The collapse of a business doesn’t usually happen all at once. There are warning signs. Late payments, legal filings and falling credit scores are all flashing red lights that something bad is coming. That goes for your customers, too, but risk information is often siloed. Creditsafe’s Matthew Debbage unpacks some findings of his company’s recent survey into the disconnect between finance, compliance and sales.
Do you know how financially healthy your business is? Do you know what risks your customers (or potential customers) are exposing your business to? And do you feel confident that you can answer these questions? To be honest, most businesses can’t answer these questions. In most cases, business leaders will guess and make assumptions — but none of it is based on hard data or analysis.
While it’s typically the responsibility of your finance and compliance teams to protect your business from financial risks, that doesn’t mean other teams shouldn’t share the burden of responsibility. But as our “Sales vs. Credit Control Battle” research study found, most other teams have no clue about credit risk — what it is, what factors the finance and compliance teams consider when approving or rejecting deals and why those factors matter. In fact, 42% of surveyed sales managers admitted they have little to no understanding of their company’s credit policy, while another 17% said they don’t even know if there is one at their company.
Why am I sharing these stats? It’s not to scare you, I promise. I just want to open your eyes to a real problem that you probably don’t even know exists and which is putting your business at serious risk. That problem is that risk management tends to be siloed inside organizations so that just the finance and compliance teams understand it.
Credit risk ignorance is more the rule than the exception
If I told you that over half (54%) of sales teams waste up to 20 hours a week pursuing leads that don’t meet the company’s credit policy, would you believe me? What if I told you that 44% of sales managers would still pursue a new business prospect even if it had a track record of paying invoices late and had bad credit? Unfortunately, both are happening, according to our study.
Just let those stats sink in for a minute. Now, let’s put aside the issue of being less productive and less effective with selling for a brief moment (I’ll come back to that later). The fact that almost half of the respondents in our study said they’d gladly chase after leads regardless of risk speaks to a longstanding mindset in sales teams, which is to chase any and every sales lead at all costs.
Of course, I’m not saying that salespeople shouldn’t prioritize prospects that have an immediate product need or high purchase intent. But winning a big contract doesn’t automatically mean it will translate into revenue growth for your business.
As most finance and compliance teams know, if a company repeatedly pays its suppliers late, owes millions of dollars in past-due payments and has over a dozen legal filings resulting in several million dollars in losses, all these factors are likely to put the company into a high-risk category. These factors also indicate that the company either already has (or soon will have) a cash flow problem, which could put a huge strain on your company’s cash flow. And we know that negative cash flow is one of the biggest causes of business failures.
It’s not about not pursuing high-value prospects; it’s about doing your due diligence in parallel. So, while you’re pursuing a prospect with high intent/immediate need, you should simultaneously be running a credit check on the business to reveal metrics like its credit score, credit limit, number of legal filings or late invoices. On top of this information, you also want to make sure you’re not working with a company that’s on a sanctions list or guilty of financial crimes like money laundering.
Finance and compliance teams need to open the dialog and educate other teams on credit risk
Our study’s findings indicate that there needs to be better alignment and communication between sales, finance and compliance teams. If sales teams don’t know where a credit policy is in place but in fact there is one, it’s important that the finance and compliance teams share this information and provide the necessary training so that the sales team understands the parameters used to decide whether a sales deal is approved or rejected. Not knowing if a credit policy is in place is bad enough. But when you add to that the fact that nearly half of the respondents in our study said they don’t understand the policy well at all even when there is one in place, this could increase the likelihood that sales deals are rejected often.
What was most shocking from our study was that nearly half (47%) of sales managers have up to 10 sales deals rejected each month by the finance team because the prospects don’t meet the company’s credit policy. To make matters worse, 52% of the respondents said they lose up to $200,000 a month because the finance team rejects their deals. If you estimate the costs for a smaller organization with a four-person sales team on the basis that half of the team loses $200,000 a month because prospects are too high-risk, that business could end up losing $4.8 million a year. This figure will increase exponentially with larger companies and bigger sales teams.
For the finance team, it’s important that you make sure your sales team knows if you have a credit policy in place and to communicate what exactly is included in that policy. Simply creating the policy isn’t good enough. You need to share the policy with your staff and make sure everyone fully understands all the elements within it. If it’s a lengthy document, you can bet that 50-page long PDF will get lost in their email inbox.
I’d recommend hosting credit policy training sessions that include mock scenarios and encourage your teams to ask questions. Get your other teams to participate, ask questions and help them understand why and how it impacts their job performance. If they don’t understand your credit policy, they’ll be less likely to follow it and more likely to bring you risky deals that get rejected. Lack of communication and information sharing can cause a great deal of tension between both teams, not to mention the impact it can have on your company’s revenue growth.
Companies should also ensure that credit risk analysis is a central part of their digital transformation plans — and not simply an afterthought. According to one study, 60% of businesses plan to ramp up investment in digital solutions this year, but those investments often are earmarked for cybersecurity and AI, leaving credit risk analysis out of the equation.
To understand the dangers of things like late payments and high numbers of legal filings, one need only look to the ongoing financial crisis at Bed Bath & Beyond, which closed all of its stores in Canada and continues to rebuild in an effort to avoid bankruptcy. Our data shows the company has 18 Uniform Commercial Code (UCC) filings against it, with the most recent one in June 2022. UCC filings allow lenders to seize listed property as a way of recouping loan funds in case a borrower defaults. So I can see why it’s closing all its Canada stores, and I imagine more closings are on the horizon in the U.S. if it doesn’t get its financial house in order.
Another thing I noticed when looking at the payment data for Bed Bath & Beyond is that its average DBT (days beyond terms) is 19 days. This means the retailer pays its invoices, on average, 19 days past the terms date. On its own, that’s a sign that the company has struggled to make payments on time to its suppliers. But when you look at the fact that similar businesses have a much lower DBT of seven days, I’d imagine that’s a big reason why Bed Bath & Beyond couldn’t line up a loan to stay afloat right now and has had to resort to a stock offering as a last-ditch effort to shore itself up.