You Want a Credit Policy Built of Brick
Bugge, Gary H., Folio: the Magazine for Magazine Management
You want a credit policy built of brick
We can all learn something about credit management from a well-known fairy tale. The characters are different, but the principles are the same.
Once upon a time there were three credit managers. They were in business, and all paid their bills in a timely manner. The first credit manager had a credit policy built from straw. It was flexible and it would bend with the prevailing winds--but ad revenues were high.
The second credit manager had a credit policy built from sticks. Advertising pages were up and everyone felt secure with increasing profits.
The third credit manager had a credit policy built from brick. It was constructed in such a way as to survive any contingency, thereby maximizing profits and minimizing bad debts--even though profits were plentiful in those days.
Suddenly, the dark clouds of recession covered the land. With smaller profits and a weakening dollar, sales were hard to come by. In order to generate more life-sustaining sales, the door was opened for a hoard of debtors, led by the Big Bad Debtor.
The Big Bad Debtor came across the credit policy made of straw. He said, "Deny me credit and I'll huff and puff and I'll blow your credit policy away." The credit manager denied the ads. But because there was no cohesive policy to shield him from the Big Bad Debtor, the ads ran--with the expectation that the magazine would be paid, eventually.
Seizing the opportunity, the hoard pushed their way into the publication for a schedule of ads for which they never paid. And because the magazine no longer received the cashflow necessary to remain in business, it folded.
The Big Bad Debtor next came across the credit policy made of sticks. He said, "Deny me credit and I'll huff and puff and I'll blow your credit policy away." The credit manager denied the ads, assured that his credit policy would prevail. But the hurricane force winds of stagnation and declining sales blew around the credit policy and found its way to management--which opened the doors, contrary to established credit guidelines. Prudent credit management was lost to ever increasing sales. The doors were open, and hoards of debtors feasted on the credit policy made of sticks as termites feast on an old wooden house.
Now the Big Bad Debtor came across the credit policy made of brick. The Big Bad Debtor and the hoards of debtors approached, and in a clear, resounding voice the Big Bad Debtor said, "Deny me credit and I'll huff and puff and blow your credit policy away." The credit manager denied the ads. The Big Bad Debtor blew, but it had no effect. The ads did not run.
The Big Bad Debtor and the hoards tried repeatedly, but were not successful. They finally gave up and went looking for other magazines with weaker credit policies to plunder. Perhaps the company with the red brick credit policy was smaller than the other publishers, but it made more net profit and lived happily ever after.
Learning the lessons
When writing or reviewing a credit policy that will stand securely against market conditions so that your company will get the greatest amount of money for the maximum number of sales, remember that the overwhelming majority of advertisers and agencies want to pay their bills on time.
And clearly, the credit department must allow as many bona fide sales as the corporate philosophy mandates to remain competitive. This is essential to the financial well being of the company. But the key phrase here is bona fide. It's up to the credit department to review accounts for 1) their ability to pay, and 2) their inclination to pay.
If a company doesn't have the ability to pay, even if it wants to, you are giving away free advertising--since those balances will become bad debts. If a company has the money to pay but wants to hold out until the last possible moment, it is your management's marketing or financial needs that will dictate how conservative or liberal the credit department's collection effort is. …