The Blind Side: Is Your A/R Program Saving Customers’ Time and Effort?

I loved the book The Blind Side about the discovery of future NFL left tackle, Michael Oher, written by Michael Lewis and later adapted into a blockbuster movie starring Sandra Bullock. The story opens by explaining how the left tackle position, someone who never touches the football, has become one of the most highly paid positions in the NFL. It’s confusing to the casual fan, but Lewis reveals the hidden-in-plain-sight logic: the most important player on the NFL roster is the quarterback, typically a right-handed passer. The second most important position is the left tackle, who prevents the defense from hitting the quarterback’s blind side, where chance of injury is more likely.

B2B businesses have a blind side too: it’s their customer experience with their A/R program. The largest customers typically represent a significant portion of a B2B business’ revenue. Sure, your customers may have been won by product or pricing considerations (i.e. an outstanding play by the QB), but that revenue will be protected or lost based on how you help them save the scarcest resource of all: time.

Simply put – customers don’t want to spend any more time getting what they need than they have to. They’re busy with their own customers and concerns about service. This is especially true when it comes to billing, A/R, and other payment or credit needs. Here lies a hidden front in the competition—and B2B businesses who exploit it have a new strategy to lock in customers and win new ones, too.

Success is no longer just the absence of problems. Sure, customers expect you to have the product they need, have it delivered promptly, have the order be accurately fulfilled, and be billed without error. However, in the world where Amazon has revolutionized the consumer buying experience – and has eyes on doing the same for business – saving customers’ time will earn you sticky, hard-to leave
relationships. Bonus surprise: you’ll also discover significant cost savings in the process.

Here’s how to make it happen.

Make it easy for customers to serve themselves

Everything we need as a consumer is online – purchases with your credit card company, ability to pay your phone bill, etc. In B2B, however, that’s still considered cutting edge. B2B businesses should invest in online customer account management capabilities. Rather than customers having to call your business and you paying staff to service these needs, make it simple for your customers to get what they need, whenever they need it. They should be able to download a statement, view past purchases, make a payment online, request more credit, dispute a charge, and any other common use case. They’ll get addicted to the ease and routine of serving their own needs.

Want proof? BlueTarp regularly conducts satisfaction surveys* and discovered something seemingly counterintuitive at first, but proves the blind side point. Removing the human touch from the service experience doesn’t decrease satisfaction. In fact, BlueTarp’s most satisfied customers are the highest users of our online tools.

Notifications, their way.

No one likes to get a phone call asking them to pay their bill. It’s a confrontation that is absolutely necessary for a few, but avoidable for most. Invest in automated email due date reminders and past due notices that provide a reminder of what’s due and when. Better yet, include a link in the email that connects to the online account so they can pay right away. Even better yet, make these type of notifications configurable so your customer can determine how they want to be communicated with and when . . . email, phone, or even text.

BlueTarp has found that email notifications are just as effective as a phone call in helping drive payment of unpaid bills that are slightly to moderately delinquent. To state the obvious, they are massively less expensive, can be executed en masse, and are preferred by most as the desired communication method.

Make it easy to get a credit account with you.

The more effort needed to do something, the less likely it is going to happen. Establishing a credit account is no different. Filling out a paper application is still the dominant process for most B2B businesses. Often times the application may be incomplete (requiring follow-up), missing a signature (sneaky, but requires follow-up), or takes a long time to be collected and decisioned. For those trying to build an online process, this is a non-starter, but even for those who are completely brick-and-mortar, this can quickly become an excessive burden on your business. After all, the credit account was designed to protect you. You have to decide how important it is to get these properly completed and decisioned.

B2B businesses using BlueTarp get the benefit of an online application portal for their customers. Getting an account is just a few minutes of online entry followed by an instant credit decision with an immediately available credit line for use in that online session or that store visit. The application has required entry fields that eliminate incomplete apps and provide digital signature capability where the customer can agree to the terms without needing to print, sign, and mail in the application.

