“We don’t stress about credit issues anymore. We have a world-class ‘approval’ process.”
How many times have we heard or even uttered those words? Ahh, satisfaction! There’s nothing like a “world-class credit approval process” to make one want to lean back in their desk chair and consider putting their feet up on the desk, if only for a moment or two. The “approval” process is so robust that it’s almost as though every system has a back-up system. Mission accomplished!
Of course, nobody’s perfect. We miss a product delivery? Engage world-class approval process. We incorrectly bill items? Engage world-class approval process. We blow a uniform size? Miss a table linen count? Have one of our occasional “stockroom” issues? Engage world-class approval process.
The truth is, our world-class approval process is a time-consuming device into which large and small controllable credit requests enter at one end and, after numerous detours and steps up and down a multi-level “paper experience,” an approval stamp is engaged at some point and a credit dribbles out the other end. By this process, many in our industry accept that credits are normal.
But honestly? Is it the new normal now? Unless you’re comfortable with annual lost income potential on the order of six digits in most medium to large operations, the new truth is that a great controllable credit prevention process beats a world-class controllable credit approval process, hands down.
Approval is the Achilles heel of the industry, and every credit is a shot fired. Let’s try to understand why.
How Control Beats the Blame Game.
At the risk of sounding repetitive, prevention is simply the key concept of your entire credit process. Simply by instituting a systematic control over credits, a competent captain can produce an inordinate impact on the financial wellbeing of the company.
You don’t even need the back of an envelope to prove this. If your business posts $12 million in annual sales and you can improve controllable credits by a mere one percentage point, you have just produced a $120,000 improvement to your top line. And because you are essentially removing friction from your system, most of that will flow right to your bottom line.
But first, you must instill in your corporate culture the importance of the concept of preventing non-controllable credits. It’s not hard. You just make a list of the only reasons for which you will allow for credits. There should not be many, so write them down. A couple examples to get you thinking are: late return for loss charge pieces and bankruptcy. You should post them internally, so every one of your employees knows what constitutes a non-controllable credit. Henceforth, you’re not going to allow any other kind. Yes, gaining control is more about a statement of attitude than anything else.
Now that you have limited your non-controllable credits to a bare minimum, it’s time to change the culture. This is where the rubber meets the road. Whether you realize it or not, you have labeled everything outside of that box as a controllable credit. And as a responsible manager, you now have the duty to your organization, your employees and yourself to identify the sources of the various issues that produce these credits and correct them. Some controllable credits could be a product shortage on load, a customer refused delivery and a closed account.
People intuitively avoid facing these kinds of issues. But make no mistake: you have to find out why it’s happening. It could be a team issue. It could be located in the service department. But you must source the issue, which could entail attacking the problem from different angles. You need to take an action and then monitor the situation daily or weekly. But you must wring the controllable credits out of your system.
Because, as we’re about to see, an ounce of prevention is potentially worth six digits of cure.
The Credit Approval Hemlock Cure.
At the risk of mixing metaphors, how would you like to die a slow death? Your garden-variety credit approval process is as good a way as any. The robust credit approval process that too many employ stretches out pain and discomfort for a longer period of time. You are going to issue a credit anyways, so do it and let us get to future avoidance!
There is a very simple reason why this is true, and it has to do with human nature. You can install the world’s most elaborate multi-level vetting and approval process for controllable credits. However, the truth is that once a credit has been submitted for approval, the outcome is all but certain. That is because submission for approval is tacit admission that your customer has already moved on to the assumption of eventual approval, and so have you. This is even true if your controllable credit approval process goes all the way up to the CEO for the requisite initials.
Nothing but divine intervention will get a controllable credit rescinded and the disputed money paid. It simply does not happen with anything like the frequency that would justify the installation of a world-class approval process in the first place. And that is why being “tough” on controllable credits has nothing to do with using your state-of-the-art approval process, and everything to do with not using it.
In the rare event you have a credit that falls outside your pre-determined, non-controllable credits, here’s what you must do. Take whatever control of the situation you can and begin by negotiating with your customer in good faith at the moment of recognition. Do it immediately. Do it at the front line of your interface with your customer. Speed and readiness are your friends.
Lengthy and robust approval processes entail hidden risks, including loss of credibility. How? Imagine a situation in which you have submitted a controllable credit for approval.
Yet, because of the lengthy processing, the credit fails to appear on the customer’s next monthly statement. It happens all the time. Prepare to look like an inattentive employee who has failed to keep his word. Worse—companies often “hold” credits to improve their monthly financial picture, again risking their credibility.
Instead of stability, the approval process has induced you to take the first steps down the road toward a deteriorating customer relationship!
Recognize, Reward (and occasionally Reprimand).
Once you have made the commitment to prevention rather than approval, infuse your culture with awareness of the difference. First, establish a reasonable goal and train your team in your non-controllable credit categories and expectations.
Be rigorous about this. People are visual; they must be able to see their success. Post the results and recognize the performers. Public visibility will reward those interested in climbing the ladder of success, as well as maintain the social pressure on those who try to buck the culture.
Next, consider a quarterly reward or incentive for those who excel. Again, make it public. You may also want to consider a reprimand in private for those who can’t or won’t get with the program. But do not ignore non-performance. The potential six-figure boost to the topline belongs to everyone. You need performers, not passengers.
Also remember: the improvements in controllable credits are not the exclusive domain of the service team. In all likelihood, sourcing the controllable credits revealed leaks throughout your organization. Make your reward/reprimand system holistic, so everyone in your business culture takes ownership. You’ll be a better owner and manager. And not only that, but you’ll be a tighter ship and a better company.
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