6 Essential Elements of a Credit and Collections Policy Framework

[0:00] Marinko Marijolovic:

Just a little bit of background about my organization before we get started, just so you guys have a feel for where I’m coming from. So I work for ShurTech Brands, obviously, we are located in Avon, Ohio, which is a little west of Cleveland, Ohio. So the weather that you see outside is year-round pretty much up there, except for the two months during the summer. But we’re owned by ShurTech technologies, which is headquartered in Hickory, North Carolina, and they are a little northwest of Charlotte. So kind of get perspective. All of our AR credit collections functions are done in Avon for the entire organization. But we do have a centralized finance team, and we all report under one CFO and so basically, we have a linear reporting structure, but not everybody’s in the same facility. We primarily make tape products. We have plants around North Carolina, we have plants in China, Mexico, there are some facilities as well in other parts of the country of the world and Peru and Dubai and things like that, but we sell to the retail industry. So Walmart Home Depot, Sherwin Williams, Staples; Some of the brands that you guys might have seen from us the most popular is frog tape for painting, but we like if you walk into Sherwin store and buy a general roll of masking tape, they refer to it as cp 66. That’s all manufactured by us.

[1:28] Marinko Marijolovic:

And then we also have a side of the business that sells to the industrial segment, for people that use packaging tape within say, within their plants or electrical tape, things like that. So on one hand, the retail side, fewer accounts, more transactions; industrial side, more accounts, fewer transactions. So we kind of cover the full gamut. Just a little bit of a background as far as you know, what we’re about. So before we do this, what we’ll cover as far as you know, today’s presentation we’ll talk a little bit about aligning your credit collections, and then designing, you know, your credit collection policy. So there are different ways I’ve worked in different organizations, and we’ve kind of put different emphasis on different components. But well, this is a fairly broad overview. So, you know, if you want to be able to write good policy, review your existing one and rewrite it, you know, there’s more in-depth that goes into this, outside of all of this. But anyway, to get started, we’ll be discussing the credit policy, the reporting, and documentation, and then collection strategy, which to me is one of the key components along with the credit aspect of it, and then documenting all your collection efforts and then tackling the delinquent accounts and then obviously collaborating and working at disputes to fall into our realm.

[2:59] Marinko Marijolovic:

So before we, before we get started, and you know why your credit collection policy should be aligned? We’ve got a quick little poll question here :

[3:09] Marinko Marijolovic:

How aligned are the credit collection departments within your company? So can we see a show of hands of folks that they operate in silos? So that kind of totally separate – anybody in that environment? Okay, that’s good. Some people do credit collections. They do both. We have people that do that. Yeah, that’s kind of like, where I think it’s, it’s moving towards, and when you report to the same manager, but there’s, you know, ideal groups, there are different groups of doing credit, people to do collections, anybody with that. And then someone aligned but not formally documented, anybody in that realm. Okay, so it’s really that the two middle ones, just to kind of see the layout of the room. So here’s like a little graph that basically depicts how credit and collections function. This is pretty simplistic but it kind of hits home, if you have a strict credit policy, there should be theoretically low collection work, if you’ve got a loose credit policy, you’re going to drive work within the collections environment. So it’s kind of you to know, hopefully, no one is on either one of these edges that you’ve kind of been pulled it within the center.

[4:24] Marinko Marijolovic:

So, you know, why do you want to have an aligned credit and collections and I kind of incorporate all of AR into this. You know, why is it important? It’s basically you want to make sure that you have an end to end process that covers everything. So from you know, it’s all, as you guys are aware, it’s all intertwined from when you bill it to when cash is received to when a deduction is made. Obviously, when an order is generated, all of it is intertwined and all kinds of plays off itself, you got to make sure that you do have a policy that is fairly clear to the organization to the folks within the credit and collections organization. But, you know, especially the sales and customer service and operations, so you’re not on the defensive, you have a foreign policy, everybody’s clear. And if you have one, you know, make sure you’re sharing it and that you might even want to go to a sales meeting or a customer service meeting and kind of go over it. You don’t have to go over every aspect of it, but make sure that the whole organization is very clear on it.