Not every B2B business is going to accept where the tide is going. Few in 1995 thought retail giants like Macy’s, JC Penney, and Sears would be struggling for survival or that the very concept of the mall would be under threat of extinction. The Internet channel, including companies like Amazon, has taken an increased share of sales every year as customers decide that convenience trumps trekking to the nearest megaplex. That trend became notable a while ago and has now reached its obvious conclusion. This trend leaves us questioning, what logic suggests that only consumers value convenience when making purchases, and business customers do not?

Consider yourself advantaged if you see where you need to get with your A/R program while others don’t. Their exposed blind side will be your gain. There are multiple paths to making this play. You can build it up yourself with your own team, consult with software providers who can build out modules for you, or consider a customized B2B credit program from BlueTarp and tailor your existing infrastructure.

 


Interested in learning more?
Check out three ways your credit program can give you a competitive advantage

Four Best Practices of A/R Automation That Cut Costs

My family has a clear, giant flower vase—I’m talking 2 feet high—that sits in the corner of the dining room. Every day, family members put any spare change we accumulate into the vase rather than bury it in dresser drawers or lose it. These quarters, dimes, nickels and pennies are both valuable and somewhat of an afterthought at the same time. In December each year, our kids love going to the local grocery store where we can dump the vase into the Coinstar machine. The clink of the coins going in the machine is like a slot machine in reverse and the kids’ eyes are glued on the digital display rapidly rising with each pour of the vase into the machine. Every time, we’re flabbergasted to find our daily change amounts to hundreds of dollars. It feels like free money and quickly turns into a new book, a new toy, or new apps for their Kindles.

Most companies try to increase profitability by selling more or cutting expenses or both. Usually, expense cuts are about taking something away, which can often hurt customer experience, add to risk, or make the task of winning new customers more difficult. Your A/R program however, is a gold mine of opportunity to delight your customers while saving you money in the process. It’s your own giant vase of hidden money.

The key to unlocking the money is to make it easy for your customers to pay you quickly. The following four best practices of A/R automation will lead you to significant savings while delighting your customers:

Enable Self-Serve with Online Customer Account Tools

Your customers should have the ability to view purchases, download statements, dispute charges, and yes, pay online. It’s old hat for consumer purchases but strangely uncommon in the B2B world. Every action a consumer can take to self serve means you aren’t paying someone to answer the call, research what they need, mail a statement, etc. By enabling them to pay online, you make life easier for your customer’s AP or bookkeeper, and you’ll get paid more quickly. By making all of their purchase and payment detail available 24/7, your customers will never be able to hide slow payment behind “I never got the invoice”. Finally – any question that can be answered within the customer portal means they’re not using your sales reps for help. And that’s where they often go first, isn’t it? Keep your sales reps selling, not doing customer service.

Accelerate Collections with Automated Notifications

Everyone has an email address and a smartphone. We look through these dozens of times a day. Why are you relying on the US Postal Service to drive your payment collection process? Set up automated email notifications to let your customers know what’s due and when. These can be statement due reminders, past due notices, account alerts, etc. With a click of a button, you can do for every customer what would take hours or days with phone calls. If you include a link to online account tools where they can pay – you made it simple to do what you need. An email isn’t intrusive or confrontational the way a collections call could be and it’s viewed by most as a helpful reminder. For those that don’t like them, make notifications configurable.

Improve Risk Reads and Account Set-Up with Online Instant Decisioning

Most merchants have a manual, judgmental underwriting process for B2B customers, if they do credit screening at all. The customer
fills out the application and then someone manually pulls a credit bureau file, evaluates whether the applicant is credit worthy, and then decides whether to grant credit and how much. The whole process can take hours to days. Here’s an important insight: the vast majority of all applicants can be more effectively risk evaluated, instantaneously, with the right credit risk scoring models. Think of how much easier it is for the customer and less expensive for you to have the customer complete the application online in 3 minutes, get instantly approved, and have the account ready for any purchase right then and there.

Quickly and Accurately Allocate Payments with Algorithms

Matching payments to specific purchases occupies a TON of manual effort and cost for most merchants. It doesn’t have to be that way. Build algorithms to help match payments received to the lock box with the proper customer and invoice they belong to. Over 80% of payments will likely be matched through this automation. Another win-win.

