Two men look through prison bars, one sees the mud the other the stars.
Some facts to ponder:
1) 80 to 90% of B2B sales are made based on payment at a later date, i.e. credit is extended
2) A/R , short term money due from customers for the purchase of goods and services is often one of the largest asset a business has…on average a/r represents 40% or more of the total assets
3) Next to cash on hand the A/R is normally the closest thing to money in the bank, it’s a very liquid asset
4) That there’s a cost factor of 8 to 14 times as much involved with selling to a new customer than there is in selling to an existing customer..the repeat sale is most often the most profitable sale
5) Credit Sales and A/R Management is misunderstood and underutilized by most business owners, CEOs, Managing Directors and senior business managers…they still view it as a negative, a cost center and as the ugly stepchild of accounting.
Dr. Don Rice once said that “Employees respect (do) what management inspects (measures) and not what management expects. What is watched gets done.
In the 1950s credit was defined as faith, trust, as the ability and willingness to pay. In the 1950s the performance of B2B Credit Managers was measured by DSO and % bad debt. And for that time of pent up demand, growing demand and limited competition a risk management worldview was the correct way to enhance profitability.
Today and in the future, just as in the past, the Profit Imperative is and will be the driving force behind the actions of business owners and business managers who understand that the work/cost of doing business must be performance-related; and that they have an obligation, a duty to strive for profit enhancement . A reasonable level of profitability for a business is not a luxury or an option.
Employees and managers with an employee mindset expect to be paid whether their work generates a profit or not.
The only reason for any business to incur the work/costs that go with selling based on payment at a later date (to extend credit) is to get profitable sales that would otherwise be lost. Faith, trust, ability/willingness to pay , risk are factors that must be taken into consideration when extending credit but they should not define credit. Credit is the selling of products/services based on payment at a later date. Credit is a lubricant of commerce and allows for the expanded movement of goods and services.
DSO and % bad debt used as performance measurements will adversely effect the profitability of modern companies ..and yet that is still the focus of many business owners, CEOs, Managing Directors, and senior business managers.
What do you think?
WalkingBear
Bron: A/R Management Group
