deductions. So it's an uphill fight.

Richard H. Gamble is a freelance writer He can be reached by e-mail at
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Author:Gamble, Richard H.
Publication:Business Credit
Geographic Code:1USA
Date:Apr 1, 2004
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