These best practices will find advocates in the CFO, the credit manager, and the sales and marketing teams. They work in favor of what everyone wants, rather than desired by some and resisted by others. All of these best practices can be built yourself if you want to spend the time upfront to do so. Better, in our view, is to take advantage of the solutions that already exist in the marketplace and tailor them to your needs. Some are software providers where you can plug in modules compatible with your ERP. Others, like BlueTarp, build your customized program and manage it for you. Whatever you choose, I’m confident you’ll find that incorporating automation in the right areas will save you a lot of money while attracting new customers and keeping existing ones.

 


Interested in learning more?
Check out three ways your credit program can give you a competitive advantage

Making Credit Policies that Reduce Risk and Encourage Growth

A strong credit policy is the cornerstone of every successful business. If your policy is lacking clear criteria, discipline or limits, you may be exposed to unnecessary risk. Here are five steps you can take with your credit program to turn a potential weakness into a competitive advantage that protects and bolsters your bottom line.

Set Explicit Credit Limits

Setting credit limits is an essential part of mitigating lending risk. If you haven’t set clear credit limits, then you really don’t have any. This fluid approach to credit can leave you vulnerable to taking on unnecessary risk. The following questions can help you determine just what your credit limits should be:

  • What credit line makes you nervous?
  • How much are you willing to lose?
  • What’s the maximum loss your business can handle?

With a clear understanding of your thresholds and the maximum credit exposure your company can withstand, you’ve got a good framework for setting your limits.

Develop Clear Qualification Criteria

Develop clear criteria for how you evaluate a customer’s credit worthiness. Some basic elements you should consider include:

Credit Minimums
What is the minimum requirement for you to approve credit for a new customer? Best-practices include:

  • 3+ years in business
  • No outstanding delinquencies of 90+ days
  • FICO score >685

Contractors who don’t meet your credit minimums should be designated as cash or credit card customers until they’re able to meet your requirements.

References
Ask for, and check, bank and trade references as part of every credit application regardless of the size of the company or the requested limit.

Financials
For new customers requesting large credit lines, ask for the company’s financials, a copy of their bank statement or a letter of credit from their bank.

Deposits
Consider asking for a deposit if you have to special order materials or the order amount exceeds the customer’s credit limit.

Know When to Get Personal Guarantees

Personal guarantees are a fairly common element on dealer credit applications. You should consider them when:A personal guarantee may be your only recourse, such as with a sole proprietor where there is no formal business to be held liable

  • A personal guarantee may be your only recourse, such as with a sole proprietor where there is no formal business to be held liable
    for credit defaults.
  • A company doesn’t have a very solid credit history, as an added layer of risk protection.
  • You make exceptions to your credit qualification criteria, give credit to a new customer, or increase credit for an existing customer.

Keep in mind that a personal guarantee isn’t collateral and only really matters if it’s a good guarantee that you’re able to collect on if you need to.

Late Penalties Reduce Lateness

No one likes fees. They are, however, a helpful tool to encourage prompt payment or to compensate you for the costs of incurring lateness. There are a couple of truths about fees you should know: People know they should pay them.

  • People know they should pay them.
  • People will pay them if you expect them to be paid.

Most companies will pay fees without discussion. A few will require you to ask for payment. For those who “don’t pay fees,” you have to decide whether you waive them. If you hold firm, explain how you expect to be paid in the same way that they expect your deliveries to be on time. Not getting paid on time communicates disrespect for how that impacts your business. Offer to waive fees in the future if they call ahead of time to tell you they’ll be late. Otherwise, ask they pay the fee as a sign of respect for how that impacts your business.

Don’t “Set It and Forget It”

Having a strong credit policy is of little value if you don’t properly execute it. Make sure your sales and credit teams know what your credit policy is and are enforcing the same rules. Have a clear process for if, or when, you will make exceptions and who can make them.

Revisit your credit policy every couple of years. Swings in the economy may change your risk tolerance, especially if your portfolio includes smaller customers. You also want to reassess your customers periodically and adjust items like credit limits and personal guarantees based on how a company meets your credit criteria today.

A strong credit policy is a cornerstone of every successful business. Implementing these best practices can help reduce your credit risk and make your credit program a growth engine for your business.