[5:41] Marinko Marijolovic:

So we’re going to go a little bit about the steps in creating a credit collection policy. So the first part obviously, is the credit policy itself, then the reporting, the collection strategy, and the documentation and then handling delinquencies and the issues the conflict that arises from various issues.

[6:06] Marinko Marijolovic:

So designing credit policy you know, what should it be? How should it be? What should it be driving I guess it would be the proper way to say it. So, you know, I should be able to tell you which customers you’re going to give credit to. And this is kind of where it comes with sharing it with other departments that people are clear that they’re not – if somebody gets turned down then they’re not in the dark as to why and then obviously, define the credit limits how you going to set up limits and then the roles and responsibilities for everybody within the team so everybody knows who to go to and who does what. And then obviously the metrics of what you know, what kind of things do you want to tackle and what do you want?

[7:02] Marinko Marijolovic:

So, the first aspect of this would be creating a mission statement. And then the KPIs I said before, and then the rolls in, and then the best practices would be the key to make sure that you know, your goal should be always achieved, like best in class doesn’t necessarily mean that you’ll get there. But that should be your ultimate goal. As you make improvements, as your organization changes, you need to constantly strive for that so you don’t get left behind. So within the mission statement, you know, it should be supporting the financial goals of the organization, the sales efforts. So this is where you got to get others involved within your organization. So when you’re writing these policies, you can’t like you can’t do it in a vacuum, can’t just sit down and go – “Well, I understand the process of my organization and I’m going to do the whole thing”. You know, your job is to maintain that the highest grade of accounts receivable, obviously, a lot of us in the room use accounts payable to borrow off. So, you know, the banks are interested, obviously your audit team, your CFO, if you report CFO or Treasury, whoever, it’s so incumbent upon you to make sure that that you get input from everyone. And almost like the probably would help to do a little interview with folks to kind of say, “Hey, what, you know, what do we, what are we trying to achieve?”. And then the risk level, you know, there’s that mode today that – Hey, every deal kind of has to be worked out. So you have to, you can’t just say no, but on the other hand, you also have to watch the risk level, your organization, you’re kind of tasked to. You’re basically the front lines of that now, people can go above you and over you, but if you’ve got a firm policy and it’s been established and you got input from everybody else, it will protect you because everybody in the organization is kind of made that decision not just you as a single individual.

[9:07] Marinko Marijolovic:

And then make sure that you’re working with the teams and the various other divisions within your organization. And then for that aspect, especially if you got multiple industries that you’re dealing with, or multiple divisions, locations, if you’re handling global versus, you know, just regional, you know, that’s a big aspect to make sure that you’ve covered all of that. So some of the KPIs are fairly simplistic that one can look at, obviously, the SL is a big thing. everybody’s familiar with the DSO. And people put a lot of emphasis on the DSOs that kind of urge you to make sure you inform the powers that be within your organization that the DSO is not the – be it all kind of the end-all. It’s just one statistical number. Okay? So people freak out when, especially if you have seasonality or customers do not order on a level, month by month basis, you know, order spike.

[10:13] Marinko Marijolovic:

People are familiar with the DSL so they think that they understand it but there are different ways to calculate DSO. So make sure you kind of educate your folks on that, even the finance people will freak out. And then the 90 Plus is obviously key because once it goes 90 was like – I cannot borrow on the AR and the risk level rises greatly. The days delinquent. You know, some people kind of like that measurement better than even the DSO so. And the roles and responsibilities of the team. Make sure that everybody is aware of who’s on the team who does what, you know, what’s the, if you’ve got limits for what people can release what they can what kind of credit limits they can assign, make sure people understand within the organization who they can go to, especially if you’ve got, like, sales team that’s larger and spread out across the country that they’re there. They’re not in the office on a regular basis.

