Ullery SeminarsCRACKER JACKS
WARNING & DISCLAIMER This material was prepared by James K. Ullery as an internal guideline for members of his Credit Department. Mr. Ullery is not an attorney and makes no representation as to the accuracy of this information or the validity of his interpretation. Please consult an attorney before taking any action based on this law or the contents of this folder.
I. Role of Credit Management A. An Overview
B. The Receivable Portfolio
C. Role of the Credit Manager
D. Creating What You Always Wanted to as a Part of Your Everyday Life
E. The Growth Life Cycle
2. Expose and Teach 3. Receiving Place your pen or pencil on the paper once, and without lifting it, connect the 9 dots with 4 connected straight lines.
F. One Key Point That Makes The Difference
II. Credit Decision Making A. The Credit Function
B. Human Effectiveness System
2. Potential 3. Effectiveness 4. Fundamental choices C. The Ultimate Strategy
D. Sources of Information - Getting the True Picture
E. Working Capital
F. Inadequate Working Capital
G. Creative Credit and Financing
H. Non Financial Factors
I. Setting Credit Lines
J. Understanding Business Life Cycles
Financial Statement YOUR COMPANY DATE
CREDIT LINE FORMULA Company: Statement Date: Ratio Parameters Check Customer’s ratio rank on the line provided:
The lowest ratio ranking determines customer’s risk class. Risk class is the basis for calculating a credit line. Formula for Basic Credit Line:
Calculate both. Lesser result is BASIC CREDIT LINE. Customer's Rank _______ Net Worth x Rank % _____________ x _______ = _____________ Working Capital x Rank % _____________ x _______ = _____________
BASIC CREDIT LINE $ Desirability Profile Score Multiplier X SUGGESTED CREDIT LINE $ DESIRABILITY PROFILE Date: Company: Score 1. Need of Customer's Business Small 18 2. Payment History 3. Product Profitability Low 3 4. Character of Management 5. Competition Average 2 Below average 3 6. Years in Business 4 - 7 2 Less than 4 3 7. Bank Borrowing None, unknown, secured by fixed assets 4 Secured by current assets 6 8. Analyst’s Assessment Uncomfortable 3 Very uncomfortable 6 + Score Weights 25 - 35 Average Desirability 36 - 45 Below Average Desirability TOTAL III. Managing a Receivables Investment A.
Measuring Performance IV. Look to the Future A. Status 1. Within the company 2. Outside the company 3. How do our actions and attitudes determine our status? a. With whom do we deal? b. Do we emphasize credit or collection? c. Results only delusion d. Visibility e. Do all interested parties know why we approve or disapprove orders? B. Vision C. Innovations 1. Credit scoring 2. Setting lines by formula 3. Electronic data transmission - Vendor express 4. Other - Working and not working D. The Art of Strategy 1. Get Smart -- know your business...establish clear definitive strategic objectives 2. Get Excited -- know your customers...analyze your market and its buying behavior 3. Get Serious -- know your competitors...analyze their strengths and vulnerabilities 4. Get Thorough -- know your plan...define all critical elements influencing success 5. Get organized -- know your priorities -- define accountability and your current status 6. Get going -- initiate immediate action -- invest your resources for the greatest R.O.I. E. A Philosophy for Life Keep your
THOUGHTS positive... Keep your
WORDS positive... Keep your
ACTIONS positive... Keep your
HABITS positive... Keep your
VALUES positive... MECHANIC’S LIEN What is a Mechanic’s Lien? A Mechanic's Lien is a legal device which, when filed properly, gives the lienor (contractor, subcontractor or materialman) a legal claim against the real property upon which the project is located or against the public fund allocated for the payment of the project. What is the purpose of a Lien? If a car dealer sells a car to an owner and the owner subsequently fails to pay the installment, the car dealer (if he holds the loan) can repossess the auto. If a painting contractor sells his services to an owner and after he completes his work, the owner fails to pay, the painting contractor would have considerable difficulty repossessing his paint and certainly could not repossess his effort or salaries paid for labor. The purpose of the Lien then is to give the workingman, contractor, or supplier certain rights to the property upon which he has made improvements or the public fund set up to pay for the improvements. These rights extend to the amount of money for which he has not been paid. Why is there a difference between a Public and Private Lien? A Private Lien filed in the county Clerk’s office in the county where the project is located becomes an encumbrance on the real property