Credits, collections and their management

Front matter

H

CREDITS, COLLECTIONS

AND THEIR

Preface

No apology is necessary for attempting to write a book of practice for credit men.

After spending many years at the credit desk in wholesale houses, the author has been impressed with the great need of systematic and comprehensive methods. He has observed the new credit man starting in without any aids and trying to build up a system, and even in many cases attempting to work without any system. He has seen many thousands of letters of a similar nature written one by one, when a system of wisely designed printed forms would have minimized labor and cost and made the result more effective.

Adding to his own experience a careful study of the methods and forms in use in many of the best credit departments of the country, he has embodied the best into a comprehensive system in successful daily operation under his supervision, which he has fully described.

While there is not altogether an absence of theory in the following pages, the theory is practically applied in at least one credit department. If in this effort the author may help some one as he would like to have been helped years ago, he will feel well repaid for the labor.

W. H. Preston.

CHAPTER I. Necessary Qualifications and Characteristics of a Credit Man

PAGE

Little attention given to the study of credits. — The importance of the credit man.— Qualifications. — Honor. — Discernment. — Firmness. — Ability to write letters. — Memory. — Concentration. — Equanimity. — Good address. — General office man.— Financier. — Knowledge of law. — Industry. — Tenacity. — Mistakes unavoidable 15

Chapter II

The Influence of Environment upon the Work of the Credit Man.

Should have all possible aids. — Should be unrestricted. — His the responsible decision. — Relation to rest of office force. — Salesmen and the credit man. — Close touch with all departments 31

Chapter III

Who Should Be Students of the Science of Credits.

Growth of interest in the study. — A nation of credit givers. — Magnitude of losses makes manifest need

IO CONTENTS

PAGE

of its study. — Important to jobbers, bankers and retailers 38

CHAPTER IV. Capital as an Element in Determining Credit Risks

Capital considered most important in considering credit risks. — How has the capital been acquired ? — Distribution of the capital in the business. — Real estate, buildings, fixtures, merchandise. — Distributions of accretions of capital. — The degree of convertibility. 44

CHAPTER V. Valuable Information and Methods of Obtaining It

Definite information would prevent losses. — Manner of obtaining information. — Credence to be given it. — Past record. — Starting clear. — Confidential report blank. — Salesmen's reports. — Blank for salesmen. — Information from banks. — From former or present creditors, with blanks. — Reports from lawyers. — Local conditions. — Boom sections. — Termini. — Mining towns. — Manufacturing towns. — Partnership. — Competition. — Attention to business. — Leases. — Manner of collating reports 51

CHAPTER VI. Mercantile Agencies— Their Use and Abuse

Value of reporting agencies. — Know risk is satisfactory before account is opened. — Handling reference

CONTENTS II books. — Assisting agencies. — Discrepancies in reports from different agencies. — Ratings too high. — How credit men can add to value of reports. — The collection agencies. — Value of trade reports 77

Chapter VII

Value of Signed Statements and the Need of Co-operation.

Agencies furnish too few signed statements. — How to ask for statements. — Need of co-operation. — Impediments to co-operation. — Advantages of co-operation. — Competition invites failures. — James G. Cannon on statements. — Statements should universally be insisted upon. — Merchants should be taught reasonableness of demand for statements. . 94

Chapter VIII

The Proper Use of Statements and Some Court Decisons.

Assistance in determining a line of credit. — Aid in effecting settlements. — Statement of facts. — Citation of cases 113

CHAPTER IX. Determining Lines of Credit

Definition of " line of credit." — Difficulty of determining. — No defined system. — Lines of credit too liberal. — Mutual confidence. — Honesty. — Insurance. — Liquidating values. — Real estate 137

12 CONTENTS

CHAPTER XV. Reciprocal Relations between Attorneys and Credit Men

Relation not understood. — The commercial lawyer. — Reporting by attorneys. — Permanent counselors. — Retaining customer. — Compensation 199

CHAPJER XVI.

C\nnot Credit Men Be Too Careful?

Small percentage of losses commendable. — In keeping percentage down it must not be done to detriment of profits. — One-tenth of one per cent, too low for most business 212

CHAPTER XVII. What Can Credit Men Do to Reduce

the Number of Losses.

After occurrence of loss go over reports and record and ascertain how it might have been avoided. — Compilation and classification of failures. — Lack of capital. — Disaster. — Commercial Crises. — Fraud. —

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PAGE

Unwise credits. — Neglect of business. — Doubtful habits. — Extravagance. — Failure of others. — Competition 217

Appendix

Additional Credit Department Forms.