[11:18] Marinko Marijolovic:

And then the whole escalation thing, that everybody knows who they can go to, you don’t want people going over you all the time. But we’re coming to you versus say, you know if you’re in charge of a department versus one of your folks but everyone should be aware of it. And, you know, the responsibilities all the way up to the CFO, and some organizations that I work that, you know, you’ve got certain limits that then they automatically need to go to a CFO if you, you know, get to half a million or something, but make sure that that’s prudent as well as the CFO is just putting their initials on it and them kind of thinking you got to cover then not want to really change that and your audit team should be fine with it. Because if there’s no real effort to it or anyone’s inspecting, if he’s not truly reviewing it, you just lost in time.

[12:11] Marinko Marijolovic:

And so some of the best practices and on a day to day basis, you know, everybody wants to personalize the vibe these days. So when, you know, when you’re onboarding a customer, you know, typically for in our case, there’s a letter that goes out from our customer service team and sales. So you can incorporate some of the AR or credit part of it in that or you can send a separate package or contact the customer if you got time to kind of welcome on board and obviously if you have any questions about their application at that time, and then make sure that very clear if you approve it or not approve it, that everybody knows, and like I said, this is kind of where that involving everybody within the organization (happens).

[13:00] Marinko Marijolovic:

Make sure you are highly transparent because they’ll help you from being reactive to being proactive. Everybody is fully aware, you know if you’ve got a good policy that you believe in, but you haven’t told everybody about it, it’s not really helping you a whole lot. And if you firmly believe in which the past you created, you shouldn’t have any issues with sharing it with them or with the organization or with even with the customer to say, “Hey, this is what our policy is. And based on the measurements, we looked at, you know, we cannot approve you or we’ve approved you for this size of a limit”.

[13:35] Marinko Marijolovic:

And then obviously, the ones that don’t get approved these days, that’s a big deal. Like I said, you got to make the deal work. Nobody wants to hear a no. So it’s kind of – I just had one real quick that we’re entering a new market, they get this customer they want to do $200,000 orders at a time and we have to make the product just specific for this customer. Nobody else would use this product and we check their credit- it’s horrible. And they’re like, “Nope, they can’t be because the customer support calls. Obviously, that’s wrong, but I’ll take care of it and I’ll share my financials”. It’s like, “Okay, good. But in the meantime, can I send you half upfront?” It’s like “Okay, well if you send me half up front, we know there’s a problem somewhere along the way. And so not everybody’s going to be upfront with you”.

[14:25] Marinko Marijolovic:

And then make sure you do your reviews and you know, on the accounts, there’s this habit of that’s not a problem, especially if you’ve got thousands of accounts, there’s no problem you kind of just say, we’re good but you got to figure out some process that you’re going to review them either you know, by size or by credit limits or by age. And then everyone’s favorites, the five seas, obviously, you can read them there. You know you try to incorporate that into your policy. And that should take care of a lot of issues that you have and then you know, on the blocked orders, kind of sense kind of look what’s causing it and then share that with the customer and with the sales because a lot of times they’re kind of kept in the dark as to why our orders are not being released. Or, you know, why do we release some immediately, you know, what’s the issue? In some instances, customers paid, we need the payment commitment, things like that. But, you know, be creative on your toes, I guess. You know, it’s easy to say cash in advance, so are we just not gonna have sold to them? But that doesn’t go over. Well, especially when sales are under the gun even if your sales are increasing – There’s expectations that they need to meet and if the vibe kind of that you project is that you’re the “No” person, you kind of get a bad rap within the organization.

[16:01] Marinko Marijolovic:

So reporting and documentation, you know, everything should be documented in what we do in the credit collection environment, I mean, outside of the policy, you know, make sure that you’re able to run some reports that you know, for your audit, folks like for us, our company, our external auditors, audit our AR to the nth degree, I’ve never worked anywhere where they’re more obsessed about the AR, I have no idea why, you know, they’re more obsessed about our AR then the bank is so it’s kind of fascinating, but, make sure that, you know, you got the supporting documents that, you know, as I said before the transparency that all of that is, you know, being projected, and that you’re following whatever controls you have. So if your audit requires reviews of your accounts at a certain period that’s been agreed upon, you know, make sure you document and obviously, if you’re doing collections and stuff, you know, to document all of that is pretty easy. You just put in the notes, but you know, you’ve got, you’ve got basically a credit application if you’re using agencies, you know, the financials. So if somebody promises you that, they’re going to provide you financials every year, make sure you have some kind of follow up structure, make sure you’re putting that into a secure environment that other people outside of the credit group don’t really have access to. So if it’s online, make sure that you have secured access through passwords and things of that nature.

