All human activity from the most simple like crossing the road to the somewhat more complex activity of running a business requires a starting point and a direction. "Why did the chicken cross the road?" "Don't worry it'll never make it across the road!"…Colonel Sanders

I think most reasonable people would agree that there is always room for improvement.
I also think that most people would agree that in today's constantly changing business environment doing things as they were done 50 years ago would result in much lower levels of efficiency and productivity , if not outright failure. And yet, many if not most CEOs and business owners still view and manage a critical area of their business as did CEOs and business owners of the 1950s.

What is the best starting point for B2B/Trade Credit Management; for that area of business involved in up to 90% or more of all B2B/Trade Sales and which is responsible for creating and managing one of the largest and most liquid asset of a business? Is it to limit/avoid risk or is it to contribute to the profitable expanded movement of products and services?

How the performance of the Credit Management function is measured will answer the question and will determine the road you are on and the direction you're heading. Look both ways and look out for the Colonel.

In the 1950s, and prior to that, Credit was defined as "trust and faith that a borrower/debtor had the ability and wiliness to repay loans or to pay for goods and services provided based on payment being due at some later date". Based on this understanding of Credit, performance was measured based on delays or failure to pay. DSO (days sales outstanding) and % Bad Debt.

The past is a very strange place indeed; people behaved differently there.
Our understanding of even recent history is flawed by our inability to understand the thinking and attitudes taken for granted at another time. Telephones today have buttons and not wheels and most don't have wires binding the user to the base.

Today's Starting Point

When I speak to groups of CEOs and business owners I start by asking a few questions so as to establish a baseline for their thinking on the topic of B2B/Trade Credit Management.
If it's a small group, like a Vistage group, I ask each member of the group to respond to the questions and in the larger groups I select/pick a half dozen or so to answer.

The first question asked is "What % of B2B/Trade Sales involve payment at a later date?". The answers will vary depending on the type of business involved from none to 100%.

Recently one of those answering "none" was the managing partner of a commercial law firm. Having had experience working with law firms I asked this man if there wasn't any monies due from work done for clients. Upon reflection he stated that sometimes the partners' work would exceed the original retainer and that they would continue to provide further services; so he would guess that some credit was extended. I later learned that in fact this law firm had several hundreds of thousands of dollars due and outstanding from client companies.

On average 90% or more of B2B/Trade Sales involve the use of credit terms.

The next question asked is "A/R (accounts receivable), short term money due from the sale of products and services based on payment at a later date, make up what % of the total assets?". And again the answers will vary from a lower % from those businesses with large capital, equipment, plant, facility investments to a high % for personal service/professional providers.

On average A/R makes up about 40% of the total assets of a business and is often one of if not the largest asset. Having established the Sales role for Credit and the size of the A/R asset I next ask "Where is the Credit Management function located/placed within the business operation and how is it's performance measured?"..

Most CEOs and business owners still have Credit Management located within accounting or finance area of their business and are measuring it's performance based on DSO and % Bad Debt….just like CEOs and business owners did 50 years ago.

To establish a new "starting point" for Credit Management I have the group itemize the costs/investment made in extending credit to business customers.

Once a new customer asks for credit terms as part of a purchase there are the costs of gathering information (should be done by Sales) , there's the evaluation and investigation of the gathered information, the consideration of the "product value" at that time and there's the establishment and possible sale of terms and conditions of sale. If the customer accepts the Terms &Condititons there is the cost of setting up the account and as products/services are provided the customer must be billed and payments must be processed both involving cost.

If the customer doesn't pay within terms they need to be contacted and the reason behind the non-payment determined and corrected (not collections). All of these item costs of doing business associated with extending credit terms can be bundled together as additional administrative expenses.

There is also the cost of carrying A/R, the time value of money and while most companies don't think of themselves as "banks" this cost can be considerable when you think about the size of the A/R.

And then of course there's the cost of Bad Debt should the customer default on payment and the credit sale is written off as a loss.

Why? Why do it?

"Why create the costs associated with extending credit?" is the next and last opening question I ask groups….their answers:

1) Because there are customers who require that vendors/suppliers provide their products/services and then give them time to determine if they received what was ordered and to process the bill for payment.

