Episode 4: Mid-Market Businesses Guide to Control Credit Risk Post Pandemic

Madhurima Gupta:
Welcome to the Mid-Market CFO Circle podcast, powered by RadiusOne. I’m your host, Madhurima Gupta. I’m Senior Product Marketing Manager at HighRadius. We hear you mid-market CFOs and we understand your challenges. On this podcast. We bring you conversations with the CFO community to help solve problems that you face. Our speaker today is Bill Eveleth. He’s currently working as CFO and COO at Go Live SMS and he’s currently also running his own fractional CFO services company called The Fractional CFO. He has over 30 years of experience across companies such as Citi and AT&T. The last 15 years in consulting, Bill has learned that the most general problems are consistent across all businesses and believes he can find solutions for your challenges. On that note, I’d like to welcome Bill Eveleth to the show, and I’m looking forward to understand from him how CFOs can improve credit policy and manage growth in businesses through tough economic times. Hi Bill, how are you doing?
Bill Eveleth:
Hey Madhurima. I’m good. How are you doing? Thank you for the invitation and I appreciate you taking the time and I’m looking forward to this.
Madhurima Gupta:
So am I. You’re most welcome. So, you know, let’s begin with my first question. So post-pandemic, do you believe it is critical for CFOs to change their credit policies, given the current economic uncertainty and why?
Bill Eveleth:
First, on credit policy, that’s a critical function that CFOs perform a setting that I’ve worked in a lot of organizations where these CFOs really want to drive their bad debt to, uh, as close to zero as possible. I don’t subscribe to that. You’re going to have to have a little bit of bad debt or your credit policies are probably too tight. So…start with that. And do CFOs need to be changing the way they’re currently looking at how they’re getting credit? I look at that in two different ways. I look at it from an existing customer perspective, and I look at it from a new customer perspective. From new customers, yeah, we might need to tighten things a little bit in certain industries. Uh, retail, for instance, is having some trouble right now. I have a large customer up in the, uh, northeastern part of the United States, and they’re really heavy in retail dealing with customers like Walmart and J.C. Penney, family names, people that, uh, that we’ve all heard of and some of the customers that they have are having credit difficulties now and so the, uh, organization has to keep a close eye on those customers. You don’t want to get too far out there or you don’t want zero percent yet, you don’t want 20 percent either. So we need to keep a good close eye on those existing accounts. As far as new accounts go, yeah, within certain industries, I think we need to be a little bit more cautious. I think that uh, you know, using D&B and other sources of information in, in certain industries, we maybe need to do that a little bit more than we’ve done in the past. But I don’t think I’ve seen any significant wholesale changes other than what I’ve just said that I would recommend that businesses make on a current basis. As far as existing accounts go, I think it’s critical that we’re keeping a closer eye on the, uh, the receivable days. Anything is that starting to get over 90 days now, uh, I’m making phone calls, I’m understanding what’s going on and working with the CFO team of the customers and uh, working out a payment plan and not letting them go much more than 90 days. And I’m not even letting them go 90 days. I think about 60 days past due is, is about my tolerance level with uh, with those organizations.
Madhurima Gupta:
So Bill, I mean, when you say that, uh, you know, you don’t really need to do anything differently, um, on our side, right? At HighRadius as we speak to hundreds of CFOs ourselves. So we have noticed that a lot of customers, right, who did not really face problems in payments earlier, they’re facing them now from their existing accounts, right? And then human biases kind of come in because, you know that this is a customer who always pays right? And not to quote any company here, but yes, uh, we’ve seen that recently, that’s not what’s happening and you know, a lot of, uh, companies, they kind of just let go of their credit limits, offer them slightly above than what they were generally given. And in the long term, they are seeing a larger debt um, coming from these respective buyers on their end. So is that not something that you’ve seen at all? Because from what I have learned, it feels that there are certain companies that are affected.
Bill Eveleth:
Oh, I’m absolutely seeing that. And it’s the same process. It’s uh, a lot of it’s the human touch. I find a lot of CFOs and organizations, CFO of organizations aren’t necessarily comfortable picking up the phone and calling customers. One of, one of my customers, uh, one of their best customers, again, I’m a fractional CFO, so one of their best customers, uh, was running close to 90 days late and my customer said, I said, well, we can’t handle this, that’s, you know? It was, 30 to 40 percent of the income of the business and they were having, starting to have trouble making their bills. And, and my customers said, don’t call them you know? You’ll only piss them off. He’s been a good customer forever. So well, good customers don’t run 90 days late. So I picked up the phone and called the guy and I just, you know, he, he started off being indignant and said, you know, I can’t believe you’re calling me, I’ve been a good customer of this company for, uh, you know, 10 years. I said, well, that’s great, and I understand that and I appreciate that. But, the fact of the matter is, you know, in your business would a good customer be 90 days late on paying their receivables? And he said, Well, no. I said, would you put up with that? And he said, no. I said, well, then why would you expect us to put up with that? And, uh, now I’m sure they were having financial difficulties. He didn’t go into that. But after that, they have, uh, made payments on time ever since. So, you know, some people run into problems, and if you’re willing to accept them as a CFO, you’re probably going to get them. But you might have to pick up the phone and call somebody, and you might have to even worry about pissing off a good customer. Um..but, uh, it’s just the way it goes, and that’s the world that we live in. So, um, you know, don’t be afraid to call customers, don’t be afraid to, uh, be perfectly frank with them. And uh, you know, sometimes if you lose them, that’s maybe OK. I haven’t lost any yet, but uh, if you lose them as a result of those phone calls you’re making, C’est la Vie, that’s the way it goes.