Signed Statement I

Trial Balance Ill

Monthly Abstract IV

General Guarantee V

Agreement to pro rate Securities VI

Proof of Claim VII

Consignment Contract VIII

Lease XII

CREDITS, COLLECTIONS AND THEIR MANAGEMENT

CHAPTER I Necessary Qualifications and Characteristics of a Credit Man

It is said we have no scientific definition of the word " credit," and it should hardly be a wonder that we have as yet no attempt to reduce the granting of credits to a science, for if it ever becomes a science it must be through the efforts of those who make a business of the granting and control of credits.

No one has yet dedicated his life and his efforts to instruct others so they may be fitted for the most important position in a wholesale or manufacturing house, that of Credit Man.

Very few articles, and a smaller number of books, have been written that are helpful to Credit Men.

Such conditions are well accounted for when we l6 CREDITS, COLLECTIONS MANAGEMENT

consider that men often grow into such positions from a subordinate place.

When once engaged in the work there is little time for study or for helping others, as conditions always exist that seem to require constant and careful attention to accounts, both old and new.

It is a fact much to be deprecated that the larger part of the work of the credit man is done without any impression that logical and systematic methods can be employed in nearly all the work, and that the law of cause and effect is applicable to commercial life, and especially to that particular phase of it, credits.

Wholesale houses have for years assumed that a certain amount of losses are inevitable, and without inquiring into the causes have not understood that a large percentage could be avoided.

But of late years, as the policy of some credit men has resulted in a smaller per cent, of losses there has been more of a disposition to investigate methods employed, and the credit man who can show a smaller per cent, of losses than the average in his line of trade is in demand at a salary commensurate with the importance of the work.

Many employers, because of the faithfulness of a clerk, or because of his success in former positions, advance him to that of credit man without first considering what is indispensable for success in the work, and without knowing whether or not he has made a study of the profession he is about to enter.

It is true, there is no teacher like experience, and it is true, as well, there is none so expensive. If our future credit men find willing and thoughtful teachers, either through wise publications or experienced professors in colleges, we may be sure the future profit and loss account will be a more cheerful one to contemplate. We quote another's words :

" A mercantile house may buy goods below the market, it may take and get inside discounts, and may sell its goods at a. large profit on the original price, but unless its credit department is wisely and judiciously handled, its inside price, discount and profit are soon wiped out, and instead of a profit to make the merchant feel comfortable at the end of the year, a loss stares him in the face.

" There is no more responsible position in any house than that of the credit and financial mam His position and work operate as the mainspring and keeps the business moving along smoothly.

" A shrewd credit and financial man may get along with little capital, but an abundance of capital without brains to direct its use is of little avail."

Competition waxes strong, margins are dwindling, expenses are increasing, the losses must be materially lessened, or many must succumb.

Let us try then to consider well the qualifications and characteristics which the successful credit man must have well developed.

Honor. — Honor, with all that the word implies, not only honesty in a business sense, but honorable in all ways. One need not be the less shrewd because he is honorable, but he who has a high sense of honor is wise and will be successful, if other elements which make for success are not lacking.

Too often it has been said, " He is smart, but he is unscrupulous." But even the unscrupulous business man demands of the credit man that he be honorable. Many a fraud and failure has been perpetrated under the cloak of honor, but honor is more useful and more successful where it is not assumed, but is real.

How quickly a retail dealer is drawn to a credit man of honor, and in time of financial disaster seeks his help and advice.

Discernment. — The faculty of seeing between things, of assimilating all the information in such a way as to enable him to see clearly through whatever there may be of an unsafe character, and judging well of the result from well collected information. He needs discernment, too, so he will catch at straws which indicate which way the wind is blowing. Many very little things, if seen rightly, affect very materially the decision on a risk.

Firmness. — Firmness, but not stubbornness, that characteristic which enables him to stand by his decision and not be influenced by over-zealous salesmen or profuse promises of the debtor, but desirous of accurate information and ready to reverse a decision if later facts presented warrant it. It is said that " a wise man changes his mind, but a fool never."

Some will claim that first impressions are the most valuable, if so, we only have to jump at conclusions and then firmly stick to them.

But the wise credit man will treat his first impressions thoughtfully, but not be so determined that he is not open to the presentation of facts favorable to a credit. Firmness but not stubbornness may well be .repeated.

System. — System in all the work, but not too much system, and not so fixed that it cannot be adapted to circumstances. System enough so that desk is always in order, all legal forms and blanks of all kinds convenient for immediate use. Work so systematized as to minimize labor.

