Sales Verses Credit – Getting The Balance Right

By David Hawkins – PAID Division – 6th July 2017

At CPA we see cases every day where otherwise well managed businesses have granted extended credit to customers well beyond capacity to pay.  The problem is often rooted in competitive pressures.   “If we don’t give 60 days’ plus, someone else will” is a common attitude and all too often it leads to poor cash flow and to bad debts.

The rivalry between sales and credit control is the stuff of legend in many companies.  Some managers even believe that the innate characteristics of the two functions are so different that the people performing them must be kept apart, since too much contact will inhibit performance on either side.   This is a grave mistake.

Where senior management has a sales background, the sales side of the business usually dominates. Higher sales are the prime goal. This is understandable in a competitive economy like the UK but,   as per the old adage “A sale is not a sale until it is paid for”.

All too often credit managers and staff are overridden when expressing doubts about the desirability of supplying marginally profitable or financially insecure companies.  On one level it is easy to avoid slow payment and bad debts; simply restrict sales to well rated customers and insist on clear and short payment terms. But if the balance between caution and sales elan is tipped too far towards the credit side there will be other problems. Profits as well as sales will suffer. Good salespeople will leave and the business will stagnate. So what to do?

Firstly senior management has to recognise that the sales/credit issue exists. What may be needed is a working group under the chairmanship of the MD with both the sales/marketing and credit functions represented. The remit is to clarify the attitude of the business towards the one point of common contact – the customer, and to unify sales and credit policy. Hard analysis is required here.  Every business differs, but frequently it makes sense to designate categories of customer account by taking into consideration such key factors as:-

  • individual customers financial strength
  • customers historic and potential spend
  • payment history
  • price resistance and margins on sales
  • location, costs of sale
  • general market and sector conditions

In conducting this review it is essential for all concerned, especially sales management, to grasp one important fact – not all customers are of equal worth to the business!   The group will then be able to give clear guidance to both sales and credit management on just how differently ranked customers should be handled. They will address such aspects as prospecting for new business, the basis of credit analysis and sales terms, collection policy – and of course the intelligent  use of outside agencies such as The Credit Protection Association.

Cooperation on this level puts a stop to the mindless provision of unjustified extended credit. and both sides of the business will benefit from sharing information. A status report or other available credit information should be just as available to the sales side as to the credit manager. A well written customer call report can be as invaluable to the credit manager in considering an application for higher credit and can aid the credit granting process.

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