upon which the project is located. Other than initiating legal action to "foreclose" the Lien, the Lien becomes most effective when the property is sold or a mortgage is taken out on the property. In both instances, either the buyer or -the bank granting the mortgage would insist that the Lien be satisfied and removed so that "clear title" could be obtained. When a Mechanic’s Lien is filed on a public project, it is not a lien on the real property but rather is a claim against the public fund set up for payment of the construction of the project. The most frequent effect is that the public agency simply withholds one and one-half times the amount of the Lien from the payment to the contractor. In other cases, many public agencies require that all liens be either satisfied or discharged and a certification to that affect be submitted by the contractor prior to issuing the final payment on the project. For the purposes of this Bulletin, a Public Project is defined as a project constructed by any State Agency or political subdivision of the State of New York. Property owned by the Federal Government is not subject to the New York State Mechanic’s Lien Law. What are the guidelines for filing a Lien? PRIVATE LIENS Lien Placement: To be effective, the Notice of Lien must be filed in the County Clerk’s office where the project is located at any time during the progress of work and furnishing of the materials, or within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials dating from the last item of work performed or materials furnished, except that for single family dwellings the lien must be filed within 4 months after final performance of work or furnishing of materials. Lien Duration: A Private Lien will expire one (1) year after the day the Notice of Lien has been filed unless an action is commenced to foreclose the lien and an appropriate notice is filed or unless a court order is granted within one year extending the lien for up to one year. Discharge of Lien: Private Liens may be discharged as follows:
PUBLIC IMPROVEMENT LIENS Lien Placement: At any time before the construction or demolition of a public improvement is completed and accepted by the State or by the public corporation and within thirty (30) days after such completion and acceptance, a person performing work for, or furnishing materials to a contractor, or his subcontractor may file a Notice of Lien with the head of the department having charge of the construction and the State Comptroller or the financial officer of the public corporation. Lien Duration: A lien on a public improvement will expire six (6) months after the day of filing the Notice of Lien unless an action is undertaken to foreclose or unless a court order is issued continuing the lien for a period not exceeding one (l) year. Discharge of Lien: A Public Improvement Lien may be discharged as follows:
PAYMENT BONDS How does filing a claim against a Payment Bond differ from filing a Lien? Many people confuse the filing of a Lien with filing a claim against a Payment Bond. As mentioned above, you may file a Lien against the property upon which the project is located and, within certain time restrictions, on all private and pubic work excluding Federal. On many jobs, including all Federal projects over $25,000 in value, and including most public work, the prime contractor is required to file a bond with the owner guaranteeing that all legitimate bills will be paid. On bonded jobs, a subcontractor or supplier may file a claim against the bond. Thus, on most public work, other than Federal, a subcontractor or supplier who is not paid for his work may both file a Lien and file a claim against the bond. Both procedures, however, have certain deadline dates that must be met or the right to file expires. What are the guidelines for filing a claim against a Payment Bond? On State projects (state agencies and some public authorities), where a Payment Bond has been posted by the general contractor:
Note: Some subcontractors feel they can extend their filing periods by returning to a project to perform additional work; thus, the clock for filing a notice and initiating a suit for second tier subs and suppliers would begin again. This is not always true. This additional work must, to the satisfaction of the judge, be (1) required; (2) within the scope of work required by agreement; and (3) not done solely to extend these time periods. The above are minimum provisions on State work as covered by the State Finance Law. These provisions will vary on other types of work depending on how the bond is written. To be safe, always obtain a copy of the Payment Bond. The best time to do this is prior to signing your contract.