Many are so bound up in their own system as to avoid considering others' systems. Some have so much system that their brain is dissipated in system and not used in consideration of their real business, credits.

Letter Writing:. — Because so large a portion of his work is that of dictating letters, he must be especially fitted for this branch of his work. It cannot be denied that this is one of the great features which makes for his success or failure. Numerous customers are lost, and indeed many accounts are lost, as a result of unwise letter writing. One must be an adept in this before he takes charge of the credits, for experiments in this line are expensive. Write a letter easy to be understood. Do not be too profuse in compliments or too sharp in criticism. Avoid statements or words of double or doubtful meaning. Let your customer understand that he is under obligation to you, especially to the extent of meeting his obligations promptly.

It ought not to be necessary to say that the good letter writer will have tasty stationery, will insist on neat work, will have a stenographer who will transcribe notes in good form, paragraphing and punctuating with care. Surprising as it may seem, many fail to see that office boys are instructed in folding a letter neatly. All these little things have their influence.

Memory. — Memory cultivated to the finest point, so that when fifty or more orders come to his desk for his O. K., he will have financial conditions in his mind so well fixed that in most cases the name will instantly flash across his memory, the dealer's worth, his manner of meeting obligations, and especially any unfavorable feature of the risk. This is a faculty susceptible of cultivation to a high degree, by stopping every time you see a customer's name to quickly bring before your mind's eye the main facts affecting his credit. Old accounts are those about which we are most likely to be careless, but if this becomes such a habit that the name brings a photograph of conditions before the mind, the old account will have as careful thought as the new. While memory will be cultivated, he will not depend too much upon it, but will keep proper records, which will be fully explained later.

Concentration. — Quick conclusions are necessary nearly every minute of the day. The faculty of concentration is very important. For the time cast everything from the mind but the one problem waiting to be solved ; settle it then and there if possible. Much time is lost by the mind being full of many things at a time, so that none are solved as they would be if the entire thought was concentrated on one question. In considering a risk we must have before us only those questions which afreet that particular risk, concentrating the thought and condensing the information and reaching a careful conclusion. The line of credit once determined should be such as can stand until material changes have developed.

Equanimity. — Self-control, not easily excited. Sometimes it will happen that news of assignment of one customer, chattel mortgage by another, and loss by fire by another, may all come in about the same time. If one can now have his best judgment he may be able to do just the right thing in time to prevent loss. It is important at all times that one maintain his equipoise, for every one is in a hurry, and of all men to make an error it must not be the credit man. Some one has said that handling credits depends a good deal upon the condition of one's liver. This may be true with some, but it is not true of the successful credit man, for he must not be a man of moods, but must be ruled by his head, and a well balanced head at that. When credit men give up the idea that granting credit is chiefly a lottery in which it is only luck by which they win or lose, the earlier will we have efforts to reduce credit work to a science.

Good Address. — As important as it is pleasant to the customer or associates, and because it does create a favorable impression, it is highly valuable. Possibly others may be careless in deportment, but when a customer meets the credit man he expects courtesy, clear and sensible conversation, business treatment and a business carriage throughout. Bulwer Lytton says : " There is no policy like politeness, and a good manner is the best thing in the world, either to get one a good name or to supply the want of it." Unless the credit man can command the respect of his associates, the employees and the customers, he is sure to be a failure. But in being courteous and pleasant to meet he must avoid making such close friends of the trade as to influence the business-like handling of accounts. While a customer should be made a friend of the house, he should not become so at the expense of the credit man having so allied himself that he cannot treat the account in a cold-blooded business-like way, if it seems necessary.

General Office Man. —It is hard to conceive of a credit man who is not a thorough all-round office man. In the medium wholesale houses, the credit man is office manager as well, and the success of the credit man rests largely upon the success of the office management. For unless there is good system throughout, the work does not come to the credit man's desk as promptly or in as good shape as it ought. And even in the larger houses, where there is an office manager, he must still have a knowledge of the work in all its branches to reach the best results. He will often find it of great value not only to understand the general principles of bookkeeping, but to be a thorough and even an expert bookkeeper. Many times, in making investigations, he will find it necessary to straighten out a set of books, and can often obtain access to the books because of his being an expert. He is the more ready to detect fraud if he has become so accustomed to books as to enable him to understand a set of books.

But the value of his expert training in bookkeeping is also prominent in his better ability to analyze a commercial report or a signed statement, for many of these may be correct, and yet made in such a manner as to be misleading. This knowledge is absolutely neccessary when the credit man is responsible for the office management or the bookkeeping department.

