Collins | Confronting Credit Conundrums In A COVID World

Credit professionals are facing new and unprecedented challenges this year. Credit Today reports recent research that shows at least two-thirds of credit teams are working remotely. This creates new challenges for credit managers and their senior leadership looking to maintain morale while keeping the focus on risk management and order-to-cash optimization.

When it comes to credit solutions, the best approach involves tackling the problem on two fronts — categorizing and managing clients based on their current situations and monitoring metrics that measure workforce efficiency and effectiveness.

Client Management

John Sloan, former executive director of credit services for Turner Broadcasting System, addresses the client-side approach in his column for the September/October 2020 issue of MFM’s member magazine, The Financial Manager. His piece titled “Steering Past Adversity” offers a tiered approach for handling advertising clients who are facing financial hardships during COVID-19.

Sloan begins by acknowledging that the pandemic, coupled with racial and civil unrest, has devastated businesses and affected their advertising spend. When it comes to extending credit to, and collecting from, advertisers affected by this volatility, Sloan recommends “thoughtfulness and creativity.”

This begins with breaking the problem “into manageable pieces.” He advises categorizing customers with similar problems, and then determining strategies for approaching each category. Moreover, he notes, “Priority should be placed on analyzing the 20% of customers who account for 80% of one’s revenue.”

While the first impulse may be to focus on agencies, Sloan proposes targeting efforts on the advertisers themselves. After all, agencies will only pay for a schedule after the client pays them. He suggests that joint and several payment terms — terms that hold both the ultimate client and the agency responsible until the media provider is paid — can be helpful when seeking agency cooperation.

In Sloan’s analysis, there are three types of advertising customers:

• Customers who have suffered financially and cannot recover and who are not currently placing schedules.
• Customers who have suffered financially but are in the process of recovering and want to continue to advertise.
• Customers that are unaffected by the pandemic or have not experienced any disruption to their business.

Each category, he says, requires unique handling and cautions against treating them all the same. Further, the urge to relax credit terms for everyone should be resisted; it’s not a viable solution.

The first group should be identified as soon as possible. They are advertisers that will not recover. Some may have formally filed bankruptcy, others may not have filed, but the proverbial writing is on the wall. In all cases, amounts due should be separated from the regular accounts receivable (AR) and either written off or be placed in separate AR account. In the case of accounts that have declared bankruptcy, best practice is to file proofs of claim even when it is unlikely that any amounts will be recovered.

For those in the first group that have “simply closed their doors,” Sloan recommends referring them to a “collection attorney or firm” to determine if there are remaining assets or other means of recovery.

Turning to the second group, those attempting to recover, Sloan notes that some of them may also have filed to reorganize under Chapter 11. There are a number of issues involved with accepting or continuing to accept business from a company that has filed bankruptcy. Again, he suggests consulting a bankruptcy attorney to get a handle on both rights and obligations involved with this scenario.

Others in the second group will not have filed Chapter 11, but still may need “some form of a reduction in the amounts they have outstanding.” This, Sloan says, calls for investigation and financial information. At a minimum, he recommends a phone interview or in-person visit with company principals to determine their situation and next steps.

In the cases for which such an investigation makes it clear that there is merit in continuing to work with client, the best practice is to negotiate a payment plan immediately. Since these customers are actively working to improve their businesses they may be interested in additional advertising to attract new customers. For these instances, Sloan advises that the credit agreement stipulate that new advertising be paid for within your company’s “normal credit specifications.”

Further, renegotiated plans should be in writing and include a promissory note for the past-due amount, spelling out the new payment terms. Barring that however, “a signed document acknowledging the past-due amount and payment terms is essential.” Such agreements will affect cash flow projections, so consider establishing a separate AR account to segregate them.

Customers in the third group are those that have not experienced any negative financial disruptions. Sloan recommends resisting, “as much as possible” any pressure to stretch payments for them.

For these approaches to be successful, Sloan emphasizes that it is essential for credit and sales to be “on the same page.” Presenting a unified voice to the customer is crucial.

Collection And Collection Performance Measures

Credit Today identifies 19 Key Performance Indicators (KPIs) for remote work teams. Since their community includes credit and collection professionals from a wide variety of industries, some of the areas measured may be of lesser value to media companies. Regardless, as famous management consultant Peter Drucker is quoted as saying: “If you can’t measure it, you can’t improve it.”

The group divides the 19 KPIs into four areas. The first is “Credit Performance Measurements.” Three items measured under this heading are:

• Average time for a credit decision.
• Percentage of credit requests approved.
• Net bad debt divided by total credit sales.

The second group includes measures of collection performance and efficiency. In this category are:

• The number of days between the due date and the date of the first collection contact.
• The number of days between the first and second contact for unresolved balances.
• The trend on balances of 90 days or more past-due.
• Collected percentage of the beginning-of-the-month AR.
• Change in between-period aging buckets.
• Third-party collectors’ collection percentage.
• Individual collector’s bad debt losses as percentage of assigned sales.

Group three measures three areas related to cash application:

• Remittance applications timing.
• Remittance application accuracy and efficiency.
• Operating costs divided by number of processed transactions.

Credit Today’s fourth category covers dispute and deduction. These four measures are:

• Days deductions outstanding (DDO).
• Deduction turnover.
• Time required to resolve a deduction.
• DDO trends over time in total, and by deduction type.

Managing both client and staff outcomes will mean more money makes it to the company’s bottom line and better outcomes for all concerned.

Media Credit and Collections (Virtual) Workshop

Want to learn more? MFM and BCCA are presenting a Media Credit & Collections Virtual Workshop on Dec. 8-9. The workshop is divided into two sessions both days: 11 a.m.-1 p.m. and 2-4 p.m. ET both days. The workshop is free to all MFM and BCCA members. Additional information and registration are available at –https://www.mediafinance.org/media-credit-workshop.

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, Facebook, Instagram, and Twitter accounts.