NEGOTIATIONS IN COLLECTIONS FINDING A COMMON INTEREST This chart illustrates how the negotiation process can be translated into a common interest. Understanding how negotiation works will enable you to collect more accounts. PAYMENT
PAYMENT
PAYMENT
PAYMENT
HOW TO MAKE YOUR COLLECTION EFFORT PAY OFF Using Proper Dating Control Dating control lets you establish definite dates when bills will be paid. This is essential. In this way you will know in advance what your cash flow will be. You’ll be able to make better plans for the future and won’t have to pay interest on short-term loans to cover current expenses. You should know how long it takes for your company to collect its accounts receivable. It is sometimes helpful to do a comparison between other businesses in the same industry. Start with this simple formula:
For example, let’s determine the average collection period for Zip Company, based on Accounts Receivable of $600,000 and net credit sales for the year of $3,000.000.
This comes out to 73 days. And that means it is taking Zip Company 73 days to turn over its accounts receivable. Average collection period figures for your industry can be found in various business publications. These figures should be useful in helping you to determine when an account really becomes overdue and when it is necessary to make the first collection effort. Your Credit Policy You don’t have to get tough to get paid. This method often builds resentment, which can be more permanent than the debt. And it can send a good customer right into the arms of your competition or prolong payments for an indefinite time period. Many companies today are finding it easier to collect from overdue accounts by adopting a firm yet fair credit policy and if your collection department is more effective with your Accounts Receivable you can afford to attract new business from the border segment of your market simply because improved collection techniques on your part can allow you to grant more favorable credit terms to potential customers. Here's a sample collection procedure that can be used successfully to follow up accounts. There's no one right procedure. Your policy will dictate follow up times and cut-off amounts. When customers respond to payment demands and request documentation or promise payment, your correspondence and follow through is handled appropriately outside of this sample dunning cycle.
Ten Biggest Mistakes Made In Credit and Collections — Prevention Is the Best Protection.
Setting Up Your Telephone Collection Program Begin by preparing a desk with a telephone, along with some standard stationery material. Here's how to initiate it:
HOW TO GET CREDIT INFORMATION FROM BANKS Sometimes checking credit ratings can be tricky, but our own bank can help us by providing useful information. It is a good idea to work through your own bank and have them get information from the customer’s bank. The nature of the information tends to be a little more confidential and detailed. It is good only to do this with your key relationships that have larger balances. Do it yourself inquiries are fine, but you should know what to ask and what kinds of answers to expect. Some of the best questions are:
You should always start by telling the bank why you need the information. Stick to the facts and do not comment on the customers themselves. Banks will respond using the Robert Morris Associates Standards and usually describe accounts for example as "upper four figures," "lower five figures," etc. You can generally figure the vaguer the answer; the more likely the answer is not good. CHECKING A CUSTOMER’S CREDIT WITH SUPPLIERS The basic procedure for checking information with suppliers is similar to that of banks. Either send a personal letter telling why the information is being requested or pre-prepared credit references form. The one we have adopted at YOUR COMPANY NAME seems to give us incredible responses by virtue of the fact that we have added an element of humor and humanity to what is normally considered a very boring task in credit departments. You should enclose a stamped reply envelope. Make your questions specific:
MOST IMPORTANT: Ask the supplier for names of businesses that deal with the customer in case the customer has handpicked their references. Remember when creditors are asked for references, they provide their best references. You would like to hear the whole story by talking with some people in that industry that might not have been supplied as references. So, develop a little cross-reference list for yourself of who else in the industry might supply this type of customer and call those people. Develop a rep with those credit managers through associations in credit interchange groups, etc. BEFORE GIVING CREDIT TO A CUSTOMER JUST STARTING OUT
A FORMULA FOR ACCESSING CREDIT RISK Our central theme in decision-making is a trade off between accepting risk and the opportunity to generate profits through increased sales. Credit sales can be increased infinitely in most business simply by liberalizing credit arrangements but the increased sales become unprofitable when the cost in collection exceed the profit margin on the swollen sale. Therefore, a balance must be sought. In general, a credit program should be based on the typical terms in the industry, for ours -- Net 30. In businesses you would expect to meet the terms provided by others in the industry. Customers who are poor credit risks require stricter terms. Here is a formula to assist you based on the five C’s of credit: Character, Capacity, Capital, Collateral, and Conditions.