If credit terms are not extended Profitable Sales are lost.

2) There are customers who need time to add value to the products/services they have purchased and to sell to their own down-line customers and be paid by them before they can pay their own creditors.

If credit terms are not extended Profitable Sales are lost.

3) There are competitors who offer credit terms, it's a standard way of doing business in their industry .

If credit terms are not extended Profitable Sales are lost.

The only reason any business extends credit terms to business customers is in order to get a profitable sale that would otherwise be lost. If customers can and are willing to pay at the time of purchase credit terms should not be offered, just grab the money and save the costs involved with extending credit.

Credit is the selling of a product or service based on payment at a later date. It is a lubricant of commerce that allows for the expanded movement of products and services. It is a sales support function . And yes there's risk associated with extending credit, but risk avoidance or management is just one factor involved and must not be the primary focus.

Credit Management is NOT AN ACCOUNTING Function and does not belong in the Accounting area and that's not to say that the Accounting Function isn't important, but very often, if not most often the black and white thinking found there is not conducive to the flexibility required in Sales.

Walls and Neighbors

Fifty years ago the Sales and Accounting Functions were like neighbors that lived with a high wall between them. If asked about their neighbors the Sales guys would describe the Accounting guys as "bean counters" and were convinced that Accounting people didn't understand or appreciate that without the Sales guy going out and bringing in business no one else in the company would have a job. If asked about their neighbors, the Sales guys, the Accounting guys might say that they were overpaid and overfed, that they didn't bother to do the details and needed someone to pick up after to them.

Fifty years ago the job of Credit Management was about making sure Sal
es didn't give away the store.

In 1987 during a speech commemorating the 750th Anniversary of Berlin Ronald Reagan challenged Mikhail Gorbachev , the leader of the then Soviet Union, to take down the wall that separated East and West Berlin, "Mr. Gorbachev, tear down this wall.".

The Credit Function should be placed between Sales and Accounting, should be called The Customer Sales Support Function and should include Customer Service, Credit Approval,and Past Due A/R Management (not collections).

New Expectations, Better Results and Better Neighbors

Rather than focus on DSO and Bad Debt companies should focus on how their Credit Management Function can best contribute to profitability.
The new profit expectations and performance measurements should be that Credit will find a way to approve 100% or more of the total amount of credit applied for by customers.

The expectation for past due A/R Management (not collections) should be to "Complete the Sale", to keep credit customers paying and buying, and buying , and buying.
And yes there will be a small % of past dues that represent a potential for loss and need to be identified early and controlled, but that is secondary to cash flow and repeat sales.

In the course of Approving Credit and Managing the A/R including dealing with all the things that can and do go wrong, The Customer Sales Support Function should identify and communicate the sources of things going wrong somewhere so as to achieve new efficiencies and lower costs of doing business for all involved in a Credit Sale (seller and customer).

The Four Stages of Change

The best information/knowledge is worthless until put to work.
When I finish presenting to CEO and business owners groups I ask one final question "What, if anything will you do with the material presented today?".
After the groups have a chance to voice what they plan to do and to clarify how to go about implementation I remind them that change is hard.

There are four stages to bringing about change:

1) Expect resistance…including in yourself
2) Strive for small successes and don't try to change everything at once
3) As one change takes hold introduce another…stress is needed to bring change
4) Remind and Pay people for the change you want.

I also remind them that failure is not a bad thing that it's a lot like climbing a ladder on your face. "Fall down seven times get up eight." Japanese saying


New Profit opportunities are too often being missed because of CEOs and business owners still cling to an old "risk avoidance" mentality regarding a critical business function. Sales Support is why credit exists today and that must be the new vision that drives the credit area of business and how it's performance is measured. The past is a very strange place indeed; people behaved differently there.

The Author
Abe WalkingBear Sanchez, co-founder of, is the developer of The Profit System, the author of Profit Centered Credit and Collections 1999, co-author of STAFDA's, Foundation of a Business 2007, and co-author of the new international book, The Best Kept Profit Secret: The Executive's Guide to Transforming a Cost Center. WalkingBear is located in Canon City and can be reached at