Madhurima Gupta:
Understood. Um, What are some other red flags that mid-market CFO offices should be looking out for while they’re monitoring their customers with late payments?
Bill Eveleth:
Well, again, the red flags I look for, CFOs tend to run businesses by the numbers, so we’re, we’re looking for numbers in these types of things. So the Day’s Receivables Outstanding is the biggest indicator that you’re specifically having an issue, but you can do other things too. You can go into Experian or Equifax or even D&B, and you can set up a, uh, credit search. You can put your customers in there with their using their EIMs or around the world, whatever their uh, their number is associated with their business, and you can get a, uh, you know, a credit warning that you can, you can uh, receive from them if there’s a, if they spot an issue with a customer or with one of your customers. So I recommend doing that too, especially with customers that you’re kind of wondering about, right? So, so setting up pre-existing warning through, you know, one of those credit agencies or D&B or someone like that, I think it’s a great idea. And then also just making sure your accounts receivable department is on top of things and that when there’s an issue, they’re bringing it to your attention and that you’re handling it quickly and efficiently.
Madhurima Gupta:
So just a while back, you did mention about, uh, customers who are existing and what’s the best way to manage credit risk for them. Uh, what I want to understand is, what, according to you, is the right timeframe to look at credit limits and creditworthiness for such customers who’ve been with you for a very long time? Because in our experience, generally, uh, customers are very, very on top of, uh, the processes for onboarding their customers right? or their buyers. But when it comes to relooking at the long-time customers, the credit check, that doesn’t really happen, right? So what is the right timeframe, according to you?
Bill Eveleth:
Well, according to your sales organization, it’s never. So we don’t let, we don’t let, we don’t let them drive the ship there. But, um, I would say annually wouldn’t be too often. Um, certainly, if you’re seeing an issue like I mentioned with my customer in the northeastern part of the United States, having in retail even by annually twice a year wouldn’t be too frequently to take a look at it. Again, the main issue that I’m running into is aging of receivables. Um, at what point do you start to cut them off? That’s, that’s a business decision, and I don’t think there’s a simple answer to that. But from a CFO perspective, get that information. Look at the things that we talked about earlier, which is, you know, are they showing credit risk in other areas? There’s a lot of publicly available information on virtually all companies where you can, uh, can see whether they’re running into issues. If you’re starting to see that, then you’ve got to tighten their credit and you know, don’t, don’t wait until they’re sitting out there with, you know, a half a month of your business’s revenue on accounts receivable and hope for the best. And it’s, it’s probably too late. Um, but, uh, again, I think annually doing a review of, of your major customers is a good idea. And, um, the question is, are you going to do anything about it? And that’s what I see for the most part, is the CFO has a certain amount of sway that, uh, that they can use in the organization to make decisions. But a lot of times that decision is made jointly between sales, marketing and the executive branch CEO as to how much credit you’re going to give a customer. And, uh, so the CFO has an opinion, but some of the other organizations and the CFO does not often win, certainly doesn’t always win, but doesn’t often win that argument with the uh, with the CEO in terms of how much credit they should be giving their customers. But that doesn’t mean we shouldn’t try and we shouldn’t keep an eye. But again, the, the main thing to look at is your receivable days outstanding, and uh, they started getting up towards 90, you know? Unless it’s with the U.S. government or something like that, they can traditionally be slow payers, but um, you know, don’t, uh, don’t let them go too far.
Madhurima Gupta:
Got that. Um, the other thing that I wanted to understand is uh, you know, you mentioned that there is a lot of information available about credit uh, history, credit risk associated with the, the businesses that CFOs can be in business with, right? So, managing all of this data is actually really difficult. So, would you say it is important to leverage right tools to ensure the accuracy and timeliness of credit data?
Bill Eveleth:
Absolutely, I would uh… again, you can get warnings. You get a customer XYZ, you can go out there and say, OK, I want, I want to keep an eye on Customer XYZ. If they’re showing any issues associated with their, their credit rating, send me a warning. Then you can get that information. And uh, you know, when, when you get it, then that’s a red flag for you that you need to be taking some, possibly taking some future action. But again, you need to know what’s going on and that will keep you informed.
Madhurima Gupta:
Understood. And what about the businesses, which are still doing this completely manually? Are there certain downsides that you’ve experienced to it?
