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Published Articles by David Balovich

Title: Working Outside The Box
Published in: Creditworthy News
Date: 8/5/09

Frequent readers of the News know that we encourage and promote working outside the box. Regardless of recent media reports that the recession is over and we are beginning to recover, those of us who live in the real world know that we are far from realizing a recovery of the present economic downturn in the near future. Here in the U.S. our leaders continue to appropriate money that does not exist for programs that have no guarantee of being successful. Job losses since the beginning of the year have exceeded losses for any half-year period since World War Two. In fact, job losses are equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle. The average work week for production and non-supervisory workers has fallen to 33 hours, the lowest level of activity since the government began gathering such data 48 years ago. Employers have begun asking their employees to take voluntary time off and many employers are now filling positions with temporary workers all contributing to the distortion of the true unemployment number that is much higher than the single digit numbers being reported. The only guarantees we have is that inflation will reach double digits before year end and this will eventually lead to increases in business bankruptcy filings and/or force some businesses to shutter their doors permanently because there will be fewer customers that once existed for the goods and services that drove a competitive market.

If our business is going to be counted amongst the survivors, we need to begin working outside the box we have always operated within and become creative in the procedures we use in dealing with our customer. To that end this article provides some examples of things we can implement to make sure we have a place to work tomorrow. 

THE 80 / 20 RULE 

Eighty percent of our company’s business comes from twenty percent of our current customers. We need to begin focusing our attention on the twenty percent of our customers who are responsible for the survival of our business, first and foremost. We should identify who they are; make certain our files contain the most current information about them; re-evaluate their credit lines to maximize that we are receiving the full benefit of their business; review the accounts receivable ledger to identify any disputed items or potential disputes and take care of them now. A satisfied customer not only purchases our goods and services, they also pay for those goods and services on time. 

Once we are assured the twenty percent of our customers who contribute the most to our business are well taken care of we should begin looking at the remaining eighty percent. We should identify those customers who provide less than twenty percent of our company’s revenue but monopolize eighty percent of our time. Once identified, we should develop a plan in collaboration with sales and management to begin letting these non-contributors take their business elsewhere. 

Our firm, regardless of size, needs to increase its assets and reduce its liabilities. One of the best places to begin, especially when the economy is down, is with the customer base and we can be of great assistance to help in identifying those customers who are costing the company money but not contributing to the revenue stream. 

When reviewing new accounts focus attention to whether they are going to be among the eighty or twenty percent customer category and process those in the twenty percent category first.


If we have past due accounts that we still sell to chances are they have balances in the over 30 day past due aging buckets. These accounts will never be current until we take the necessary steps to separate the past due from the current. This is an excellent time to think about using promissory notes to clean up our past due receivables. Creating the promissory note for past due balances can provide many benefits. 

First, it cleans up the past due and makes our aging more presentable and it reflects that we are actually accomplishing something rather than shuffling numbers. 

Second, a current account receivable provides the company the opportunity to borrow money, if needed, on more favorable terms. 

Third, transferring past due invoice balances from accounts receivable to notes receivable eliminates any opportunity for the customer to raise a dispute issue in the future. Why would the customer sign a promissory note for a balance owed that was in dispute? 

Fourth, any payments received on the promissory note would most likely not be subject to a preference claim in bankruptcy as long as the note payment is being paid current. 

Fifth, we can increase revenues and improve collections by agreeing to give the customer open sales terms as long as the promissory note payments are paid current along with payment for future purchases. We can also increase the customers’ line of credit on the open terms account as the promissory note balance is reduced. This motivates the customer to off his promissory note quickly. 


This is an excellent time to review and re-write job descriptions and responsibilities. As credit professionals we need to spend more time and focus on credit and collection tasks. We need to identify those tasks that are non-related to identifying and managing risk and collecting money and move those tasks to the departments in the organization who are affected by them. Tasks such as obtaining sales tax certificates, Sarbanes-Oxley, tracking return authorizations and proofs of delivery, just to mention a few, should be delegated out of the credit area.   


When we ask our seminar participants who they contact for payment the answer is always “accounts payable”. The problem with contacting accounts payable is they don’t care when or if we get paid. Processing invoices and paying bills is a never ending job and one collection call follows another, only the vendor name and amount of payment changes. If we want to get paid when we call the customer we have to identify first who to contact. We have to call the people who care. The person who cares is the one who has an equity interest in our product or service. If we are providing a product to our customer for resale that person would be in the customers’ sales department. The sales department has promised their customer that they will receive their purchase by a certain date and they want to maintain a good relationship.

