Collins | Managing Customers During Times Of Change
With 38 quarters of consecutive Gross Domestic Product increases, the U.S. economy is experiencing one of the longest periods of economic expansion in its history. The first quarter GDP report, released in late April, estimates first quarter growth at 3.2%. This also means a recession — defined as two or more consecutive quarters of negative growth — is unlikely in 2019.
However, recession is coming. One indicator is declining personal/consumer spending. It’s been down for the last three quarters. Additionally, there are some indications that inventories are increasing which may mean future production cuts.
Businesses, particularly media businesses, will note two other differences between 2019 and the situation in 2018. First, is that there will be no big federal tax cuts or budget increases. The second is that 2019 is an odd year, which means media companies will have little to no political advertising revenue.
Robin Szabo, president of Szabo Associates, an Atlanta-based collections firm, cautions that changes are coming that will affect the management of media advertising clients. Saying companies must plan now for what’s ahead; Szabo outlines changes he recommends in an article for the March/April 2019 issue of MFM’s member magazine, The Financial Manager (TFM). HIs piece, entitled “Rocky Road Ahead?” is part of a special report on media credit and collections.
The decrease from 2018 political advertising spending means more advertising inventory will be sold on credit; candidate spots are typically sold cash-in-advance. Szabo also sees more fragmented advertising spending as technologies evolve and clients look to spread their message across various platforms.
The economy will also play a role here. Despite the Federal Reserve Bank’s decision to hold interest rates, banks are seeing profitability challenges, which leads to tightening credit standards in some categories. On top of that are indications of weakness in housing and continuing concern about potential retail failures (more about that in a future column). Szabo says, “The constant watchword is: ‘be prepared!’”
As I have stressed in previous columns, and Szabo reinforces, that preparation begins with an analysis of your current customers to include “revenue concentration risk, credit risk, and days sales outstanding (DSO).” A good place to begin to reduce risk is by diversifying your customer base. Szabo’s rule of thumb is not to have more than 10% of your business with any one customer or advertising category or 25% with your five largest customers. There are exceptions, “If the concentration is with healthy, stable, timely paying customers with whom you have a longstanding relationship, then the risk is not as great.”
It is imperative that you evaluate your customers’ credit risk on an annual basis, by reviewing the volume and frequency of their business and payment history. Szabo believes that creditworthiness is the foundation of the client relationship, and that understanding your client’s creditworthiness is imperative.
Evaluations must include both advertisers and the agencies. Unfortunately, media companies have seen failures from both recently. In addition, staying alert about negative information in your larger advertising categories can allow you to move quickly to limit your exposure if needed. I would be remiss if I neglected to mention here that BCCA, MFM’s subsidiary, offers a media-specific credit report that includes alerts when a client’s credit situation changes after the report was pulled.
DSO is an important benchmark. It allows credit professionals to track results from period to period. Szabo suggests this should be done monthly, utilizing both individual customer data and advertising category comparisons. The results allow companies to spot trends, fine tune collection strategies, and more accurately forecast cash collections.
Collections professionals, however, should never work in a vacuum. Once they’ve done their analysis, Szabo recommends they merge the data with the data compiled by the sales team to achieve their goals and update forecasts.
Everyone should understand the changes and how they affect the accounts receivable portfolio. Working together, the two groups will be able to make sure the company’s customer management plan is in order and ready to meet the challenges ahead.
Szabo goes on to offer a checklist to help companies determine how prepared and effective their organizations are when it comes to credit extension and collection procedures. “The credit application remains the single most important document to determine whether or not to do business with a particular client,” he says. He goes through a series of questions along with explanations of why these questions are important in determining the organization’s credit and collections preparedness. These questions are:
- Does your credit application clearly indicate with whom you’ll be doing business and what their qualifications are for credit extension?
- Does your credit application clearly state the terms of the business agreement?
- Do you have procedures for dealing with borderline customers?
- Do you reinforce payment terms at the beginning of the relationship?”
“Sales reps are in the best position to become aware of their customers’ management or cash flow problems early on,” Szabo says. He encourages collection professionals to build their relationships with reps by attending sales meetings, either in person or via teleconference, to reinforce their understanding of the business from a sales perspective.
When it comes to the collections process, Szabo asks, “Do you maximize the effectiveness of your collections tools?” He remains an advocate for what he calls the “tried and true” tools of the trade. Among the most effective of these, he says, is the telephone. Of course, collection conversations must be followed-up with a letter, via email, fax, or the U.S. Postal Service; this is critical to the confirmation process. A sidebar to the piece, “Keep Calm and Make the Call,” offers additional tips on telephone communication.
While not as effective as a phone call, Szabo notes that a carefully worded letter can be the least offensive collection communication. He suggests companies develop form letters, with two or three variations to allow flexibility and dispel the perception of them as form letters that recipients can ignore.
Szabo recommends a strict collections schedule, “Begin the collection process when the account falls 15 days past due and then follow up at least every week.” He goes on to say that it is important to communicate only with the person in charge, and never to let a customer think that an extra week or two to pay is acceptable.
Company policy should outline when it is time to revoke an overdue client’s credit privileges. When an account is 90 to 120 days past due, Szabo suggests enlisting the services of a third-party collection firm.
Preparing for what is likely to be the bumpy road ahead includes having a sound credit and collection plan, backed by rock-solid policies and procedures that the entire company follows. As Szabo concludes: “By honoring the principles of credit and collections, you can help ensure that your organization will continue to survive and thrive.”
MFM Annual Conference Just Weeks Away
Scheduled sessions for this year’s Media Finance Focus 2019, the 59th annual conference for MFM and its BCCA subsidiary, include a full track focused on media credit issues. In addition, the conference includes tacks for television, radio, newspaper, video games, internal audit, tax, and networks, programming, and streaming. We look forward to having members of your finance, accounting, and credit teams join us in New Orleans, May 20-22, where we will be focused on Big Ideas in the Big Easy.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter or Facebook sites.