Bill Eveleth:
No. Um, Well, I, I think that if you’re not taking advantage of any of the, the modern ways of looking at, at businesses, you’re probably doing too much work in your accounts receivable department. So, I don’t know why anyone wouldn’t go to D&B and set something up, which says, send me a report, but, you know, maybe they don’t have very many customers and um, they want to do it manually, that’s fine too, but it just seems like extra work for your accounts receivable department and perhaps the CFO in general. There are businesses that have a limited number of customers and, you know, you only have four or five customers, then you can probably handle things manually. You’re only bringing on another new one or two every year, that’s, that’s fine. You can just handle an invoice but, uh, but most businesses in the mid-market category have many more customers than that, and I always recommend doing something on an automated basis with those people.
Madhurima Gupta:
Mm-Hmm. Absolutely. And, um, you know, how can, uh, mid-market CFOs strike the right balance in handling credit risk when they are growing in terms of their business trajectory? What would you suggest?
Bill Eveleth:
Well, it’s a partnership. It’s, it’s mainly between sales and the CFO, and it’s, it’s understanding the risk associated with bringing on a customer that perhaps doesn’t have stellar credit and taking the risk of write-offs, uh, versus not having the revenue associated with bringing on that new customer. So again, it’s a discussion..and uh, you know, CFO shouldn’t be an autocrat. They should not say this is the way it’s going to be, and uh, you know, we don’t want any bad debt, except some bad debt. They’re like a bank, almost they have to accept that, yeah, we’ve got, we’ve got some credit risk here and we’re going to have some, some write offs associated with it. But again, it’s a partnership in the organization, and that partnership really makes the decision jointly. And that’s been my experience..um. What’s the right number? I don’t know, um, banks have a good formula if, if you’ve got a uh, if you’ve got a situation with the larger company and you’re dealing with larger customers, um, you can look at how banks offer credit. Most of that’s, well, that’s virtually all collateral based and accounts receivable is not collateral based. But um…, but look at, look at what they look at, the banks look at when they’re offering credit to somebody, you know? Collateral’s important, but they’re also looking at the, uh, credit worthiness of the, uh, of what would be your customer. So study that a little bit. Find out how they’re doing. And uh, again, don’t be too conservative. Don’t be too aggressive.
Madhurima Gupta:
Absolutely. And you know, I also wanted to understand from you that in your experience, how should or how have you seen, uh, mid-market CFOs leveraging, uh, the credit reports and analytics for credit risk mitigation across their, uh, customers lifecycle? And how prepared are they to use advanced technology? For example, have you seen businesses of a little larger size? I’d say the top part or the upper part of the mid-market where they are prepared to use AI and maybe advanced technology for this purpose?
Bill Eveleth:
No, I haven’t. That certainly does not mean that it’s not done. Using, using A.I. in this space. I’m sure there’s a lot of bleeding-edge technology. I’m kind of more of a nuts and bolts kind of CFO, and I tend to look at things more on a one-on-one basis when it comes to my customers and their uh, their collections and certainly their accounts receivables. So could you save money by doing that? Could you, could we be more sophisticated in how we’re looking at the uh, the credit worthiness of customers and when the risk goes beyond something that we would tolerate? Absolutely no question about it that technology is out there and it’s available, you know, do you need to do it? I’m sure in certain circumstances you do in virtually all the circumstances. And I’ve, I’ve worked with hundreds of companies over the years, and virtually all of those were able to manage accounts receivable quite effectively using the tools that I’ve gone through today.
Madhurima Gupta:
So, you know, we come to a conclusion of this interview bill. Um, If I had to ask you your parting thoughts on the best three tips that the mid-market companies should be following for managing credit risk throughout this economic uncertainty that we are going through, uh…What would you say those three things are?
Bill Eveleth:
It would be as follows: Look at your new customers and understand how much risk you’re going to tolerate. Work with your sales department and your, and/or your CEO makes sure that you’re all in sync in terms of how you’re going to be bringing on new customers and how much credit you’re going to be willing to give them and in terms of accounts receivable and make sure the organization knows when to pull the trigger on cutting them off. So, that would be number one. As far as existing customers go, make sure that you have a good clear line of communication to the right people in the organization. CFO should not be calling accounts payable clerks and asking for payments, but at some point, if the situation is such that a company is passed, what the CFO would consider acceptable levels of tolerance. CFO picks up the phone, calls the right person in the organization. Maybe the CFO of the other organization, maybe even above that, and ask what’s going on? So, don’t be afraid to, uh, manage the, uh, the credit yourself. And then the, uh, third one is set up some sort of automated system where you’re getting pinged from D&B or somebody like that with a hey, hey, this customer, um, has gone from good credit to bad credit. And these are the reasons why. So those would, those would be my top three.
Madhurima Gupta:
Perfect. Thanks for those tips, Bill. I think everybody is going to learn a bunch from it and benefit as well..uh. And uh, I’d like to thank you again for taking out time for this interview, and I hope that you enjoyed talking to me as much as I did. And I look forward to having you sometime soon again on the CFO Circle podcast.