 


Interested in learning more?
Check out four credit risk protections you need for your B2B business

All Customers Are Not the Same…So Don’t Treat Them That Way!

When managing your accounts receivable, do you have a one-size-fits-all approach to collecting late payments?

Perhaps you shouldn’t.

Every customer situation is different, and we advise companies to be strategic about how they collect. Specifically, they should make efforts to properly assess the true risk of not getting paid and also understand the relative profitability (or lack thereof, sometimes) of the customer. Putting those two pieces together gives you a simple, powerful framework for how you should approach collecting.

To understand which customers are in trouble, pull credit three times a year and look at trends that matter. There are obvious warning signs to look for, such as delinquent accounts with other companies. A more subtle one might be a customer whose borrowing amounts are steadily creeping up to historical highs. To understand the true profitability, go beyond looking at gross profit dollars to factor in a customer’s share of your delivery, administrative, borrowing, inventory and other costs. It’s important to recognize that someone regularly paying you slowly could be costing you 2%-4% more than your average customer. That can often make the difference between a customer being profitable and unprofitable.

Do this analysis at least once a year and then chart where your customers are on a 2×2 risk vs. profitability map.

Map Your Customers By Their Profitability and Risk

(See Fig. I). Indicate risk on the horizontal “X” axis, and indicate profit on the “Y” axis. Now, start placing customers in the proper square, depending on their buying and paying habits.

Escape

If a customer appears in the lower left quadrant, they quickly become customers you want to escape from, as you are very concerned they are at risk of never paying you back. e.g. negative profitability. The corrective actions you can take include moving them to COD, assessing fees (especially for difficult deliveries), preparing and filing liens, and considering a collections agency if they are delinquent. With these actions, you are ok if they continue to buy from you, but they’ll no longer be doing so on your in-house account (read: on your money).

Protect Against

These are customers that are 60 days late, bumping into a pre-set credit limit, yet looking to buy more. They show warning signs of being high risk and as such, you need to monitor regularly, such as pulling a credit check monthly. It’s also time to ask them to pay down their line. The key: Don’t let the situation get worse.

Address

These are customers who you are confident will pay you…you just don’t make money on them. Address this by moving them to higher-margin products or be willing to assess and collect fees when they are late. Figure out how to earn more margin here.

Love

Finally, these are customers you want to show love, because they are high profit and low risk. These are the ones you’ll go the extra mile for, make a challenging delivery without charging extra, or even waive fees you normally charge others.

A one-size-fits-all approach is straightforward and easy to execute, but there is a better way. It takes only a little upfront effort to understand customer risk and profitability. The benefits are worth it.

 

Interested in learning more?
Check out four credit risk protections you need for your B2B business


Three Ways Your Credit Program Can Give You a Competitive Advantage

Your products, pricing, and customer relationships are likely the cornerstones of how you attract and keep your customers. But have you ever considered how your credit program could provide you with a strong competitive advantage?

If you are like many companies, your credit program probably doesn’t make you think about growth and competitive advantage. In fact, it probably does the opposite — bringing on thoughts of thoughts of long pay cycles and manual, time-consuming credit processes. But it doesn’t have to. Consider these three ways your credit program can deliver a competitive advantage:

Win more business by offering larger lines and longer pay cycles

With the strong economy comes more customer requests for larger lines of credit and longer pay cycles. By offering customers more of what they need, you’ll earn more of their business. By offering pros more of what they need, you’ll earn more of their business.

With in-house credit, you may not always be able to meet these credit needs, and the additional credit exposure may increase your risk to a level that you’re not comfortable with.

An option to consider is a professional credit management service that can offer larger lines and extended terms for your customers — without risk to you. Companies like BlueTarp provide credit services that include extending credit, billing services and collecting on invoices, while also guaranteeing your payments. You can get paid for every sale without having to wait 60 to 90 days or more — which means you can offer your customers what they need without taking on increased risk.

Save customers’ time and effort

Success is no longer just the absence of problems. Sure, customers expect you to have the product they need, have it delivered promptly, have the order be accurately fulfilled, and be billed without error. However, in the world where Amazon has revolutionized the consumer buying experience – and has eyes on doing the same for business – saving customers’ time will earn you sticky, hard-to-leave relationships.

