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Giving Credit, Where Due --Dickeson

February 2004
What credit terms are most frequently granted by printers? 2/10/n30—2 percent if paid within 10 days, net due in 30 days. Or maybe it's 1/10/n30—1 percent. Either way, it's a pile of money when you think about it as yearly rates.

Know what it amounts to on an annualized basis? A tad over 73 percent a year if you're using 2 percent. If you're using only 1 percent for 10 days quick-pay incentive it's a bit over 36 percent per annum. You knew that already, of course. Just wanted to remind you in order to make a point.

Any customer that doesn't take advantage of that generous allowance on both materials and labor has to be a borderline credit risk. Trouble is, many customers do take the discount even if they don't pay the invoice in 10 days—if the printer allows that to happen. And most of us do allow it to happen, don't we? We're so desperate for sales and cash that we accept improperly discounted cash and shut-up.

Think about this for a moment. We've spent all that money for a computerized estimating system to give us a target selling price and then we turn around and effectively give 36 percent to 73 percent of that price back to the customer by a quick-pay discount.

We buy new equipment because it promises to give us a payback in three years—33 percent annually. Who are we kidding? We harangue production for a 5 percent increase in efficiency. We holler if makeready waste increases by a few points. We're puzzled by the wide variance in job costs and general ledger profits. If every customer took advantage of that discount all year long we'd wind up in deep hot slop, wouldn't we?

I just don't get it, good buddies. There's a message here and we're missing it, somehow.

Perhaps it's not so much the significance of the discounting for fast pay but the importance of the receivables inventory to our business. They're an inventory you know. Just like that raw paper in the warehouse. They have such an impact that we're willing to sacrifice an inordinate proportion just to collect quickly.

Hey, that's it. They're subject to the same laws of JIT (Just-in-Time) as raw, process and finished goods. That's why we're so pleased when the customer will supply the paper. We don't have the burden of paper in the receivables inventory. In a sense, we've collected in advance for it. The customer isn't tying up our money in receivables inventory!

That's why accumulating inventories has prime significance to the nation's economy. If you're an acquiring company, the first thing you look at in your due diligence exercise is the inventories, especially the raw materials and receivables. That's where the sins of the past business policies and practices lie buried.

The first thing I'd look at as a criterion of effective management in any printing business: how fast do they get their invoices for completed jobs in the e-mail (e-mail can be a day or two or even three faster than snail mail.) The invoice should precede the packing slip! Then a phone call to the customer to be sure they've received it, that it's clear and when you can schedule payment. The date on that invoice starts the quick-pay period clock running. None of this horse-puckey of waiting for all of the so-called costs to be reported. That's distorted history.

Price, customer changes and count are all we need to know. If we don't know them instantly, then we'd better crank up the computer system. I recall with sadness one printing leader, no longer in the business, saying, "Try as we might, Rog, we can't get our invoices out in less than 14 days."

Collection of receivables is another thing. If I ask a printer what his credit terms are, the most likely answer I'll get is a proud "30 days." Yet when we look at the collection record it shows 45 days. And that's after the invoice has been issued. Somehow, after the sale has been booked, management forgets about collecting the money. That's why, in applying TOC—Theory of Constraints—we look first at the constraints management itself has allowed in administering its policies. What causes that difference between policy and execution? And is it after that quick-pay discount, which has been abused?

Let me suggest what one of the primary problems is—call it "Chasing Receivables." It's extending credit beyond that 30-day policy in the hope that a little more credit will enable the customer to pay the invoices. That's a fatal mistake that leads inevitably into quicksand. I'd even go so far as to venture that 25 percent or more of the bankruptcies of printing companies in the past quarter century has been due to chasing receivables.

Track your receivables every Monday. Do it by using the statistic for Days Sales on Hand. Divide total receivables inventory at the end of each week by receivables collected during that week. Multiply the result by seven days. The table shows what it might look like on a rolling quarter basis. The goal for the particular chart is 30 days or whatever policy is established. If you're using a quick-pay discount, then the goal should easily become reality.

If you're having trouble collecting some accounts, my suggestion is that you read through the tips published by Inc. magazine.

In a nutshell:

* E-mail the invoice and follow up with a phone call.

* Think very hard before allowing a quick-pay discount.

* Enforce payment terms.

* Don't chase your receivables.

* Track receivables every Monday morning.

* Use a rolling 13-week table with a graph.

Will all this help? Unless you're doing all these things now, you can bring more money in—faster—by minimizing or actualizing the constraint.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached via e-mail:


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