SHOULD CREDIT PROFESSIONALS REPORT TO ACCOUNTING OR SALES?

By David Balovich

Whether credit is an art or science has been the subject of debate for as long as we can remember and there are an equal number of proponents on both sides of the aisle who can and will provide sufficient evidence to support their position.

We are of the opinion the more important question is, where does the credit function belong within the organization and who should the position report to?

In most organizations the credit department is considered part of the accounting function and usually reports to a mid-level or senior finance position such as controller, treasurer or finance officer. In fact, in several organizations the chief credit officer may carry a title of controller or assistant treasurer. Then there are organizations where the credit department report to the sales side of the aisle. This has long been considered by many as a conflict of interest in that sales could influence, control or even manipulate credit sales to customers who are not creditworthy due to financial insolvency and / or because they were at one time or are now delinquent. A few organizations have the credit department reporting directly to either the chief executive (CEO) or chief operating (COO) officer.  The chief credit officer is often a vice president and considered equal to his or her counterpart in sales.

The informed credit professional is cognizant that the reasoning for not having the credit function reporting to sales is without merit because in most organizations sales regularly influences or manipulates the outcome of every credit sale. In fact, it is safe to say that most credit decisions are usually sales decisions under the pretext of business decisions. The basis for this statement is simple. Ninety-nine percent of all organizations sell something, whether it is a product or service. It is amusing that when attempting to implement sound credit controls and / or alternative sales practices that the number one reason given for non- implementation of these best practices is “We are a sales oriented organization”, that is an understatement. If we are not selling something to someone else then what need does an organization have for credit in the first place?

This brings about the question, “What is the function of credit”? There is more than one answer but the most common are:

To promote sales;

To introduce new products or services;

To provide customer satisfaction;

To open new markets;

To reduce excess inventories.

How many of the five purposes stated above promote or support “accounting”?

That’s right, none. The function of credit is to support sales. In fact, there is nothing credit does, by definition, to support the accounting function. However, in order to justify credit being under the accounting arm of the organization we have over the years delegated the credit department duties and responsibilities that are not credit related but justify its’ existence in the accounting area. Responsibilities such as;

Sales tax certificate & compliance. This is clearly a billing function aka accounting. It should be a very simple process to enforce. The customer is billed sales tax until such time the customer provides the billing department a sales tax certificate. Upon receipt the billing department no longer bills sales tax. It is the billing department who is audited so why is the credit department responsible for obtaining sales tax certificates  for the billing department? We can think of only one justifiable reason and that is to place credit under the control of accounting and in doing so, valuable time that could be spent on credit investigation, approving orders, contacting customers for payment and updating credit files and other activities promoting sales is misspent chasing sales tax certificates for another department.

Dispute resolution is another activity non-related to the credit department. What is the purpose of a customer service department? Of the many things customer service is responsible for, the primary one is to handle customer disputes in a timely manner and issue credits and return authorizations when appropriate. How many credit departments are out there who are charged with identifying the dispute, gathering the information and documents, writing up the support information and then submitting the package for approval and the only thing customer no-service does is issue the credit or return authorization after credit personnel have done all the work? Or, what is worse is having the customer no-service rep inform the credit rep that a customer has called to dispute a bill or shipment received and the expectation is that credit personnel will stop what they are presently doing and track down the information so the customer no-service rep can issue credit or call the customer to tell them the reason, provided by credit, for not issuing a credit memo.

Sarbanes-Oxley. This is a relatively new law passed by Congress to insure that senior management, namely Chairman of Board and President but can include CFO, when signing documents related to the financial condition of the company are responsible for the accuracy of the information contained in those documents. This information includes revenues, inventory, receivables, assets, liabilities, etc. The aforementioned items are compiled and maintained by the accounting department and this should be an accounting function. Once again what department is delegated with Sarbanes-Oxley policy, procedure and compliance?

Roger has been a credit professional for the past thirty years. His company was acquired a few years ago by another firm and as part of the transition the credit department was moved from accounting to sales. He recalls it was a shock to everyone and he was not sure if he would be able to handle the change because he had always considered sales an adversary. “When I graduated college” he told us recently, “there were no courses in credit or collections and I did not interview with any company for a credit position, heck I didn’t even know credit existed, I started out in internal audit and then moved to operations, after a few years I found myself on the short list to assume the credit managers position who was retiring”. How many colleges and universities are there throughout the world that offers accounting courses? The majority of them do. And within the accounting curriculum how many offer courses in credit and collections? We would be surprised if there were one percent. In fact of the few that we are aware of the courses are not offered in the accounting curriculum but rather in management or business and of those there is usually only one course, an introduction to.

When jobs are posted for credit and collection positions one of the skills / attributes often required is good communication skills and the ability to establish and maintain customer relationships. Customer relationships include both the internal and external customer. Roger smiles and shakes his head after reading the above. “You know”, he says, “ you can find hundreds of job descriptions  for accounting or sales or a financial analyst positions and they all read pretty much the same. But try to find a job description for a credit manager with similarities and its like looking for a needle in a haystack”. “The majority of credit personnel seldom see the customer unless they are in the same proximity as the credit department. The majority of credit departments does not have the resources available to visit the external customer and are seldom invited to sales meetings, usually held at resorts far from the office, to visit with the internal customer. Credit personnel usually do not really know the internal or external customer except through phone calls or an occasional office visit by the customer. Roger continues, “I can’t tell you the number of times I could have made a better decision if I’d had the opportunity to meet the customer and see their operation first hand. And the sad thing is my company would have benefited had I had that opportunity but unfortunately they only saw the costs involved and not the benefit”. And why would they? If the position is thought of as accounting why would the credit professional need to travel and meet customers? Accountants don’t travel unless they are part of internal audit. Accountants deal with numbers while credit professionals deal with people, the very same people the sales personnel call and visit. Customers are not numbers, they maybe to accountants, but credit professionals do not motivate and satisfy numbers, not when assigned the responsibility of increasing revenues while controlling risk and turning accounts receivable, that’s a sales function that requires both internal and external contact.