Everything we need as a consumer is online – purchases with your credit card company, ability to pay your phone bill, etc. In B2B, however, that’s still considered cutting edge. Consider investing in online customer account management capabilities. Rather than customers having to call your business and you paying staff to service these needs, make it simple for your customers to get what they need, whenever they need it. They should be able to download a statement, view past purchases, make a payment online, request more credit, dispute a charge, and any other common use case. They’ll get addicted to the ease and routine of serving their own needs.

Reward customers and build loyalty

A rewards program helps you thank your customers for their business and gives them more reasons to spend with you. But managing a rewards program can be time consuming and complex. Working with a credit service like BlueTarp makes it easy for you to offer enticing rewards such as adventure travel, sports packages and brand-name merchandise, without the overhead and expense. You can also pick which customers qualify for rewards, so you can use the program to drive spending with your biggest and most profitable customers or to win new ones.

If you’re serious about sharpening your competitive edge, consider how a professionally managed credit service, like BlueTarp, can keep your customers coming back for more by giving them more of what they want.

 


Interested in learning more?
Check out four best practices of A/R automation that Improve efficiencies

Protect Yourself From the Four Most Disruptive Credit Risks

Underestimating credit risk can turn a healthy business upside down quickly, so there’s a lot riding on your ability to minimize your exposure. When it comes to assessing risk, looks can be deceiving. You’ve heard stories of customers who looked big and sounded solid but ended up being insolvent—causing a nightmare for the companies left holding their unpaid invoices.

Credit screening is the best way to minimize your credit risk and weed out applicants whose good first impressions may be covering financial flaws. But, there’s more to credit screening than collecting a credit application. Effective credit screening is a mix of science and art and is a skill you can hone with attention to a few key details.

Know the Four Key Credit Risks

When it comes to minimizing your exposure, you want to eliminate or mitigate the impact of these four most disruptive credit problems:

Bankruptcy: While some companies may be fine doing business with a customer who has a bankruptcy in his past, no one wants to be stuck holding the bag when a current customer goes under. Do you know the red flags that can help predict bankruptcy?

Slow Pay: Customers who chronically pay you 30 or 60 days late increase your risk and cost you money. Are you checking applicants’ payment history with other companies as a predictor of how they will pay you?

Disputes: Customers who consistently eat up your time and energy with disputes can also impact your bottom line. Do you know how to identify a customer who may be prone to this behavior before he becomes a customer?

Fraud: Fraud can turn a great sale into a major business loss. Do you have a way to vet applications and monitor customer purchases to help identify potential fraud?

Use Your Risk Assessment Toolkit

So how do you identify the potential for these risks in credit applicants? There are lots of tools available to help you identify and manage potential risk that you otherwise might not have visibility into. A good place to start is to pull commercial and consumer

A good place to start is to pull commercial and consumer credit bureau data for both the company and its owner. This information will tell you how well this business and individual pay bills, as well as allow you to gauge stability and see payment trends. Where there is conflicting information—for example, strong business credit but a more checkered individual rating—dig deeper to better understand your potential customer.

If commercial credit bureau data is thin or non-existent—which is not unusual for a small or new business or single proprietor—then you’ll have to rely on consumer credit bureau data. Some companies may skip this step and just secure a personal guarantee, but this isn’t a good idea. A personal guarantee is only as good as a person’s ability to pay, and that’s what you’re looking for in their credit bureau information.

Your next tools are bank and trade references. Ask for 1-2 bank references and 3-4 trade references, and follow up on them all. Look at the length of relationship with each of the references—you want to talk to banks and companies that have a history with the applicant, not ones that are all new.

Look for references that have extended comparable or larger credit and similar terms to what the customer is seeking from you. If you have a customer asking for a $35,000 line, you want to understand whether he’s previously handled this level of loan, as well as what cash balances he has on hand. Also pay attention to his payment terms for that line and whether he met that obligation.

Be sure to have a conversation with trade references about what type of customer an applicant has been. Ask about disputes around deliveries or quality and find out if he’s been a reasonable and good partner. Chances are, he’s going to treat you the same way he’s treated other companies.

