The CEO Quiz

What CEOs and business owners should know about their largest asset.
Abe WalkingBear Sanchez, president, A/R Management Group, Inc.

If you are a business owner or CEO, try your hand
at this little quiz:

1) On average what percentage of B2B (business to business) sales involve credit terms?

2) In companies that sell their  products or services based on payment at a later date, Accounts Receivable on average makes up what percentage of their total assets?

3) In your company, where is the credit function located and who does it report to?

4) How is the performance of the credit function measured?

5)  What is the greatest source of return from the investment made in the credit function?

Did you have fun? Good. Did you read ahead and crib from my answers? Oh, well. Now, here are my answers. How closely do they reflect the reality in your company?

1) On average what percentage of B2B (business to business) sales involve credit terms?

On average, 80% to 90% or more of B2B sales involve credit terms (payment at a later date). As commercial lenders have cut back on business lending, the use of trade credit has grown. In the U.S. the spread between the two as of September 2009, had grown by nearly $100 billion since the end of 2008.

In a recent on-line posting, Simon Groves, experiential marketing manager at Atradius, based in Cardiff, wrote, “In tough times, the use of trade credit goes up and not down despite the fact that there’s the additional risk of non-payment. A recent Atradius survey on the economic crisis, covering 3500 companies in 20 countries, showed that in all but six of those countries, the use of credit had risen during the economic downturn.

“What’s behind the rise in the use of credit as the medium for sales? There’s likely an element of rejuvenating flagging markets, but in the main, it’s to fill the gap left by the lack of bank lending available to buyers.”

The Atradius report can be downloaded from It makes interesting reading.

2) In companies that sell their  products or services based on payment at a later date, Accounts Receivable on average makes up what percentage of their total assets?

Accounts Receivable (A/R) is one of — if not the largest — assets of a company that sells on credit terms. On average, the A/R represents 40% of total assets and, as more trade credit is extended, it can only increase in size. The A/R is also one of the most liquid assets a business has, being but one step removed from money in the bank.

Short term money due from customers, the A/R is far more than just an accounting transaction involving the billing of customers or a journal entry on the balance sheet — it represents the very reason why any business exists; the profitable sale of goods and services based on established credit terms.

The management and condition of A/R has a direct implication and effect on cash flow, and often on the most profitable transactions; repeat sales to established customers. Consider the cost difference between finding new customers and selling more to existing credit customers.

Debits and credits are accounting terms used to record credit sales and payment on those sales, but the creation of A/R and of its proper management is sales related.

3) In your company, where is the credit function located and who does it report to?

In many companies, the Credit and A/R Management function is still found in accounting and reports to the CFO or finance department. But the only reason that the costs involved with trade credit are incurred is to acquire profitable sales that would otherwise be lost by having the ability to sell to customers who won’t or can’t pay at the time of purchase. Credit approval and the management of resulting A/R is primarily a sales support function and as such should be located within or in close proximity to sales — but it should not report to sales.

In the course of approving credit sales and then working with the issues involving past due payments, credit interfaces with just about every facet of the business. It deals directly with customers (new and established), sales, billing, A/P and other internal functions, as well as with vendors and suppliers. It has access to information and insights that if understood and used can help direct marketing and sales efforts toward specific types of customers or markets. The credit function knows who is buying and paying.

Credit also has a role in supporting purchasing. Purchasing managers need to keep on top of changes affecting the supply of products and materials and this is where credit has a role to play. Now, you may be thinking that sellers/suppliers extend credit to buyers and not the other way around. You would be correct, but a supplier’s credit worthiness or lack thereof, can adversely affect its downline customers.

James Early, of Marsh Trade Credit in Croydon, UK, recently wrote, “One must understand the supply chain up the line also. An example (in the UK) would be the retailer Zavvi who failed at the end of last year as a direct result of the failure of Woolworths/EUK. Zavvi’s main supplier was EUK and when the Woolworths group failed they suddenly found themselves in the position of having to pay the administrators for the stocks they already had on credit. Then they were unable to secure new supplies of best selling titles in the Christmas market!”

The cost or loss from a key supplier failing can also adversely effect its customers. The credit function can provide an initial and then on-going investigation and review of key suppliers, but only if asked. And, of course, there is the cash flow resulting from the management of the A/R and its impact on the purchasing department’s ability to secure the best deal from suppliers by being able to meet or exceed their payment requirements.

The credit function can also support the operations function by identifying and reporting “areas of opportunity for improvement” throughout the entire business chain. This brings new efficiencies that lower costs of doing business for everyone, including customers and suppliers.

It often seems as if the best input from participants at training programs comes during a break, and so it was recently in Phoenix. The program was on the Profit System of B2B Credit and how it can contribute to profitability.