Let’s briefly discuss numbers and one in particular, DSO. Days Sales Outstanding is a number that is universally used incorrectly to measure credit department’s collection performance. DSO is actually a measure of sales performance rather than collection performance. For example, let’s say the account receivable is $100,000 and sales are $150,000, if you perform the basic DSO calculation, AR divided by sales X 30, DSO is equal to 20 days. Now let’s perform the same calculation but change the sales number to $90,000.  DSO increases 13 days to 33, why? The answer is because the sales number is always the denominator or integer. We have, over the years allowed accounting to convince us and management that DSO is a measure of our collection performance and the reason is because we are not accountants and most of us could not define the word integer. Secondly, the accountants, supported by national credit associations, have created many variations of DSO in order to obtain the desired number they want to report. In accounting that’s known as quantifying the numbers. We were once presented with a resume for a credit professional seeking employment that included the following achievement, “Reduced DSO 59% while revenues increased 50% during the same period”. We would have expected nothing less since the majority of the reduction in DSO can be attributed to the increase in revenue. We guarantee that if revenues had declined 50% during the period reported the DSO would not have been reduced.

The true measure of collection performance, by the way, is quite simple. Take the amount collected in a certain period and divide it by the beginning account receivable. For example, if the beginning AR balance in January was $166,000 and $92,000 was collected during the month of January then we would divide $92,000 by $166,000 and that would give us the percentage of the amount collected in the month of January. DSO will increase or decrease depending on the sales number while cash collected divided by the beginning AR will always provide the accurate collection percentage regardless of the sales number.

Many credit professionals we have spoken with, like Roger, are of the opinion that credit should be included in the sales area because credit supports sales. They speak of the many resources and advantages that sales has that accounting often lacks, such as a travel budget, to better manage the account receivable and minimize risk by allowing credit personnel to meet with both the external and internal customers. They also mention that management tends to look more favorably at their opinions and requests then when they were under the accounting umbrella and also are recognized for their contributions in the company’s success. They also believe their relationship with sales personnel is improved. One credit professional commented that he used to dread coming to work at the end of the month because “every day was a battle” with sales to get last minute orders approved on marginal accounts. “I don’t know how many times I was berated about not understanding the big picture or called a bean counter” he told us. “Now that I’m in the sales department there is no animosity and the sales people will actually call on their accounts and ask for money or the documents we require, where in the past they would find excuses to not help saying they were too busy or  it was not their job”. Credit reporting to sales provides an opportunity to strengthen the relationship between sales and credit personnel to produce more profitable sales for the organization rather then to tolerate animosity between the two functions. “When I was part of the accounting group, says Roger, I could not get any funding to call on delinquent accounts or even to attend creditor committee meetings of a bankrupt customer”.  “Now that I’m reporting to sales, resources are more readily available and I usually travel 7 to 10 days a month with the sales representative calling on accounts.  Rodger admits that he was concerned when his department was transferred from accounting to sales. However, any concerns that an opportunity for undue influences by sales on credit decisions was quickly put to rest when his new boss, the vice president of sales, asked him to write and submit to management an inclusive credit and collection policy. The V. P. then requested company management to not only approve the policy but also have the internal audit department perform quarterly audits to make certain that policies and procedures are being followed by everyone.  Another confirming factor was resources. “All the time we were reporting to accounting we could never get the systems necessary to do the job right”, says Roger. “When the company purchased new receivable software the emphasis was always on inventory or another aspect of accounting, credit and collections was always an afterthought and if there was a particular type of software application specifically for credit or collection we never had the sufficient budget allocation so we could purchase it”. Roger smiles when he says, “but when we got over to sales one of the first things we were asked was do you have the necessary resources to support our goals”? “We were able to obtain the resources almost immediately that we had been told so often the company could not afford.

One never hears about the credit professional that grew up wanting to be in credit. Ask any child what they want to be when they grow up and you will never hear “I want to be a credit manager”. Look at a guidance counselors list of professions used to counsel students in selecting a career and the credit profession is not among those listed. Many credit professionals come out of other areas of the company, most often sales or operations and very seldom out of accounting. The fact is that many credit professionals struggle with the concept of debits and credits and statements of cash flows. There are numerous senior credit professionals who began their careers in credit in the consumer sector working for finance companies. These individuals learned their trade developing new business, making loans, floor-planning inventories and collecting receivables. They accomplished this by using best practice sales and credit principles without ever having to create needless reports or perform thankless tasks to justify who they reported to. And most importantly they received the recognition when their branch office met the goals that made the company profitable.  

Credit professionals know the majority of their success is due to developing and nurturing relationships among both the internal and external customer while following company policy and procedure. The credit professional is an integral member of the sales team, regardless of who they report to, and responsible for the company’s success and should be given the recognition they deserve for contributing to the company’s continued growth, success, and profitability.

A final comment from Rodger, “Until we became part of the sales organization it seemed the credit department was only recognized when the company failed to meet expectations or for minor things we did not always get done timely and we couldn’t get help from anyone. It was as though we were the bastard at the family reunion”.  But today is so different. We are continually recognized when the company exceeds its sales quotas and most importantly we are recognized as being responsible for the company not having to carry large debt on the balance sheet because of our ability to turnover the account receivable.

What is your opinion? Where does the credit organization belong and is there better opportunity to receive recognition and support reporting to sales or accounting?

I wish you well.

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.