Google and public record searches can provide a wealth of information that can, directly and indirectly, tell you a lot about an individual or
company. You should consider this kind of research a must before you sign off on any sizable credit line. A quick search can uncover both positive and negative information about the applicant:

  • Active or past lawsuits, liens or other legal activity
  • Press coverage of company and its owners
  • Support of community and trade initiatives

Lastly, don’t forget the importance of getting the word on the street—especially in small markets or for new businesses looking for credit. At the end of the day, your credit screening should be based on solid information rather than a rubber stamp approach.

Mitigate Risk Before It Hits

The next step in credit screening is to assess all your information, looking for signs of the four key credit risks: bankruptcy, slow pay, disputes and fraud. The screening process used by many professional credit management services offers some rules-of-thumb that can help you in your assessment. Bankruptcy: The failure rate in the building industry is nearly 70% in the first

Bankruptcy: Proceed with caution when extending credit to new companies. Applicants with FICO scores <685 should also be watched, along with those who are bumping the limits of their lines of credit with the bank and other companies.

Slow Pay: If a customer pays slowly with other companies and vendors, chances are he’ll be slow with you. If this trend exists, set credit lines and terms that protect you, and use pricing and fees to help reduce the impact of slow payment on your bottom line.

Disputes: When trade references uncover a tendency to dispute invoices, return merchandise or chronically complain about products and services, think long and hard about whether this customer will be worth the effort.

Fraud: Believe it or not, the perfectly filled-out application can be a big warning sign of potential fraud. Look for these red flags on a credit application:

  • The company claims sizable revenue but doesn’t show up in commercial
  • The company claims sizable revenue but doesn’t show up in commercial credit bureau reports
  • The company is located far away—why are they buying from you?Generic email addresses, such as info@abc.com
  • Generic email addresses, such as info@abc.comReferences are typed and not on bank letterhead
  • References are typed and not on bank letterhead
  • Immediate responses from references

Stay Vigilant

Credit screening is not a one-time activity. Once you’ve set a customer’s credit line and terms, you need to pay attention to their purchasing and payment patterns. With new customers, make sure you follow up to see if they bought what they said they were going to buy and paid when they said they would. If they didn’t, talk to them and understand why.

An existing customer who always uses 20% of his credit line comes in and unexpectedly uses 100% of his line. Did you notice and do you know why? This change, combined with slow pay, could signal that the customer is in trouble.

Maybe you have a new customer open a line and immediately maxes it out in an online purchase for computers and electronics. Are you sure you know they are who they say they are and are not fraudsters buying hot items to resell and leave you holding the bill?

In addition to monitoring buying and payment trends, pull a new credit report on existing customers every year or two. The information provided by a fresh credit report can give you a full picture of a customer’s current credit worthiness.

“Trust but verify” is a good motto to keep in mind as you follow your credit screening process. In addition to collecting information, you really need to review it closely and ask yourself—does this seem reasonable? With this approach, you’ll be in a good position to minimize your credit risk and focus on growing sales.

 


Interested in learning more?
Check out our 10 insider tips on credit screening

What is the True Cost of a Customer?

You May Be Surprised That Some Actually Cost You Money

Most dealers precisely know their gross margins on a per-customer basis. Assume you’re a business with 40% gross profit margin. Of those 40 points, 25 are usually consumed by overhead, leaving you with a 15% net margin.  Some dealers are higher, some lower.

Very few know their net margin on a per customer basis.  If you think about what goes into “overhead,” they are things like delivery expense, sales and marketing, cost of bank borrowing, legal expense, etc.  Are these expenses consumed by your customers in direct proportion to their sales volume?  I’ll save you the suspense – they’re not.  As a result, if you took the effort to allocate those expenses by what each customer actually consumes, you’d find your true net profitability for each customer.  What you will realize is that not all customers contribute equally to the bottom line.

To highlight this point and show where perceptions can be wrong, let’s take an example. Ask yourself: Are large customers more profitable than smaller ones?

It’s possible. It also might prove the opposite. Your big customers typically get the best pricing for their large volumes, which means a lower-than-average gross margin to start. Instead of making 25% gross margin, you may be making 19%, before your overhead is paid down.