Financier. — In all except the larger houses the credit man is also the financial man. He must not only see to his collections, but must prepare to make payments, keeping close watch of the financial outlook, borrowing judiciously, arranging maturities carefully. He will keep in close touch with the buyers, that funds may be on hand to take advantage of cash discounts, or to caution against over-buying if the financial outlook is unfavorable, or crop prospects in his trade territory are unpromising. This part of his work will call for a general knowledge of banking and familiarity with bank customs and usages. He must learn how to deal with his banker in a straightforward frank manner, remembering his bank may be the most necessary adjunct to his business. He will study carefully to keep as satisfactory an account with his bankers as he wants his customers to keep with him.

He will therefore be a thorough student of financial questions, and so equipped as to discern the effect certain financial policies will have upon his business. He will study closely the history of panics and financial depressions, and will not only be watchful of financial legislation, but fully posted as to the operation of former laws of similar nature. He will avail himself of the great benefit of the best financial publications at whatever cost.

Law. — He must have a general knowledge of many branches of the law, and must be well versed in common law, as well as the statutes of the various states in which he does business; not because he proposes to do his own law work, this he cannot do successfully, for he cannot read sufficiently and he cannot take time to conduct trials, etc. But he must have a good understanding of law to handle successfully the questions that are before him every hour of the day. In fact he cannot expect to conduct his business so as to keep from serious or perhaps fatal errors without this knowledge. Ignorance of the law excuses no one. He must know, too, the special statutes of the various states in which he does business, as applies at least to the following points; assignments, attachments, chattel mortgages, foreign corporations, estates of deceased persons, executions, stay laws, grace, interest, judgment notes, jurisdiction of justice of the peace, limitations, married women, statutes of frauds, exemptions, notes, leases, and perhaps other points not mentioned. Books are numerous giving this information, and he should have one always at hand, but should have memory sufficient to cover most of these topics, especially in states where he is doing his chief business. The more he knows of law the more he will esteem the counsel of a wise attorney, w!k> is constantly reading new laws and recent decisions. Only the larger establishments can expect to have their own law departments, but all may consult frequently with the best attorneys.

Industry. —We find that the motto, " Everlastingly at it," is one the credit man will do well to adopt. There come times when it seems as if the manager may cease his labors on some of his lines of investigation, but if there is one single thing left undone that he knows ought to be done, he will be apt to find that very thing the vital one to have known. Surely it is the industrious man in this profession who proves successful. There is no room for the sluggard in our ranks.

But let us not be unwise in this faithfulness to our work. It is an economy of time to assist in all worthy efforts to better conditions in the commercial world, and time would be well spent in efforts to prevent or repeal mischievous legislation. The reason we are so woefully in need of better commercial legislation is found in the false industry of the credit men in attaching themselves to their desks at times when a little effort by a large number would result in saving much time and many dollars. The only reason we do not have more and better business legislation is because the business men and especially the credit men have not asked and worked for it.

Tenacity. — When the accomplishment of some much desired result seems impossible, when an account seems hopeless, when all others have given up the struggle, we will find our model credit man tenacious and persistent, being fully convinced that "while there is life there is hope" of collecting that account.

But notwithstanding all these characteristics and qualifications he will not be a god, and so he may expect to make mistakes. Strange and annoying as it may seem, nearly all connected with the business will learn of his losses in some way, and sometimes discuss the matter, fully determining that if something had been done differently this loss would not have been incurred. But no* one, not even the good credit man himself, can tell how many losses he has avoided by adopting certain plans of procedure, by carefully avoiding the necessity of turning down an order, or by feeling it was best to insist upon prompt payments, and thus drive the customer to a house more lenient which eventually stands a heavy loss. Neither does any one seem to know how many merchants he has saved from failure by wise advice or by a helping hand, at some critical point. No one knows how he has allowed the name of the green country boy to go on his books, with some appreciation of the hard task to educate another farmer for business. A remark once made may contain some good sense: " A jobbing house in our line ought to open a kindergarten to educate novices in business and thus prevent many failures."

But this good work does not go unappreciated by the capitalist connected with the business. For while there have been losses there have been many more avoided or prevented, and the net profit at the close of the year is not only indicative of good times, and large sales and fair margins, but it is sure proof that the credit and financial man has done his work well. While the net profit would have been more had there been no losses, it is certain it would have been less had there been one degree more of laxity in the management of credits.

