Credit Matters Newsletters

Credit Matters is still building facilities and special features for our members and visitors.

We have not had time this month to review other blogs which might normally appear in our Associates Blog and there have been some additional issues which we have had to review.

Hopefully next month, there will new blogs to read.

Have you noticed that sales and marketing issues are generally viewed as positive aspects of business? Meanwhile have you noticed credit, due diligence and accounts receivable issues are viewed as negative business aspects?

This view is also clearly understood when talking about the language of funding the respective operations. Generally costs related to the sales and marketing functions are called investments whilst costs related to credit, due diligence and accounts receivable are viewed as expenses.

We also see this positive-negative aspect in funding the running costs of these operations. Generally, funding sales and marketing operations is like trying to fill in an open pit that never gets filled. However because these are deemed positive functions, they are often given funding priority.  

Credit, due diligence and accounts receivable on the other hand, usually only require once off funding to set up the operations or an occasional top up to cover industry, legislative or technology changes. Unfortunately, these functions are perceived to be of less value to the business. Consequently they are often provided with the equivalent of funding scraps, or if there is any money left over in the budget.

In team sports, you do not see half the team treated as champions and the other half as support drones. All players are considered as of equal importance to the team's total performance. In business, it is no different. Both groups of employees have a positive role to play if the business is to be successful. Unless you take the view that both groups are of equal importance, your business (the team) will never achieve its maximum potential or profits.

Our quote of this month which is based on avoiding costs seems to be a constant modern day factor of doing business. For instance there are business organisations which specialise and advertise, "... we can do it cheaper or we can reduce your expenses". We also know this is a seductive message. After all, which business doesn't want to reduce their expenses?

There is no doubt; cost minimisation is a valid focus of any business. Concentrating on reducing costs at the expense of common-sense or at the cost of actually doing any business; is not! There are times when I wonder whether reducing costs is the only product some business professionals actually know how to sell. It seems all you hear from such business professionals, is how they reduced costs or about the next cost reduction exercise.

As a consequence we continue to see business professionals trying to reduce upfront costs so they can brag"... we reduced costs of X!" Unfortunately we rarely see these same business professionals explain why further "unexpected costs" were incurred later.

The perfect example of this situation is the current problem now facing GM. It appears  GM refused to change a faulty switch costing about US$0.57 in a some of its motor vehicles a number of years ago. Now GM management is facing an enquiry in the US as a result of drivers' deaths, a recall of 2.6 million vehicles and almost certainly, a large number of law suits.

Likewise, I  know of friends which have lost sales and / or their business, because they concentrated on reducing costs at the exclusion of doing business. These people could not see unfortunately, whilst concentrating of reducing costs, they were not selling, dealing with customer enquiries or chasing their unpaid invoices.

Too often we see the risk management functions of credit, accounts receivable and due diligence, likewise deprived of the resources required to protect and or to grow the business. I suspect there are two reasons for this state of affairs.

The first reason is; the expense on these functions is deemed to be of less value to the business than the expenses which focus on sales and marketing.

The second reason is; from a management and accounting perspective, any additional costs caused by a lack of funding can be explained away with the throw-away line, "... these costs were unexpected!"

Alternatively, any unexpected costs can be quietly hidden in the general costs of running the business. As a wise old business friend of mine once said, "The sins of the organisation are hidden between the Gross Profit and Net Profit figures in the Balance Sheet."

The classic situations where costs are minimised in these areas include, but are not limited to:

1  relying on obsolete trading documents, or copying a competitor's application for credit rather than paying for properly prepared legal documents;

2  ignoring the benefits of the PPSR (Personal Property Securities Register) if appropriate;

3  ignoring the implications of the Privacy Act and its consequences;

4  by not spending on due diligence services which may expose delinquent and fraudulent customers or employees with problematic employment records;

5  by not using the best possible risk management systems available for your type of business;

6  a lack of resources and training for the risk management employees;

7  not having a budget for legal action against defaulting debtors and to deal with employees found to have committed fraud, etc. 

There is an investment expense to having the best possible resources for the risk management functions of your business. At times, these costs may look expensive and yes, possibly restrict the funds available for sales and marketing. However such costs are always positive and measurable in building the foundations of a sound and profitable business.

Furthermore, using less than the best resources, relative to your business situation, will always lead to unmeasurable costs, surprise cost over-runs, and unexpected costs. We can also add, although many business people will not admit it, a lack of resources in the risk management functions, will also lead to lost sales and customers.

Sales and marketing professionals like to explain their costs of sales to management or the purchase of their products to their customers as "investments" not costs. Likewise, the funds spent on the risk management functions for your business are an investment and not just a cost.

What better explanation is there of the investments designated for your risk management functions which help build the foundations of building a strong and profitable business. If that is not an investment in the future success of your business, what else is?