And the margins for large customers can get even thinner: Big customers often get the attention of your top salesman, they get specialized delivery, and favorable return/restock terms. When a dispute pops up, you are quick to accept responsibility and accommodate without delay. After all, they’re a big customer, right?

Now look at the big customer from the perspective of A/R. Perhaps these customers routinely hit you with chargebacks, some not even warranted.

Add all that up, and you may not be making 5% net margins, but shocked to find you are not making any money at all! Trust me, that’s more common than you might expect.

To calculate per customer profitability, attempt to allocate the share of “overhead” expenses each customer is actually driving.  Look especially in the following areas:  delivery expense, disputes, how quickly or slowly they pay their bills, who pays with credit cards, % late charges collected, restocking and dispute fees, and sales expense.   If there are other overhead categories where it’s clear some customers are driving a disproportionate amount of the expense, then allocate those too.  Make sure after you’ve attributed the expenses that the sum of the allocations is neither higher nor lower than your actual total.

Next, subtract these expenses from the gross-margin per customer you already have and that’s it.  If you are like most dealers, you’re going to find some powerful insights . . . some customers are making you a lot of net margin % that you didn’t realize (usually smaller customers that don’t get special attention) and some customers may be making you less net margin than you thought.  Some may even be negative in their profitability!

What to do with those customers?  Fortunately, you have lots of ways to improve low or negative net margin customers.  Pricing is a great place to start.  If that isn’t easily movable, think about collecting late fees from them the next time they are late.  Consider how you can reduce expenses that that customer is explicitly driving.

If low or negative net margins can be attributed to issues with A/R, consider bringing in a credit management provider like BlueTarp. BlueTarp provides efficiency gains from automation and customer self-serve tools, which reduce your costs while providing a better customer experience.   Whatever you choose, take heart in knowing that you now have the right insights on true profitability per customer.  Knowing that is more than half the battle.

 


Interested in learning more?
Check out four ways A/R automation can cut costs while improving customer experience 

Four Credit Risk Protections You Need for Your B2B Business

I was a victim of identity takeover a few years ago. In a big way. Professional fraudsters had hacked my personal email account, somehow figured out one of my recipients was my financial advisor, and researched my past communications to get a feel for how my financial advisor and I communicated. They managed to re-direct any correspondence from him to them while not disrupting my day-to-day use of that email account. My security was fully compromised. I had no idea it was happening.

“Did you get the money I wired?” my advisor asked during a regularly scheduled check-in.

“What money?” I asked, without a clue.

I’m not kidding when I tell you time seemed to stop over the next 30 seconds as it dawned on both of us that something horrible might have just gone down. And it had.

I’d like to tell you it was a false alarm and the bad guys got nothing. I’d like to tell you that I had been sloppy in protecting my passwords or had opened phishing emails or accessed my email using unsecured Wi-Fi. But, the truth is that this episode cost my financial advisor financial and professional pain—he made me whole on what was lost and suffered sanction for a mishandled verification process—and I lost the blissful consciousness of thinking these things happened to other people, not me. I actually would have considered myself well protected before this episode revealed that to be an absurdity.

There is an analogous though less obvious situation happening in how companies manage the credit risk of their commercial, or business, customers. Many are challenged in the areas of expertise, risk infrastructure, and control processes to properly assess and insulate their companies from the true credit risks they face For starters, the base loss rate of commercial customers is low, but when these losses occur, they tend to be large and painful. The episodic nature of losses creates a tendency to excuse the losses as anomalies. Add to this the fact that nearly a decade has passed since the last recession – creating a string of years without significant delinquencies or bad debt – and it’s not hard to see that sensitivities to credit risk have become dulled. But, the benefit of a good economy and good fortune does not equal good credit risk management.

One of my early credit mentors would always invoke the phrase “even turkeys fly in hurricanes” as a reminder that the real measure of credit risk protection is taken under economic duress, not in good times. Any company looking for assurances they are properly insulated needs to assess the quality of their expertise, the sophistication of their risk management infrastructure, and the rigor of their risk management processes.

Compare your company’s credit risk protections with these items. If you lack some or many of these, resist the urge to assume they are unimportant.

