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Vital Signs:
Timely  Decision Making and Corporate Health

by:   Abe WalkingBear Sanchez

In medicine basic vital signs include temperature, pulse, blood pressure....and pain level.

Vital signs are measurements taken in order to assess critical body functions.

Vital signs are an essential part of  communication between doctors, pharmacists, nurses, therapists, nutritionist and others  regarding a patient's state of being...well or not. 

And so it is with vital signs for critical business functions.

CEOs, business owners and senior managers need a better way to monitor their company's B2B Credit Sales and A/R vital signs.

Before you can monitor the vitals sign  for Credit Sales and A/R you have to know what it is that you are dealing with and then you can establish the best possible outcome... and yet many managers misunderstand and underutilize their Credit and A/R function.

Some basics:

1) 80 to 90 % or more of all B2B Sales involve payment at a later date...credit terms are extended

2) A/R, short term money due from the sale of products or services based on payment at a later date is often one of the largest assets many  companies have.

On average the A/R is 40% or more of the total assets.(less with manufacturers more with service companies and some distribution companies)

3) Next to cash on hand the A/R is among the most the most liquid of assets,  being but one step removed from money in the bank.

4) In the course of approving Credit Sales and then managing the resulting A/R, the Credit and A/R function interfaces with customers, sales, marketing, accounting, operations, the warehouse, service, vendors/suppliers, attorneys, transportation and many others involved with the supply chain.

Based on their understanding of a business function  business  Management team members need to establish clear best goals for the different functions of the organization and then be able to  check/monitor  the progress or lack of progress being made toward those goals.

They  need to hire the right people capable of carrying out the tasks and then measure their work.

Managers need reliable information on which to develop strategies and then monitor the execution of plans.

And lastly but maybe most important, the Management team must constantly work on everyone knowing the goals 

and then ensuring that everyone is working together to get to where the company wants to go, to the achievement of the goals.

What vital signs regarding Credit Sales and A/R should managers be monitoring? 

Credit Sales

Companies make an investment in getting  business customers to the point where they want to buy.

A good thing to know (vital sign) is the number of  new customer information forms (not credit apps) being submitted by sales to credit.

If the number of submitted new customer information forms is down during key times of the  month compared to the prior month and  the same month the prior year, sales people can be  incentivised to turn the month around. This can be done by daily contests that include the credit area timely processing of submitted new customer information forms.

Another good thing to know (vital sign) during key times of the month is the total amount of credit that has been applied for and  what % of that applied for credit was approved by the Credit area. A good profit directed Credit Manager can be  worth 3 to 4 good sales people... if they view pending sales as their highest priority and focus on finding ways to approve profitable sales while remaining confident of payment.

When sales people focus on quality customers and credit people focus on both making the deal happen and on  granting a larger line than was requested, the % of credit approved should be more than 100% of the applied for credit amount. (credit lines never limits)

If during key times of the month the % of applied for credit  approved drops, is it because the quality of the customers is down, is it due to the economy or due to the sales force  calling on the wrong market?

Or is it because the credit guy isn't working hard enough to find ways to make profitable sales happen?

What is watched gets done.

Sometimes management sends confusing messages to the Credit Manager, they'll stress the need to get pending and profitable sales on the books and then measure the credit area's performance based on DSO and % bad debt which in turn leads to the  credit area focusing on risk rather than focusing on sales and on profit.

Sometimes management itself doesn't understand or know the proper profit approach to credit approval  and therefore can't provide the credit area with the necessary understanding and training on how to weigh the customers' profile and  past performance with the company's product value at time of sale ...so as to maximize sales and minimize risks.

A/R Management (not collections)

The proper management of A/R (accounts receivable) results in good cash flow, sustained repeat sales and controlled bad debt.

The vital sign that is directly connected to cash flow, repeat sales and bad debt is the PDI (payment days index) at the end of the month and the daily collection % during key times of the month.

      Terms of Sale (for each term of sale)
PDI =                  Payment Percentage  (end of month) 

Start with the beginning  total A\R balance as of the  first of the month. 

This means all A/Rs regardless of age. 

Any new credit sales made during the month will be picked up in the next month's beginning total A/R balance.

For example let's say that our total A/R balance as of the 1st of the month is  $1000.

Track payments and credits on those invoices that make up the beginning total A/R balance.

During key times of the month (the 10th and the 20th) we want to compute the Payment Percentage as of that date by dividing the amount paid/credited as of that  date by the beginning total A/R balance. 
If, by the 10th we have been paid/credited  $200 of the beginning $1000 total balance, our payment percentage as of the 10th is 20%.   We can compare this month's 10th day payment percentage against last month's 10th day payment percentage. 

If last month's 10th day payment percentage was 40% and this month it's 20%, it doesn't necessarily mean that we are doing a poorer job this month than last.  If there's a  variation of the payment percentage  it's not a matter of good or bad, but of why?    That's the question management should be asking.

A lower payment percentage may be due to as simple a reason as the A/R person going on vacation and no one following up on past due A/R. 