During the lunch break, an operations manager told how she had once been the credit manager; how in dealing with approving credit lines (never limits) and dealing with past due issues (not collections), she found that she interfaced with customers, sales, finance, accounting, billing, the warehouse, transportation, vendors — every area of the business both internally and externally.

As credit manager, she could identify inefficiencies that were driving up costs for the entire supply chain and her habit of pointing out these areas in need of improvement led to her promotion to operations.

Credit managers can directly contribute to new efficiencies throughout the entire business chain of suppliers, sellers and customers, but only if asked. Credit can and should support more and larger new and repeat sales, customer service and retention levels, marketing, sales and operations efforts — while maintaining good cash flow and controlling bad debt.

CEOs and senior managers often miss an opportunity by asking too little of their credit function becasue they don’t fully understand it’s ability to contribute to profitability.

Due to the accounting/finance function’s responsibility to safeguard assets, it must have oversight of the credit function, but credit and A/R management should report directly to the CEO or, in larger companies, to the Operations area.

4) How is the performance of the credit function measured?

What is watched gets done. DSO (days sales outstanding), the average time it takes credit customers to pay, and percent of bad debt are measurements of risks. If used to measure the performance of the credit and A/R management function, they will adversely impact profitability. Credit and A/R management should be measured on to how it best contributes to profitability. Risk management is but one factor in the equation, and not the desired solution.

How hard is credit working to find ways to approve profitable sales while remaining confident of payment? What percent of the applied-for dollars are approved? A good credit manager, being measured and paid to focus on profit, may well find ways to exceed the percentage of credit applied for by customers. A good credit manager, properly trained and incentivised, is worth three to four good sales people.

Credit customers paying on their accounts, even if not current, keep buying. If allowed to not pay, good credit customers may take that next order elsewhere, resulting in a negative impact on cash flow or the loss of a repeat sale (often the most profitable type). You might also lose that customer forever to their new supplier and friend.

Past due accounts not dealt with in a timely and positive way can also produce negative word of mouth advertising. There are often “issues” that must be resolved before a customer pays, and the longer these “issues” hang out there, the higher the cost of doing business for all involved.

Past due A/R management is not “collections” — the enforcement of payment. It is about “completing the sale” — keeping credit customers paying and buying.

The credit function should be trained to identify and deal with different types of past due customers (every past due will be 1 of 3 types) and then measured on the percentage of credit customers paying. The incentive should be based on elevating profit levels and not on credit holds/stops — on keeping good credit customers from buying.

Yes, there will be a small percentage of credit customers who represent a potential for loss (type 2, financial serious, and type 3s) which must be identified early and controlled. This is accomplished by having credit determine the “type” of each past due account.

When something goes wrong somewhere, credit customers don’t pay. Fixing whatever went wrong will contribute to improved cash flow, repeat sales and customer service/retention levels. If these “areas of opportunity for improvement” are communicated to the operations function, new levels of efficiencies and lower cost will result. Measure and pay your credit managers for “systems problems” identified, fixed and reported.

5)  What is the greatest source of return from the investment made in the credit function?

The costs incurred/investment made in extending trade credit include: A) additional administrative expenses; B) the cost of carrying A/R, the time and opportunity value of cash on hand, and; C) bad debt losses from customers’ failure to pay. So what is the greatest source of return from this investment in trade credit?

The obvious answer is more and larger profitable new and repeat sales while controlling losses. The less obvious answer is the support that credit can and should provide to customer service/retention, purchasing, marketing, sales, and new levels of efficiency throughout the entire chain of suppliers/customers/downline customers. Over the long term, it is this contribution of the credit function that may prove the most valuable.

It is important to know if a failing supplier may also spell your own failure, but being able to identify “areas of opportunities for improvement” is like getting a good compounded interest rate. Not only does it drive down costs of doing business for your company, your customers and even your suppliers, it also creates an open environment where thinking is allowed, encouraged and rewarded.

In many companies, credit management is still viewed and managed from an old and out of date “risk” perspective. It is still thought of as the ugly stepchild of accounting, as a cost center, a necessary evil or, as one CEO put it, “the place where sales go to die.” Based on a new understanding by CEOs and business owners of the true potential of the credit and A/R management function, it can and should be a profit center and nothing less. CS


Abe WalkingBear Sanchez is the developer of the copyrighted Profit System of B2B Credit Management: a proven philosophy and set of methodologies that move the credit function from being a cost center to a profit-driven area of business. President of A/R Management Group,Inc. (, Abe WalkingBear Sanchez  is also a founding member of the international Profit Centered Credit Group.