Notifying the sales department that their purchases may not be forthcoming due to slow payment processing will provide us an ally within the customers’ organization to assist us in getting our invoices paid on time. If the product or service is not for resale but is to be used by the customer, who in their organization will be using the product / service? This is the person we want to contact because they have an interest in receiving their purchase in a timely manner.  


Usually during a downturn in business and/or the economy firms look to cut or eliminate what is often referred to as “non-essential” expenses. Most often included in this term is education and training. This is exactly the time that the emphasis on training and education should be moved to the fore front. Now is not the time to stop learning or look for ways to improve productivity. We should be looking for seminars and classes to make us sharper, more productive and more competitive. If we do not belong to an industry group now is the time to join and attend one. If there is something we don’t know such as negotiable instruments or bonds & liens we should be looking for course material or seminars and signing up for class. The more knowledge and information we can acquire the better chance we will have of not only being successful but also keeping our position.  


OK, we don’t have a travel budget but that does not mean we are prohibited from calling on local customers (those within a 100 mile driving radius). We need to get out from behind our desks and find out what our customers are doing, what is happening in their organization and what we can do to assist them. We don’t need to visit all of our customers to identify opportunities. By visiting the customers close to us we can get a general idea of what all our customers are experiencing and what they need from us to survive. 


Professional drivers will tell us, when asked, that the way to avoid an accident is look beyond the vehicle in front of us when driving. If we see the traffic ahead of the vehicle in front of us or to the side of us beginning to slow down then that is the time to begin braking. In credit we need to look beyond our customer and identify not only who our customer is selling to but what is their condition. We should remember that “conditions” is one of the four C’s of credit and does not just apply to the economy and the marketplace. Our customers’ customer “condition” will determine how and when we get paid and should be a factor when assigning credit lines/limits. 


The majority of organizations today employ a customer NO service department. Customers who are not satisfied do not pay their bills timely. We can improve cash flow simply by taking care of the customer properly the first time. If we are one of those companies (we know who we are) that has a customer NO service department, we should give considerable thought to assuming that responsibility.

This is very easily accomplished. All we need to do is inform the customer at the time we establish the account for new customers or during a collection call for existing customers that if they have any type of issue to contact us and we will see that it is timely and properly addressed. Assuming this responsibility also eliminates the problem of not having the customer return our collection phone calls. Once firmly established they will return all of our phone calls as they will not know if we are calling to collect money or to inform them of resolution of an outstanding issue. 


We should be asking every customer to sign a security agreement and be a secured creditor. If we are selling a product there is no reason we should not be secured. Yes, their may be a bank or other financial institution with a previously filed security agreement. Article 9 of the Uniform Commercial Code also provides for a Purchase Money Security Interest (PMSI). 

A PMSI allows the creditor to have first priority solely in the product they sell, including proceeds from the sale or other disposition of the product, without affecting the bank or financial institutions previously filed security agreement. A secured creditor is not subject to a preference in bankruptcy; a secured creditor is paid before any payments are made to unsecured creditors in bankruptcy; secured creditors are generally paid better than unsecured creditors. Being a secured creditor is good business. 


Every customer should have a credit limit and maybe a credit line assigned to them and it should be reviewed at a minimum annually although we prefer every six months. A credit limit is based not on the customers’ net worth but ours. How much money can our organization lose on one customer and still remain in business? The answer to that question is the customers’ credit limit. It is not negotiable and when reached no additional amount of credit should be extended. 

A credit line is the amount we are willing to give a customer without first checking their account status. Credit lines will vary by type of customer; their payment history; length of time in business; management experience in the industry; Security and other factors. 

Credit limits and credit lines are not interchangeable and should never be treated as such. Every customer should have a credit limit but that does not mean that every customer should also have a credit line. 


We observe every day organizations announcing a major sale or contract that it has acquired or renewed with kudos going to the sales team. How often, however, do we witness the announcement that the same major sale or contract, worth millions of dollars in revenues, has been collected? We know that if it were not collected and instead written off it would make news and the credit department held accountable. Why is the collection of these mega sales not newsworthy? The answer is because the credit and collection department, who collected it, does not announce their accomplishments like the sales department does when they ink the contract.

If we, credit and collections, want to be recognized for our contribution to the organization, we need to begin letting people know about our accomplishments. When we collect a larger than normal invoice or a portion of a major contract, we should be sending out a company wide email letting everyone in the organization know about it. If we wait for someone else to make the announcement chances are very good it will not occur. We will never be recognized for our achievements and contributions until we begin informing our supervisors, peers and subordinates about our accomplishments.  

The above listed examples will not work for everyone but we believe there are several ideas that everyone can do to be more successful. Work through the examples and think about what we can try to become more customer oriented as we navigate through these difficult times. 

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.  

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