[17:51] Marinko Marijolovic:

But, you know, the same thing with the with any kind of trade references you get, you know, it is confidential information and should be kept like that. If you end up disposing of it, make sure you know that it’s shredded, don’t just put it in the to be shredded pile. That’s not a good policy. So, and then in a lot of organizations, you have to justify, if you’re increasing or decreasing the credit line, you can just arbitrarily move them around. So make sure that you have some kind of report form that you know, that you’re filling out that says, here’s what we’re basing the movement of the credit limit on.

[18:29] Marinko Marijolovic:

And then just overall, anything that pertains to the customer, make sure you have one spot and that you have access to it and try to keep it in some summary format because you can go back and rifle through old reports. And the best one, as I said, is if you have a form that you can summarize your activity on that account outside of the normal collections work that you do. And then as far as designing a collection strategy – So the credit part obviously is big, you’re deciding what you’re going to do with the account, assigning a credit limit that’s big, if you’re big into financials, are just using the MBE or some other, you know, credit agency. But the other aspect is the collection policy. Then you’ve got to decide like, appear we’re showing like segmentation of the accounts.

[19:37] Marinko Marijolovic:

So, there are different ways to do one of these. This one is based on risk so you can segment your customers by risk. You can segment it by also by the size or the industry, things like that. But make sure you can’t cover everybody the same way. So all the customers you know, kind of are equal, but they’re not going to get treated equally. Kind of like football players, I guess, you know. So make sure that you know that you know what you want to do, we broke, we break our accounts by industry, then with the industry, we break them out by size. And then within that size, we break out the risk actually. So we kind of layer it down. And it’s time-consuming, but it saves you a lot of time in the long term. So this is kind of just showing you as a low risk, you know, medium, high, and how you can move as far as you know, creating a strategy. So if you guys like, I don’t know how many of you guys are using SAP, Oracle or the HighRadius cloud solution, but you have to create a strategy even within that and you got to tweak it and things like that. So make sure you know what you want to do and then tweak it occasionally doesn’t just kind of set and forget it. That’s not a good policy, and then recording the collection calls, obviously, we know the importance of that, you know, if you got to send that to an asset collection agency, whatever you got to do with it, you know, but the key is kind of developing a customer behavior and the promise to pay are big because you can see how many customers are abiding by that or not, and how you know, they’re trustworthy or not. And that should be incorporated somehow into your collection strategy as well.

[21:39] Marinko Marijolovic:

And then like I said before, the reviews are key. I’m going to blow through some of these real quick since I’m given the time kind of card there. Now, a lot of you guys you know, under the gun here, but you know, negotiate with a customer when they go delinquent. You know the easy one is trying to negotiate yourself. Charging interest is fantastic, but I like charging interest on large accounts, large orders. But when I gotta charge interest on like 2000 accounts every month, you know, and I’m going to get like five bucks on each one. It’s highly annoying, because on top of that, now I have to collect the deductions, I got to collect these five bucks if they were going to pay me the money to begin with, I wouldn’t have to worry about the five bucks. So kind of, you know, be practical about that. And then the third party outsourcing agencies, some of its great, but a lot of it, you know, they’ll work out the deal that you’re going to work out anyways. And then litigation. Litigation is fantastic. If you have an internal legal team, the cost is way down. But if you’re using an outside legal team, it gets pretty pricey. So that’s one of those things where you might actually use an outside collection agency because it might be cheaper than just going to an attorney on your own. So you know, keep that in mind.