As an example of a credit scoring method, you could take each of these items and assign points to each rating within a category on a scale of say zero to five, then decide the cut-off points you want to establish, some of the points provides your customer score. As long as you develop a consistent method of evaluating all customers, you will be able to weight your customers in the industry this way. Of course the aging of accounts is your most useful technique because it directs attention to the most troublesome areas. Also, useful would be an analysis of payment history by customer class or category. I use a pink analysis sheet to break down the date of a credit response, high credit, the amount now owing, the amount past due, the selling terms, how the payments are, how long you have sold -since, and any remarks respondents might give you. I include our information of this on a regular basis also, giving you a brief profile of the customer. EXTENDING CREDIT CUSTOMER SUBSIDIARIES: Whenever you extend credit to a solid company, but find yourself lending to a lot of subsidiaries, it is good to keep track of the overall lending to the operation. It is also important to determine the strength of the subsidiary itself, if it collapses probably the parent company is not legally required to make good on the payment of the subsidiaries' bills. If proof of good financial condition of the subsidiary is not possible to get, ask the Parent Corporation for a guarantee. HOW TO SPOT CUSTOMERS ON THEIR WAY TO FINANCIAL TROUBLE: A common sense tactic is to keep an eye on the industry trends and use them as a guide to develop credit procedures. For example: The manufacturer supplying the building trade might want to tighten credit when housing starts decline. Some things you could watch for would include a dramatic or unexplained increase in the number and size of orders. The possible significance of this is that other suppliers have cut the customer off and are wary of their future, and the customer is laying in stock from you to get through. Post-dated checks or delayed payments begin. Should especially be way of delays that are caused my trivial questions. DRAMATIC AND ABRUPT CHANGES IN BANKING RELATIONSHIPS: I highly recommend that you keep a copy of all checks and track what banks customers deal with. When you see a major change in a banking relationship, it represents a problem at the lending level in many cases. You will also want this account information in the event you have to go to judgment and do an asset search or go to enforcement. MAKE DEBTORS PAY COLLECTION AND ATTORNEY'S FEES Your company's credit application should contain agreements, as your contracts do, whereby the debtor must pay reasonable collection and attorney fees in the case of default. Pro-Forma Billing on a Rental Buy Out. If your business is primarily rental, it is reasonable from time to time to sell rental equipment that has been out on rental. You need to preserve your rights to additional rental charges in the event the customer does not pay for the purchase of the equipment in a timely fashion. You are entitled to rental income until such time a buy out is made for cash. My recent thinking has me believing that buyouts on items in rental should be cash deals and rendered on invoices net due on receipt. It is proper to give the normal 30-day terms; however, enforcing very strictly the 45 days from date of invoice cut off before the item is put back on rental. This gives the customer incentive to come in and pay the bill as soon as they receive the first bill. EFFECTIVE COLLECTION METHODS By making calls earlier in the week. Generally, customers who promise on Friday to pay on Monday often forget over the weekend. Speak to the person who actually signs the check; do not waste time with other employees. Be persistent if customers are out. Leave name and number and request a return call. Ask again when they are expected, and call again and again. When writing a letter for payment, tell customers these messages have gone unanswered. Make the call as personal as possible; always address the customer by name. Give the customer a chance to explain; it may be a valid excuse for being late. The best procedure is to call, introduce yourself, where you are from, and simply say, "Will you be mailing your check in full today? (Pause)…. The first person who talks loses! Listen for reasons or excuses; there are some very typical responses you will get. Learn what they are and how to conquer each of these objections. It is at this point that I truly believe you are involved in telemarketing. You are selling the customer on paying you bill in a timely fashion. Encourage the debtors to commit for a partial payment or a payment program if they are not able to pay in full today. Make use of a local courier to pick checks up within an hour or two hour's time. If a customer is past due beyond terms, stress the immediacy of the situation. Do