"Selling on Account" In Tough Economic Times

By: Steve Grudzinski, Senior Vice President Finance and Administration

Granting payment terms has become a requirement of most businesses today. If you have been in business for any length of time you probably have heard many clichés regarding the management of accounts receivable. For example “the sale is not complete until the money is in the bank” or “a sale is a gift until you get paid” and my favorite, “the customer purchased on account – on account he didn’t have any money.” The seasonality that we all deal with in the mulch industry adds another level of difficulty to the management of receivables. Let’s explore some techniques that can help you to manage your receivables more efficiently.

Your granting of credit to a customer will usually focus on the long established principles of the three C’s of credit; Character – will he do his best to pay you, Capacity – can this customer pay based on the financial strength of his business, and Capital – how much can he pay? Each of these should play a part in your decision to extend credit. Your prior experience with a customer and your ongoing relationship often plays more in your decision than the mechanics of the three “C’s”. Once that decision has been made, the setting of a limit can help you manage your receivables more efficiently on a day to day basis. There are several methods you can use to set that credit limit for any individual customer. For new customers, you need to ask for some trade references. What level of credit is being extended from other vendors your customer depends on who have the pay history you lack. Can your new customer provide a bank reference – someone who can verify the on going existence of a business? For existing customers, look at their past performance. How have they paid in the past? How much do they buy? You also need to consider the risk level your company can tolerate. How will not getting paid – for whatever reason – affect your on going business?

Having predetermined credit limits allows for a “red flag” to be waived should a customer place an order that would put them above their limit. While we don’t suggest that this makes it an automatic yes or no as to shipping another order, the red flag gives you an opportunity to look at the account more closely, to determine if an extension in the limit, either permanent or temporary, is warranted. Your closer look should include the customer’s previous payment history – how long do they usually take to pay, when was their last payment received, their current business level, how long have they done business, and your all important “gut check” on this customer.
 
In smaller businesses, the “gut check” can play the biggest part in the credit decision. This is because the granting of credit and setting limits is as much an art as it is a science. As much as we sometimes would like it to be black and white, Amerimuch recognizes the importance of our customer relationships. Many folks at Amerimulch, from our sales team through senior management, share a sense of pride, knowing that we have helped many customers over the years to grow successful businesses through good times and bad. Many times that additional time allowed to pay an account or temporary increase in a credit limit has had a significant impact on our customers’ success. On the other hand, we haven’t always made the right credit decision and, of course, our ability to work with customers is dependent on the outside economic conditions that affect each of our businesses. The biggest advice we can give regarding credit issues is what we call the fourth “C” of credit – Communication! You and your customer should know what each other expects in managing the terms of sale.

When any company makes a sale it extends an obligation to its customer to deliver a consistent quality product, an on time delivery and a competitive price. As part of the sale, a customer takes on the obligation to communicate any problems he may have with the product or service and most importantly pay their bill within the agreed-to terms. All the folks at Amerimulch take our obligation seriously as we work everyday to deliver you Real Tangible Value™ in everything we do.