Running a successful business can be full of complications, but your company’s bottom line really boils down to doing two things well: (1) Acquiring clients; and (2) Getting paid for what you do. It’s that simple.
Or is it?
This article examines the balancing act required for companies to perform both of these tasks well, specifically reviewing the relationship between sales departments and credit departments and discussing best practices that can help companies on both fronts.
Goals and Incentives: Two Departments Naturally At Odds
In the quest to acquire new business companies have sales and marketing departments pounding the pavement to sell. However, to assure the company gets paid for its work, it will also set up accounting and credit departments charged with the task of managing financial risk and collecting unpaid debts.
Can these two departments co-exist?
It’s clear that credit departments and sales departments are naturally at odds. Sales departments are charged to “sell, sell, sell,” get paid by commissions and get reviewed based on the company’s revenue. Credit departments, on the other hand, are salaried and bonus based on the company’s ability to collect on accounts and reviewed based on the bottom line.
The salesperson wants to sell to anybody and everybody, but the credit manager wants to clear every credit check and be comfortable with the client’s ability to pay. The salesperson is moving at the speed of business, and the credit manager, for better or worse, moves a bit more slowly – more at the speed of a tiny bureaucracy.
The push and pull from the two departments is generally good for business. One without the other would spell disaster. Ryan Himmel (@BIDaWIZ) hints at this on Enterprenuer.com in answering the question of “What department should handle credit applications for new customers, sales or accounting?,” saying:
It is very important to segregate duties in this situation because the sales department is likely less objective and more likely to receive incentives for closing sales whereas a separate billing or accounting department would likely be more objective and their work is not directly linked to closing sales.
In an article on the Credit-To-Cash Advisor website titled “Sales vs. Credit,” I also enjoyed this quip about the “two functions [who] have been arm wrestling for dominance since the first transaction on account was made:”
Credit has no purpose without sales. The credit function was birthed to facilitate and support sales.
But before all you salespeople start gloating over a victory, hear this. Without credit, profitable sales – the kind that consistently bring in revenue and make for a successful company – are not possible. Remember, the purpose of sales is not to meet quotas or win incentives, but to bring in the cash.
The friction between credit professionals and sales people is plain as day. But what can be done about it?
Theory Tip: Align The Vision Between The Sales and Credit Departments
It’s a universal business understanding: communicate your company’s vision to your staff. Read about it at Inc.com or the Harvard Business Review, or just about anywhere else. That’s how a leader can lead a team towards a common goal.
As a company gets larger functions are departmentalized, and suddenly the departments are left to their own devices. Goals, visions and the like are communicated (sometimes – yikes!) within a department, but rarely do these communications transcend the departments. We can see this in every shade of organization.
In fact, a great example of the perils of over-compartmentalizing an organization comes from the NFL. The pathetic 2011 and 2012 seasons for the Philadelphia Eagles may have been partly caused by each component of the team (offense, defense, wide receivers, running backs) being isolated from the other, a change that Chip Kelly recently made to the locker room. Or, perhaps a worse case, the example of Bountygate getting out of control because one department allegedly wasn’t aware of what the other department was doing.
I love the above-quoted Credit-To-Cash Advisor article simply because it points out the “cold, hard facts” about why the sales and credit departments exist. They truly need one another for the company to reach its goals. Separated, the departments may believe they can accomplish their goals alone. This belief is mistaken, however, because each is serving to accomplish a component of a single company goal: to make more money!
Don’t let your credit and sales departments forget this about one another. Help them understand the ultimate vision of the company and where they fit in. That communication will help the two departments work together to reach a common goal.
Oh, and how do you communicate it? Repeat, repeat, repeat.
Practical Tips: Steps You Can Take To Lead To Increased Sales And Decreased Credit Risk
This article has identified the problem and discussed a theoretical way to help align your organization’s credit and sales teams. Alone, however, this will do little to prevent the day-to-day friction between your credit department and sales department. Your company needs to implement real, practical changes to grease the gears. Here are some thoughts on this.
Offer Options: Not a perfect credit candidate? Offer options that makes sense.
I recently asked a client whether Levelset has enabled them to take more business. Their response was a lightbulb moment for me, as they indicated that they now had a lot more options to work with someone who has risky credit or can’t pay an upfront deposit. The lightbulb was this: Options!
A good salesperson isn’t interested in selling to a non-quality customer, but there is a really fine line between a good and bad customer when looking only at creditworthiness. Sometimes, in fact, the companies with the best credit can be the most dangerous to a business. And frankly, finding good credit in the construction industry is extraordinarily difficult and unreliable given the volatile nature of the business and its cash challenges.
What can an organization do? My client said it best: Options.
Credit departments should do what they can to give their sales departments options. Best case scenario is squeaky clean credit, but what if that’s not possible? What alternatives are available to enable the company to do business with the prospect? Here are some ideas:
- Personal Guarantees: If the company’s credit isn’t up to par get the company’s principals, or someone with good credit willing to vouch for the company, to execute a personal guarantee.
- Joint Check Agreements: Others on the project (i.e. the prime contractor or developer) may have good enough credit. Getting an assurance through them through a joint check agreement will give your company the confidence to go forward with the job. Be careful, however, as joint check agreements are hairy.
- Mechanics Lien Rights: If you’re on a private construction project your mechanics lien rights can enable your company to do business with a customer not otherwise qualified. Lien rights provide your company with security to get paid, which is almost always enough to do the trick. In fact, proper use of your mechanics lien rights should enable your company to do business with anyone.
- Bond Claim Rights: If on a state, federal or bonded construction project, the underlying payment bond is security to get paid on the project. Think about it like this: Your company gets a personal guarantee from a licensed surety! Wow! What can be better than that? The only thing you need to do is comply with the statutes to take advantage of it.
- Letters of Credit: A letter of credit is a guarantee issued by a financial institution such that if your customer doesn’t pay you can actually go to the financial institution and withdraw money against the customer’s credit line with the institution, reserved and guaranteed specifically for your company.
- Credit Insurance: Last, but not least, there are a lot of credit insurance products out there that can help mitigate any loss. If your customer doesn’t clear your credit hurdles, maybe they’ll be stable enough to get a green light from a credit insurer, who will indemnify you in the case the customer doesn’t pay.
What do you think? What other options are out there?
Co-bonuses Based On The Opposite Departments Performance
Your company undoubtedly incentives its sales force and credit departments, but I wonder if one department gets incentives when the other department hits performance targets? Your company undoubtedly incentives its sales force and credit departments, but I wonder if one department gets incentives when the other department hits performance targets? Likely not…but think about it. It makes perfect sense.
Your sales people should be given an incentive when the customers they sell actually pay! Perhaps you already tie a sales commission to an account’s actual collection, and this is a good start. Take it a step further by creating a bonus structure that rewards the sales department when the credit department hits its overall goals, and not simply when a sales person’s specific customer pays. This will align your sales department with the big picture goals of the credit department.
Likewise, your credit department should get a piece of the action when the sales team meets it’s sales production quotas. Giving the credit department an incentive to increase the company’s revenue (not profits) will inspire them to be more creative and proactive to convert prospects into customers.
Comment And Give Some Additional Tips
Leave a comment and give us some of your experiences. Do you have any other options that enable your credit department to allow more new business in that may be riskier? Do you have any other tactics you use to align the credit and sales departments?
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