not hang up without specifying details of the payment arrangement. Determine what the next step is going to be, whether it is to pick up the check on a particular day, call back, etc. Once a person gives you a commitment, thank them for the commitment, by saying, "thank you for your commitment to pay ‘x’ dollars." When a customer agrees to pay, immediately send a letter formalizing the agreement, if the dollar amount is substantial enough. If a letter threatening the use of a collection agency or legal action is sent, do not follow up immediately. Silence makes customers edgy. They will call you, but do not wait too long because you should not establish a pattern of saying you will do things that you do not ultimately do. When you establish deadline dates, keep them. USING THE PHONE TO BOOST BILL COLLECTION: Hard core telephone collections are never pleasant, but can be more effective than letters if they are handled properly. Try making a person—to—person call to the individual responsible for paying the bills. Give your own name, not your companies. Many times you will get through to the right person, where an ordinary call you would not have. Insist on finalizing terms of payment during the phone call and follow up immediately with a letter confirming the arrangement. This approach needs to be limited to cases where the cost of the call does not exceed one percent of the overdue amount. In some cases I have even made collect calls to the individual. If the debtor keeps ducking the call, you keep leaving a full message, the reason for the call, amount owed, and how long, and all the other facts, no matter who is on the other end of the line. The message usually is embarrassing the debtor into paying, calling back, or accepting future calls to work out terms.
This is a high-pressure tactic, if you misuse it, you could raise some legal problems if the caller is not careful. The caller should be briefed in advance to avoid personal slurs on the debtor and any statements that could lead to legal liability. WHEN THE CHECK IS "IN THE MAIL." Follow up with a telegram saying ‘thorough search shows no record of payment. Stop payment on previous check and send a new check for ‘x’ dollars at once." A variation might be "thorough search shows no record of payment, stop payment of previous check and wire ‘x’ dollars at once." It would be good to get wiring instructions as soon as you establish a banking relationship, and talk with the bank’s wiring department so that you have a written set of instructions on how to receive wires. Usually banks can wire funds bank to bank within a matter of hours and give you confirmation of the receipt of that. Another strategy is to have a courier service drop by to pick up a check. These services are usually bonded representatives, and in many cases your customer has an established account. The courier can be there within a matter of hours. CHECKS MARKED "PAYMENT IN FULL": You have been given a rubber stamp that I recommend using stating that the check is accepted without prejudice and will full reservations of all rights under Section 1-207 of the Uniform Commercial Code. The effectiveness of this technique has recently been tested in the Court of Appeals of New York in an October ruling and found that the creditor who received a partial payment on the account was entitled to receive those funds toward the full payment. LENIENCY CAN COST A CREDITOR THEIR RIGHTS PROBLEM: If an agreement provides that the entire amount of a loan is going to come due if a single payment is late; and the payments are constantly late and a creditor accepts them without complaint, the courts have held that the creditor, by its leniency, gives up rights to strict enforcement of the terms of the contract. How to change the pattern and get compliance with the payment schedule: Send a buyer a written notice that lateness will no longer be allowed. By giving notice that the contract will be strictly enforced in the future, the creditor can regain rights it may have given up. Further information with regard is available in 24 UCC Reporter 144. WHAT TO DO WHEN A CUSTOMER GOES INTO BANKRUPTCY: Unsecured creditors should not give up hope of collecting something. It will take time and effort to collect. The theory of bankruptcy is to let the debtor start over. Once the bankruptcy petition is filed, unsecured creditors most file their claims with the trustee or referee and wait. The assets, if there are any, will eventually be sold and the proceeds distributed to the creditors. The claims are then discharged. The bankrupt later gets back on his feet; creditors have no legal right to press those claims. There are exceptions, however. Certain claims are not affected by filing Bankruptcy B. They can still be pressed and maybe even during the proceedings. These are:
In addition, the following claims are also not dischargeable:
WHICH CUSTOMERS SHOULD GET COLLECTION CALLS
WHEN SHOULD CUSTOMERS BE CALLED?
