One of my biggest gripes about credit is that in most companies the reporting line is directly into Finance and there are times when the clever heads of Finance show how little they understand the function by the stupid KPI’s they put in place.
I have come across two different companies recently, well-known household names, who shared their performance monitoring methods with me, and explained how they manage credit. The first company monitors the improvement in the over 60-day debt on a monthly basis.
The second company pays a bonus to their salespeople as long as the 90-day debt is below 10% of the total.
Both were delighted with how they are monitoring the function and celebrated the fact that since they brought in the measures, they recorded improvements month on month, which proves how good they are at credit control. Well, they did, until I pointed out some possible downsides…
In the first Company, their terms were 30 days in other words all December Sales should be paid before the end of January. The problem is that because they are only monitoring the 60-day debt, credit controllers are concentrating on the November and older accounts as any work done on collecting December accounts in January, would be invisible. The result is that although they are showing improvements month on month, the ledger at the end of each month is probably around double what it should be!
The second Company is even worse, because there are two ways to keep the 90-day percentage down. The first is, what I am sure what they wanted, to collect as much of the older debt as possible. The second way to keep the percentage down is not to collect any money in the first three months. Let me show you:
Say their sales are €200k per month and they collected the money when due, with the few inevitable exceptions so the ledger would look something like this:
Balance Current 30 Day 60 Day 90 day 420, 000 200,000 110,000 60,000 50,000
In this case, the 90-day debt is 11.9% of the total so no bonus is payable.
To get my bonus, if I stopped collecting current debt the ledger would look like this:
Balance Current 30 Day 60 Day 90 day 660,000 200,000 200,000 200,000 60,000
Now the 90-day debt is only 9% of the total and I get my bonus! Even though the 90-day debt has got bigger by €10k and the overall debt is €240k higher than the previous example and I haven’t collected anything in the one or two month columns!
Be careful when setting KPI’s, make sure the results you get are really the results you want, and in my book the aim of credit control is to collect as much money as you can as quickly as you can and the two examples given are real-world examples of how it can backfire on you.
Hopefully another convincing argument as to why credit should be managed by credit professionals!
Declan Flood, Chief Executive, Irish Credit Management Training