CHAPTER II The Influence of Environment upon the Work of the Credit Man*

The importance of environment is certainly not fully appreciated when considering the work of the credit man.

In discussing the influence of environment in this connection, it is not my purpose to refer much to the surroundings as pertains to convenient desks, suitable files, books or office furniture, but more particularly to the effect of the attitude of the general manager and the entire office force toward the credit manager.

I am, however, firm in my belief that the credit man should have one of the cheeriest places in the office, should have convenient and substantial appliances, all possible aids in the way of books, files and agency information, and that his expenses for the conduct of his department should only be limited by the reasonable needs of the work — not to advocate extravagance, but a freedom to choose the very best.

But there is that more important environment, consisting of the managerial department, the office force and the sales department which seems to me to have more to do with the success of the credit man than anything else, save his own ability, can possibly have.

First of all we will concede the Credit Man must have ability and possess the elements which have been enumerated; we say he must have this ability and then he must have liberty to exercise it.

It has been frequently said that the credit man is usually an employee, and as such is not as free as he might otherwise be.

It is true that most credit men are employees only or hold a nominal interest, sufficient to give them an office with a title that will have force in the conduct of their department.

As such employee, he is very apt to feel the need of pleasing his employers; in his effort to please, he too often runs the risk of forfeiting his personality by releasing personal convictions, formed after a careful study of conditions, rather than appear to oppose a superior officer.

INFLUENCE OF ENVIRONMENT 33

Usually the credit man is well paid, his position is one not to be hastily resigned, but let it be remembered the value of his services depends upon the results of the conduct of his department more than upon the giving up of a personal conviction for the sole purpose of agreeing with the management. Time, that great prover of all things, soon demonstrates the success or failure of certain lines of action.

It has been my fortune to be so situated and to have had such personal acquaintance as to show clearly the value of independent thought and action, not independent in the display of antagonisms, but such a reliance upon hard won convictions that one is willing to stake his reputation and his future upon it.

I confidently urge the value of consultation and advice, and none but the stubborn and conceited will spurn it, but advice is different from interference. We often hear the credit man say, " Well, that loss wouldn't have occurred if I had had my way. I was convinced that account ought to be cut off, but the manager having in view only the profit on the sale, and possessing only a superficial knowledge of the risk, insisted that we continue the account." Now this is something we meet often, persuasion taking the place of honest judgment.

There are not many managers who will say " That credit department is run by Mr. Blank, and as long as he has charge of it there will be no interference. I will gladly advise with him at any time, but his must be the responsible decision; when results are not satisfactory we will make a change." But is not this the way it should be? We know that a decision is not or will not be reached in a minute or by other than a careful investigation, and when we begin to feel that an account is getting dangerous, is it not because of much pains-taking consideration of all the influences surrounding the risk? (I might add right here, parenthetically, that I don't take much stock in the intuitions some credit men claim they rely upon, nor in the judgment that comes to one as the condition of one's liver, but rather in that discernment that can see through many things and reach a conclusion formed from the relations of all and not from one single characteristic such as we have seen enumerated in various journals, viz., parting the hair, gaping, holding thumb in the

INFLUENCE OF ENVIRONMENT 35

palm, shutting the hand in answering a question, etc., etc.)

But, to come to our subject, a manager has much to do toward making or unmaking a credit man. If a man is worthy to be intrusted with so important a department, he ought to be given free use of all his powers and let results decide his fitness, and the credit man himself owes it to his employer or associates that his careful judgment be followed, for only in this way can he do his best work, and if his best work is not successful, surely the position should be taken from him. Not in any controversial spirit should he maintain this attitude, but with a spirit born of deep conviction and a plea, if necessary to abide by it and await the outcome.

Once it was remarked of a certain house, " They would make a good credit man of him if it was in him to be a credit man, for the manager of a department in that house is in sole charge."

But there is another effective feature of the credit man's environment. I refer to the employees in the other departments of the office.

The bookkeeper should not be the man who feels he should have been the credit man and thus jealous of success and disposed to rejoice at the failures that may come, he should rather be one who feels that in a measure he is responsible for the success of the credits, and thus be alert to detect a slow account or a fast increasing balance. The bookkeeper is in a position where he can disclose much of value or can withhold many facts. His assistance should be cultivated, not repelled. Many credit men are themselves at fault for the antagonism of the bookkeeper, for they too often look upon the bookkeeper as a rival and therefore one to be kept down. This is a condition many offices are in at this time, " divided against themselves." The manager should know that there is perfect accord between these departments.