GOAL OF CREDIT DEPARTMENT
THE STRUCTURED COLLECTION CALL
SCRIPTED/PLANNED OPENING
Trained Response Sequential Progress To To Variables Close of Call
CHECKLIST BASED CLOSING
THE SYSTEMATIC TELEPHONE COLLECTION PROCESS
PAYMENT
USING THE BROKEN PROMISE EFFECTIVELY
INFORMATION/DOCUMENTATION
COLLECTION CALL PHILOSOPHIES
INSERT
FORM 211
Pg. 1
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FORM 211
Pg. 2
INSERT
FORM 2848-D Pg. 1
INSERT
FORM 2848-D (Pg. 2)
YOUR COMPANY ADDRESS PHONE, FAX
DATE
POSTMASTER Albany, NY 12205 Dear Madam or Sir: RE: POST OFFICE BOX # CITY, STATE, ZIP In accordance with the United States Postal Regulation, ASM-352-RRd, "Freedom of Information Act Regulation, " Section.44D, as shown below, it is requested that you provide this office without charge the following information: name, address and telephone number, if available, of the above business we are attempting to locate. Thank you for your cooperation in this matter. Sincerely yours, YOUR COMPANY NAME
Name Title C File No. 7260 Section .44D - D. The business name, telephone number, and address of the holder of a post office box being used for the purpose of doing or soliciting business with the public, and any person applying for a box in behalf of a holder, will be furnished to any person without charge. The postmaster may furnish this information when he satisfied from the entries appearing on Form 1093, Application for Post Office Box or Caller Number, or from evidence furnished by the requester, such as an advertising circular, that a box is being used for such a business purpose. When the postmaster is unable to determine whether a business use is involved, he shall refer the request to Regional Counsel for advice.
STATE OF NEW YORK SUPREME COURT Index No. YOUR COMPANY NAME Plaintiff(s), AFFIDAVIT OF CONFESSION OF -against- JUDGMENT d/b/a
Individually, Defendant(s),
STATE OF NEW YORK) COUNTY OF ) ss.: Being duly sworn, deposes and says: that deponent is the ( of a corporation) and is duly authorized to make this affidavit on behalf of the corporate defendant herein.
The defendant hereby confesses judgment herein and authorizes
entry thereof against
Defendant resides at in the County of , State of . Defendant
authorizes entry of judgment in County, New York, if said residence address is
not in New York State.
This confession of judgment is for a debt justly due to the
plaintiff arising from the following
Sworn to before me this Day of
Notary Public
STATE OF NEW YORK SUPREME COURT COUNTY OF ALBANY
YOUR COMPANY NAME
Plaintiff
-against - STIPULATION
WILLIAM d/b/a WILLIAM CONSTRUCTION CO., and WILLIAM Individually,
Defendant,
The undersigned being the parties to the above-captioned
action hereby 1. That the defendant has executed an Affidavit of Confession
of Judgment. 3. That if the defendant fails to abide by the above, the
plaintiff may forthwith
Dated:
YOUR COMPANY NAME
By: WILLIAM
COURT COUNTY OF Index No.
Plaintiff EXAMINATION OF Against JUDGMENT DEBTOR
Defendant
APPEARANCES: judgment creditor, by Attorney(s) for judgment creditor Attorney(s) for judgment debtor, or Judgment debtor in person
STATE OF NEW YORK, COUNTY OF as:
1. Q. What is your full name? A. 5. Q. Do you occupy an apartment or house? A. 7. Q. Have you a written lease? A. A.
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