Credit Matters Blog

We Make Bad Decisions Under Pressure

Kim Radok 02 October 2012


Never has a truer word been spoken when it comes to granting credit. Too often the credit manager will be confronted one or two days before the month to approve a new customer or an increased limit to an existing account.

What actually happens on many occasions, the customer and/or salesperson has been holding off on presenting their purchase order for consideration until the last minute. The excuse usually given is that they were "... just tiding up loose ends and approval has only just been given to complete the purchase order".

That excuse sounds good until the credit manager finds out that everybody else knew about the possibility of the purchase / sale. The truth more than likely is, there is something suspect going on, or the salesperson is trying to meet another impossible sales budget.

The customer or salesperson hope by waiting until close to the end of the month, the credit manager will make decision they would not normally make in their favour. As the pressure builds up to make a quick decision, the credit manager may accept incomplete details and not identify  other damaging information they might have found given more time.

On other occasions, the salesperson's budget may be so impossibly high they are tempted to "create" sales to make their budget. Alternatively the salesperson may schedule sales due in the forthcoming month, forward to the current month and exceed a customer's authorised limit.

However occasionally there will be the genuine pick-up of a new customer or a late sale at the end of the month. So whilst never ruling out the possibility of the late genuine new customer or sale, what can we do?

My suggestion is that no approvals be granted for any new customer or "sudden sale" within two working days of the end of month. This sales discipline would cover normal day to day operations and is intended to try and eliminate the "creative sale or the sale brought forward a month.

There are two exceptions to this rule. The first is to allow for the  occasional genuine new customer or sale. These exemptions would only occur infrequently and where the credit manager believes they have  identified the situation correctly and made a proper decision. The second is where the credit manager has been provided information prior to the two days deadline and has been able to complete credit checks on the new customer, or the current customer's trading history.

If the sale authority is forced for "the good of the company", the Sales / Marketing / CEO should be held responsible for the authorisation. In addition, if the customer or sale goes bad, it is stipulated within the rules of the business, a complete revision of the sale approval takes place.

If there is to be an exception to the above suggestions, then the Credit Manager must be provided with the tools to allow prompt evaluation of the genuine application.

Where there is an organisational sales discipline requirement of the two days before the end of month, other benefits will soon become apparent. These include:

(i) better lines of communication between sales and the credit manager;

(ii) a more orderly sales processes;

(iii) the creation of better credit granting processes;

(iv) the identification of lazy and 'smart' salespeople who try to manipulate the system;

(v) identifying of new sales opportunities for quicker payments;

(vii) fewer time-wasting applications by dubious customers;

(viii) less bad sales decisions which only create more profitless work for both sales and accounts receivable employees.

The reality is, very few genuine sales opportunities occur suddenly within the last two days of the month. An organisational discipline of no sales within the last two days of the month will soon identify which sales are genuine or not.

When there is less pressure to make a decision, more good sales and credit decisions will be made than bad decisions.

May you be paid today rather than tomorrow

Kim Radok