I learned an important lesson from a seasoned credit manager when I was a relatively new division president. The primary reason for high deductions and slow payment is not some mystical force. It is sales people who do not define the “deal” clearly with customers. Worse yet, they don’t accurately document what deal they think was made.
There is a common failure in negotiations that I call “informed misunderstandings.” Consider this discussion of a pending price increase:
The sales person goes into the buyer’s office and says, “We need to increase your prices, effective right away.”
The buyer pushes back from the desk (a symbolic rejection) and says, “You know we are in no position to take a price increase now.” With that, he folds his arms across his chest and leans back in his chair.
The sales person restates his case. “You don’t understand. This isn’t something I can give on. Our costs have gone up and we must put this price increase in effect right now—next week.”
The buyer’s response is expected. “No, you must not understand. We can’t accept any price increases.” Just as the exchange is in danger of becoming contentious, the buyer’s phone rings, and he answers it.
After a brief conversation, he hangs up and turns back to the sales person who fears a confrontation that might damage their relationship. He changes the subject. “Did you see that overtime ball game yesterday? What a game.”
Since the buyer feels he has made his position clear, he responds in kind. A knock at the door is the buyer’s assistant reminding him his next appointment is here. He turns to the sales person and says, “We’re clear now, right?”
To which the sales person says, “I think we are.” They shake hands and the sales person leaves. When he calls to report to his boss how the call went, his answer to the question: “Did you get the price increase?” is “You bet. I told him we couldn’t budge an inch.”
The buyer runs into his boss in the hall, who asks, “What did he want?” He wanted another price increase, but I told him “No way.” “Good,” says the boss.
Next week, the customer’s orders come in with the old prices (no increase) on them. The sales person’s computer contains the new prices that he put into place (he said). The orders are rejected for a price mismatch by the system. In the interest of customer service, the rep overrides the rejection and allows them to be entered with mismatched pricing and ship to the customer.
Upon the invoice arrival, the customer takes a deduction and pays at the old (lower) price and then the fun begins. This kind of thing happens all the time.
What the credit manager taught me is the importance of getting the deal “down on paper”—and into the computer—and not leave these loose ends to slow payment and increase deductions. Either there was a deal or there wasn’t. Don’t “kick the can down the road” to the poor collections person, who has no way of knowing what deal was agreed to.
By developing a computer “deal sheet” that the sales person and the buyer are required to sign off on, these kinds of “informed misunderstandings” are avoided. Does it make the contentious issue like price increases desired by one party and rejected by the other any easier to resolve? NO. But it forces the resolution between the right two people while a compromise solution might be possible: a smaller increase, a delay, a quid pro quo—a delayed increase in return for additional business, etc.
No business transaction is done until the finance department—and that means Credit & Collections gets money from the buyer and into the bank. That doesn’t mean just part of the money. Deductions without documentation are discounts—and unauthorized ones at that—because they deteriorate to negotiations, in which the buyer has the leverage.
Smart credit managers and accounts receivable pros take such matters up with Sales Managers and VPs and seek their help. Documenting the deal so it can be correctly entered into the order entry system is necessary. Doing it routinely is just good financial management.
Sometimes it takes a little persuading all around. Once the right way becomes “the way we do it,” life is better for both parties, deductions drop like a rock and disputes are settled on matters of fact instead of opinion—and the documentation backs them up. DO NOT be guilty of “informed misunderstandings,” and always remember, “deductions without documentation are simply discounts.”
John L. Mariotti is President and CEO of The Enterprise Group. He was President of Huffy Bicycles, Group President of Rubbermaid Office Products Group, and now serves as a Director on several corporate boards. He has written eight business books. His electronic newsletter THE ENTERPRISE is published weekly. His Web site is Mariotti.net.