It may also be a matter of a product/service with a lower Product Value being sold to someone with less that perfect past performance (pay record).  

Or it could be due to the accounts being worked in alphabetical order rather than by largest dollar first. 

If by the 20th, we've been paid $400 of our beginning balance of $1000 our payment percentage as of the 20th is 40%. 

By tracking the payment percentage during the month we can determine if we need to exert greater efforts.  

If we are not happy with the payment percentage as of the 20th, we have 10 days in which to turn things around.

At the end of the month compute the PDI by dividing the payment percentage into the terms of sale.
For example:  at the end of the month, we have been paid  $500 of our beginning A/R total of $1000, our payment percentage is 50% or a  0.5.  If we are selling on 30 day terms our CDI would be 60 days .

      Terms of Sale (for each term of sale)
                                       PDI =            Payment Percentage  (end of month)

If you have varying terms of sale, you must compute the PDI for each and then average them out, just as you would do with DSO.

If you have a good payment percentage your cash flow will also be good and more of your established credit customers will buy from you.

Keep them paying and keep them buying.

Also a good payment % will contribute to controlled bad debt because it's a positive  indicator that the accounts are being worked and that potential bad debt is being identified earlier in the process when the amount of poptential loss is less. 

What's a good PDI?

All vital signs will vary based on the variables  involved.

For example if a company's product value at time of sale is low due to sales and related business activity being down , the unused capacity to do business (fixed expenses) goes up. When this product value at time of sale is  factored in  to the credit approval decision making riskier credit sales should  be approved even if this  results in slower payments, a lower paymnet % and in time even to an increase in bad debt.

If done correctly  the utilization of the unused capacity (fixed expenses) will more than off-set the slow payments and increased bad debt.   

The purpose of vital signs is to draw the focus of management.  

Again the question to be asked when it comes to vital signs is "Why?.

Summary

I'm not a mechanical sort but I've learned the hard and expensive way that when the oil or service engine "idiot light" comes on it means that you're an idiot if you don't pay attention to it. 

In the course of approving credit sales (80 to 90% or more of all sales) and then managing the resulting A/R, the credit area interfaces with many of the different facets of the supply chain and can identify areas of opportunity for improvement .

Dr. Demming said that the true cost of errors is unknown and unknowable. Dr. Coase said that of all the frictions (cost) involved with business the greatest friction of all is the friction of failure. Something going wrong somewhere.

A vital sign that  should be monitored and given full management attention and energy is the number of "systems problems" (something went wrong somewhere) and the dollars therein involved. 

Systems problem are friction and drive up everyone's cost of doing business ...seller and buyer alike. And lead to a competitive disadvantage.

 Smart guys pay the tuition for their education but once. The not so smart guys  buy new engines.

The Author:  

Abe WalkingBear Sanchez

In his own words

"Prior to serving as a Corporate Credit Manager I owned a small business and understood first hand the Profit Imperative.

 What I found in Corporate Management was a mindset fixated on risk and not on profit. Having seen how my own organization, our suppliers and our business customers misunderstood and underutilized the Credit and A/R Management (not collections) function I entered the business consulting and training field in 1982.

The target audience for my work is Business Owners, CEOs, Managing Directors, and senior business managers...the decision makers who can make improvement happen once they know a better way.

http://www.armg-usa.com/WBinDublin.html

Profit Centered Corporate Credit Management

Developer of the copyrighted Profit System of B2B Credit Sales and A/R Management Abe WalkingBear Sanchez has worked with many hundreds of Business Owners, CEO and senior business managers groups internationally including at the Shakespeare Globe Theater in London. The endorsed Credit Consultant for STAFDA's 2900 members and PEI's 1600 members he was presented "The 200 Club Achievement Award" for speaking to over two hundred Vistage CEO Groups internationally.

WalkingBear was both a panelist and featured speaker at the 2007 World Credit Congress held in Mexico City and the 2009 World Credit Congress held in Dublin.

An International speaker and trainer, WalkingBear is A founding member of PCCG  www.profitcreditgroup.com , an international  group based on the Profit System,  and has authored hundreds of business articles, is a contributing columnist for The Wholesaler Magazine, is the author of Profit Centered Credit and Collections 1999, co-author of STAFDA's  Foundations of a Business 2007, and co-author of the new international book, The Best Kept Profit Secret: The Executive's Guide to Transforming a Cost Center 2009.  WalkingBear is also a columnist for the  Progressive Distribution magazine.

Cimex Training,  Irish Institute of Credit Management, Atradius, Vistage, CU, CSU, Texas A&M, National Association of Credit Management - Kansas City, HTDA, BCFM, Poli Hi Solidur, Skinner Nurseries, Deardens, Rain Bird, STAFDA, IBM, Hunter Industries, ACIL, University of Industrial Distribution, Chemir, are but a few of the groups, schools, companies and associations for whom WalkingBear has conducted programs.

WalkingBear can be reached through:

A/R Management Group, Inc.

http://www.armg-usa.com

(719) 276-0595
email: abe@armg-usa.com