[23:00] Marinko Marijolovic:

And then conflict resolution. So this is a big one for me. So I just wanted to kind of go over this real quick. So whatever issues the customer has, when it’s time to pay, they’re bringing it to you, you’re the person that they can get hold of the easiest because you’re not going to ignore them because you’re trying to get money, they’re going to withhold payment. And now you got an order on hold, or you’ve got a pass to invoice. So you’ve got to figure out how to address their issues. Make sure that, you know, you can collaborate with other teams in the organization because, you know, if you’re in customer service, you can kind of push it downstream if you’re in sales or if you’re in transportation or whatever. But when it gets down to the collection aspect, that’s it. There’s nobody you know, behind us, the third-party collection agency, I guess, but beyond that, so you got to understand what the issue is you got them saying how your process works within your organization. So make sure you guys are fully versed in how your organization operates and make sure you’re training your people. And, you know, like I said before, go to some of the meetings that other departments have, send some of your folks to either meet, or just send them to goes, you know, sit with a customer service person, or even, you know, still do the sales ride, you know, where you go on a few sales calls, just even if it’s to a good customer, just to kind of see what’s going on, it will make them appreciate a little more and also understand, you know, understand the process a little better.

[24:28] Marinko Marijolovic:

So, some key takeaways, if we’ve got a few minutes here, the Credit and Collections team, you want the whole thing to be aligned, make sure it’s aligned with the whole AR operation, and then make sure it’s aligned from the whole order-to-payment process. You know, if there’s no order because we were restrictive in our credit abilities, there’s no business, there’s no work. On the other hand, if there’s no payment, and there were a lot of orders, guess what, it wasn’t a sale, it was basically a giveaway. So it was the sample that doesn’t help the organization at all either. Make sure you document everything. Start with your policy. If you guys have a policy go back, rewrite it. Hopefully, this will motivate you. If you don’t sit down and write one. These days with the internet, there are great examples out there. Use ones from previous organizations, you worked at – kind of always evolving to your current situation. And then, you know, be a strategic thinker, you know, use the number crunching, use the analytics, the technology that’s offered today. You don’t have to go all-in with every offering, for example, that HighRadius has or some of these other folks. But pick the pieces that worked for you that will are going to help you out and kind of think about your process and think about the ideal way that you would want your process to work and then determine what aspects could you put in easily without a lot of effort or a lot of work and kind of start off small especially if you got like a bigger department. Sometimes when you throw in a lot it’s really you know, really difficult. And then, you know, make sure you’re aware of your customer behavior and you’re trying to analyze that. And you’re always asking the questions you find out, you know, what makes your customer kind of tick and what makes some of your own folks to do things the way they do, especially if you got different divisions, why does one division now have certain issues, the other one does and vice versa. So last but not least, anybody got any questions? I know I was kind of quick and was really broad, but it’s something that was more meant for some of you guys to think through.

[26:33] Marinko Marijolovic:

So the question is how to quickly review your credit limits for your current customers and staff. So be practical, hopefully, in your policy, you stayed for example: if you’ve got a kind of small accounts, where you’ve given them like three to five thousand dollar credit policy, I mean credit limit, a lot of in a lot of those instances, there’s not a good reason to review it unless your company is really tiny, you know, you’ve got to be practical, what risk you can take so make sure you segment that. There are certain ones that probably you don’t need to review, you can just review based on the run some, have IT run some reports based on you know, average days to pay and number days delinquent, things of that nature. And then you can also do a middle gap, I guess we pulled some reports and if they were within a certain rating, just you know, either up their limits or give them what they need. So have IT run some reports of how many people are going avail limits where they’re adding their limits. And then the other one, obviously, the larger ones, the riskier ones that have issues that are key, you know, you’re gonna have to do those by hand and in alliances, you got to call them and ask for financials and go through that and then you know, if you’re doing like a Z-score model, you know, you can set something up like that. Previous company that I worked at, that’s all we did. We were just strictly Z-Scores. We didn’t care about anything else, you know, so if you didn’t provide us with financials, we just didn’t do business with you. Now, in some instances, we had to go visit them because they wouldn’t send them but you know, that’s kind of how to work.