LOUISVILLE, Ky.-Since most tire sales these days involve credit, how effectively a dealership manages its accounts receivable will help shape its future success and growth, according to Richard A. Palmer. Mr. Palmer, a veteran of 55 years as an independent tire dealer and a professional sales trainer, gave his fellow dealers a short course in credit management in a seminar titled, ``Collecting receivables and keeping customers,'' presented April 23 during the ARA World Tire Conference & Exhibition.
The president of Palmer Tire Co. in Macon, Ga., observed that most companies purchasing tires from commercial and wholesale dealerships are small and highly leveraged. The typical customer operates a small retail service outlet or owns a fleet of one to three trucks where ``every dollar he's got is (invested) and working.''
Therefore, unless they're able to manage accounts receivable, dealers must sell only to customers with gilt-edged credit and turn down business from those who are slow-paying.
Moreover, Mr. Palmer said, by successfully managing credit accounts, dealers can wind up with as much as 5 percent more gross profit.
Unfortunately, by being in the credit business, he added, dealers also are bound to deal with a lot of customers who don't pay on time-if at all.
Nine in every 10 customers will pay without question provided they have the money to do so, according to Mr. Palmer. But the rest just don't like to pay their bills. ``And if they can get in debt to you and ride you, they'll use that money for something else,'' Mr. Palmer said.
``How many of your customers aren't paying you, but have big, expensive cars, motor homes or a second house at the lake?'' he asked his dealer audience. ``They're doing it on your money.''
When a dealer extends credit to a wholesale or commercial tire customer, he, in effect, is putting money into that customer's business, Mr. Palmer pointed out.
Thus dealers need to determine the rate of return or the gross profit margin they want to receive on that investment.
Some of the questions dealers need to ask themselves are:
How does the dealership view credit? Is it conservative or liberal in granting credit? How much credit loss is the company willing to stand?
Are the company's salespeople comfortable with the credit manager and credit policies?
Do the salespeople know enough about financial statements to obtain the necessary information about a credit prospect?
What can the credit department, in turn, do to increase the company's sales?
Professional selling is supported by a credit department that looks at all the facts in making individual decisions, he said.
Likewise, Mr. Palmer said his own business depends heavily on its salespeople to minimize credit risk.
His $40 million-a-year tire business, he said, employs 10 outside wholesale representatives and three outside commercial salespeople and does business with about 3,800 active accounts.
The observations and information brought back by salespeople after calling on new accounts are vital in helping the credit department make a determination on credit, he said.
Everyone, including department managers and field sales personnel, share in the company's credit losses when they occur. And sales representatives call their own accounts when invoices are past due.
In extending credit, he said, a dealer must carefully consider the three C's: character, capacity and capital.
Character: Is the customer honest? Will he live up to his word? What is his reputation for paying?
Capacity: What does the prospect's financial statement show about his business? Does it show he's really making a profit? Are sales going up or down? How capable is the customer at running such a business?
Capital: What is the cash position of a prospective account? What accounts receivable does the prospect have on his books and is he collecting them? How much inventory is on hand? What fixed assets does the customer have?
It's also important to know how the customer is going to meet operating expenses.
``Once you know all these things, you'll have a lot fewer problems in credit,'' Mr. Palmer advised.
Where new accounts are concerned, the more information obtained about the customer, the better, he said. One way to obtain such information is from Dunn & Bradstreet and credit bureau reports. Another method is to telephone the prospect's current suppliers, once they're known.
``After talking with a customer, I know who they're buying from. Then all you have to do is call,'' said Mr. Palmer, who explained that he never leaves a prospect's office without completing a credit application.
The key, said Mr. Palmer, is to say to the prospect: ``By the way, (Those are the proper words to use, Mr. Palmer says, when changing gears during a sales presentation.) ``while I'm here, why don't I just get a little information and put you on our mailing list. We send out specials and have all kinds of deals, and I want you to know about them.
``I start writing out a credit application and say, `Your correct mailing address is....
`` `And by the way, who do you bank with?' He'll tell me who he banks with.
``I don't need to ask for trade references, because during the normal process of selling him, I'm going to find out who he's buying from.
``At the end of the form, the customer gets to sign it, and I say, `By the way, I need to attach your latest financial statement to it.'
``Usually, the customer responds that he doesn't have a current financial statement. Then I'll say, `But what's your latest?' He'll say, `My accountant has that,' and I say, `Fine. Why don't you give him a call, and I'll drop by on my way out of town and pick it up-or get him to mail it to me.'
``And 80 percent of the time, I will get a financial statement.''
As dealers know all too well, the first thing that gets paid in any business is payroll, Mr. Palmer pointed out.
Next comes the rent, utilities and bank notes-in other words, those expense items that simply must be paid to continue operating.
``The last thing that usually gets paid are the accounts payable,'' said Mr. Palmer. So ``how are you going to collect them?'' he asked dealers.
The biggest question, he said, is where the dealership ranks on the pecking order of who gets paid first. And the truth is that a business ``earns'' its place on that pecking order-either by insisting on being paid on time, or by letting customers ride while they pay other creditors, he said.
On every invoice, Mr. Dunn's company prints, ``Due on the 10th of the month, past due on the 15th.'' Then, on the 16th, the computer automatically starts printing COD on the invoices of past-due accounts and the company's drivers are told that future deliveries will be ``COD or FOB,'' meaning ``cash-on-delivery or fetch-it-on-back,'' drawled Mr. Palmer.
The customer may get mad, ``but he'll only get mad once. After that, he'll understand that you can't extend any more credit to him because he's `past due.' ''
Don't allow customers to ``pyramid'' debt by making partial payments each month while the total amount owed continues to mount, he told dealers. That process won't stop until somebody stops it-and that somebody won't be the customer.
In his business, everybody, including the salesperson, participates in a credit loss, when one occurs. It comes out of the salesman's paycheck and the managers' profit participation.
Telephone collection is vital: ``It's the same as a sales call,'' he told dealers. ``Begin by introducing yourself and telling who you're with. Then say: `The reason I'm calling is that (insert credit manager's name) told me she hasn't received your check.'
``Then I shut up and wait for the customer to speak. There will be a long silence, and I don't care if it lasts a week. I won't say a word until he talks. The pressure now is on that customer, who then will give me some excuse and say he'll mail in the check.
``I'll say, `Fine. And by the way, do you have the amount?' It's (the exact amount due).
``Then I shut up again and wait for him to say something back to me. Then I'll say, `That's fine. If you mail the check today, we ought to get it by Monday or Tuesday at the latest. That would be (Monday's date) and not later than the (Tuesday's date).'
``Then I say, `I certainly appreciate your cooperation,' and `Good-bye.' On the specified date, ``if the check hasn't come in, we do it all over again.''
Unless he's the customer's principal supplier, a dealer is unlikely to become No. 1 on that customer's ``must pay'' list each month. But over time, according to Mr. Palmer, he'll move up in the pecking order.
Even a poor credit system followed well is better than the best credit system not followed at all, he reminded dealers. ``It's the systematic follow-up that makes a credit system work,'' Mr. Palmer said.