Credit risk screens are grounded in the credit risk performance of the population you serve

Many businesses pull an Experian or D&B commercial credit file and pair it with a judgmental evaluation of whether to accept or deny the account. If pre-established, clear score cutoffs exist and are followed, and if there is backward-looking review of how those credit criteria relate to the performance that comes later, this could be fine.

More common, however, is a situation-by-situation assessment where general rules of thumb prevail. Each credit analyst has their own bias on what they like and don’t like. Sales pressure, especially on big accounts, is known to play a role.

The gold standard is to have credit risk models that successfully score an applicant based upon variables that are statistically significant predictors of severe delinquency or charge offs. These models are re-validated regularly to ensure they properly slope credit risk. It’s also smart to continually validate your credit policy cut lines by looking closely at those that are declined. Rigorous, model-based shops have added bonuses too: they enable instant decisions for the vast majority of applicants (good customer experience) and significantly reduce the cost of judgmental credit review, since only exceptions or marginal applicants get flagged for manual review.

Credit monitoring is frequent and tuned to changes in behavior

It is surprising how few companies monitor the credit health of their commercial customers after an initial credit pull. Credit health is not a constant, so don’t assume accounts will remain in good standing in perpetuity. Just because your child didn’t have a fever last winter doesn’t mean they don’t have one today, especially if they are displaying symptoms. Same concept.

 Your company needs to re-screen every commercial customer at a regular frequency. Changes in credit health are as important to observe as the absolute level. Best practice is to have a behavioral scoring model that incorporates both credit bureau data as well as the customer’s payment patterns with you. An effective model will help quickly and accurately alert you to changes that are predictive of higher probability of severe delinquency, giving you the advanced warning to reduce credit lines, more aggressively collect, or monitor more closely. A credit manager might discount a recent delayed payment of a formerly pristine customer, but the behavioral model won’t.

You have preventive and detective controls for fraud

If you transact online, you need fraud defenses. If you don’t know all of your customers intimately or much beyond an account number, you need fraud defenses. If you are a business of any scale (especially >$50M in revenue), you need fraud defenses. Nearly every business goes through the same a-ha experience I had personally . . . they consider fraud to be irrelevant to them until they are hit with a doozy.

The fraud use cases that your particular business needs to defend against may be idiosyncratic to what you do and who you serve. At a minimum, consult a third party fraud defense expert to help diagnose vulnerabilities and identify ways to insulate. More than likely, all transactions and credit screens warrant a screening for fraud flags via home grown algorithms or external software. This is seamless to your day-to-day operation and calls out for additional scrutiny those items that fail pre-set business rules.

No matter how strong the upfront defenses, you can’t assume 100% of fraud is prevented. You should have robust detective controls to monitor spending patterns, particularly among new customer accounts. You need to know whether the brand new customer blowing through their initial credit limit is a sales success to celebrate or a fraudster that needs to get shut down.

You’ve taken the worst case off the table

All bad debt accounts are not equal. You may only have 1 account that goes bad out of 300, but if that account is a large one and a disproportionate share of your sales, that is going to be very painful. ALL businesses have a limit where a credit loss is unduly painful and must be avoided. This may be where a loss would trip a bank covenant and jeopardize a credit line. This may simply be a judgment on what’s unacceptable.

What’s most important is that credit limits have some ceiling irrespective of perceived credit worthiness and that these are lines that don’t get crossed. Every business should have a max credit line they are willing to extend, though that max credit line can change over time. If needed or valued, pursue credit insurance to help insulate the pain of a very large loss. You may not ever expect Large Public Customer X to be a bad debt risk, but if they are, make sure they don’t take your company down with them if they go.

If you don’t have one or multiple of these in place, do not fret. They can be easily tackled with the right focus and prioritization. There are also many external providers who can help you get there for a fraction of the time and cost it would take you to do it yourself. BlueTarp, for example, creates customized B2B credit programs tailored to the needs of your business without changing how you do business. Whether you tap BlueTarp, another provider, or do it yourself, don’t delay. It’s too late to defend your business from credit risk in a recession.

 


Interested in learning more?
Check out our 10 insider tips on credit screening.