Businesses operating in the cannabis market soon will be able to access traditional bank credit. When this happens, every aspect of the market—grower, manufacturer, wholesaler, distributor, dispensary, and retailer—will have access to credit, provided they meet creditworthiness norms. From that point forward, the cannabis industry will change forever. In the one to two years following access to banking, exponential growth will occur and small enterprises will lose their first-move advantage to larger corporations if they do not adapt and change quickly.
Why will growth happen? Consider your current customer with $2,000 in cash on hand. They are now only a $2,000 customer, nothing more. But, if they can get bank credit—say, a $5,000 credit line—they become a $7,000 customer. Multiply that figure by the number of customers you serve, and your business will expand accordingly. At that point, the question becomes whether you sell companies the additional merchandise on credit terms or continue to require them to pay cash at time of delivery.
Customers no longer will want to pay cash on delivery, because they are creditworthy; a bank says so. After the bank approves credit, customers will want credit from you, too, so they can pay you “sometime down the road.” To get their business, you will need to extend credit, which means you will have to carry “paper” in the form of accounts receivable.
How much credit should you extend? What kind of terms should you offer: seven days, fourteen days, thirty days, or something else? You will need to make a credit decision you may not be fully equipped to make. Furthermore, as your business expands, your company will need to make credit decisions daily. Plus, you now will have accounts receivable, and with that will come delinquencies, defaults, and collections. If you want take advantage of growth, but also want to minimize your risk and reduce potential losses, you need a professional to manage the credit process. You need a credit and collections manager.
The Credit And Collections Manager’s Job
This article assumes a cannabis-related business with a one-person credit department managed by the credit and collections manager. If the business grows to the extent that multiple credit personnel are needed to manage the customer portfolio, then the credit and collections manager’s job expands accordingly, and supervisory and training skills come into play. We will cover these requirements in a later article; for now, let’s look at the basics of establishing an initial operation on a solid foundation, so it can grow easily when necessary.
At the onset, the credit an collections manager will be responsible for the entire credit-granting process, including developing and consistently applying the company’s credit policy, as well as managing and collecting the accounts receivable and the dispute-resolution process. Periodically, the credit and collections manager also will review the credit status of existing customers and be responsible for evaluating the creditworthiness of potential customers. The net result: increased sales, fewer bad debts, and a better bottom line.
Developing A Credit Policy
As credit and collections experts, it’s our opinion that for the most part the management teams of most cannabis-related business are not extremely trade-credit savvy. They have never had to be. Therefore, the credit and collections manager’s first job will be to develop a policy defining how the company will manage its credit and collections process and evaluate credit risk in the cannabis market. It is management’s job to understand, review, and accept the new credit policy. The policy will seriously affect the way the company does business, and it is important management understand the consequences of moving from an unstructured environment to a professionally run business. (For a detailed discussion of credit policy objectives, see “Trade Credit in the Cannabis Market” in mg’s May 2017 edition or online at mgRetailer.com/trade-credit-in-the-cannabis-market.) Once the new credit policy is in place, the credit and collections manager’s next job will be to develop a credit application.
Creating a Credit Application
The credit application provides basic information about your customer’s business and is one of the primary tools available for protecting your company and controlling credit risk. Even customers who pay COD should fill out a credit application. (For a detailed discussion of the importance of a credit application, see “The Credit Application” in mg’s August 2017 edition or online at mgRetailer.com/the-credit-application.)
Collecting Accounts Receivable
Once you begin extending credit, you will have accounts receivable that need to be managed. In corporate America, accounts receivable usually compose the largest asset on a company’s balance sheet. Therefore, someone needs to pay close attention to them. One of a credit and collections manager’s major roles is making sure all of the customers on credit pay within their terms. If not, the manager should be aggressive in contacting them convincing them to pay the overdue amount.
Managing Relationships With Collection Agencies
No matter how proficient the credit and collections manager, he or she is not going to collect all monies due when they are due. Some accounts will become seriously past-due, and you’ll need to employ a collection agency. Evaluating and employing the right agency for your business is both an art and a science, and the credit and collections manager’s knowledge of the collection agency universe will be an important factor in selecting the right agency for your company. Once an agency is employed, the credit and collections manager will be responsible for evaluating performance and making sure your company is receiving as many as possible of the dollars turned over to the agency.
Maintaining The Corporate Credit Policy
The corporate credit policy should not be a static document. Business and the economy are dynamic processes, and the corporate credit policy must keep up with the sales environment. The is the credit and collections manager’s responsibility. The article mentioned above, “Trade Credit in the Cannabis Market,” discusses this topic at length.
Maintaining Customer Credit Files
Each customer’s credit file should contain all the information about your company’s interaction with that customer, including comments about any personal, email, or telephone communication. Additionally, the file should contain information about the customer’s credit status—for example, whether they are on credit hold or in collection. Many software applications are available to help with record-keeping. As most of the products are cloud-based, the information will be readily available to every employee who needs the information. The credit and collections manager is responsible for evaluating the various system alternatives and making sure once a system is installed it is properly used and maintained.
Reviewing And Updating Credit Limits
The credit and collections manager is the company’s risk manager. Customers’ ability to pay may vary over time. To maximize the bottom line, credit extended to low-risk customers should be increased periodically and credit extended to higher-risk customers should be reduced. Credit risk evaluation is an ongoing process. Only by routine reviews of customers’ account activity can the credit and collections manager advise the sales force and take remedial action before accounts become seriously delinquent.
Monitoring Customers’ Deductions And Disputes
A deduction is a credit your customer applies to an outstanding invoice without your approval. Disputes are amounts not paid because a customer disagrees with all or part of a bill. Some deductions and disputes are justified; some are not. It is the credit and collections manager’s responsibility to ensure deductions and disputes are justified. Given there are third-party companies whose entire business is settling deductions and disputes, you can be sure unresolved issues may seriously affect a company’s bottom line.
Communicating With Management
In a small company, communication is vital. Credit and collections managers must make sure management is aware of the company’s financial health. Developing management reports to convey the information is important, but providing information management doesn’t want or need is a waste of resources. The credit and collections manager should sit down with management and discuss what needs to be reported and then deliver the appropriate reports on a regular basis. Only in this way can both the company and the credit and collections manager’s performance can properly be evaluated.
Credit And Collections Manager’s Previous Experience
A credit and collections manager needs a specific skill set. Aside from previous experience in common-to-the-position tasks, personal chemistry is important. No matter how qualified an applicant, if management does not feel comfortable things will not go well. Make sure the individual you hire is somebody with whom both you and your customers can work.
Aside from that, basic qualifications for the position include:
- Strong computer skills, not only with basic programs like Microsoft Word and Excel, but also with installing and integrating credit and accounting applications.
- A degree in accounting, finance, or a related field.
- At least five years’ experience in credit-related functions.
- Experience dealing with credit reporting agencies.
- Experience with personal guarantees.
- An ability to communicate effectively both in writing and in person.
- Good management skills.
- Good interpersonal skills.
When credit becomes available to the cannabis industry, mom-and-pop shops, small business, and large companies will be seriously affected. Risk-management will be imperative, so the credit-granting function should be turned over to a professional. In a small business like most cannabis companies, the credit and collections manager performs a vital function. How well they perform may mean the difference between a successful business and a failed operation.
The responsibilities outlined above are the basics. As the business grows, the credit and collections manager’s duties will increase accordingly. Management, supervisory, and training skills will come into play when more than one credit and collections person is required, and eventually, an accounts receivable manager will be necessary.
In a future article, we will discuss the accounts receivable manager position in addition to the basics of setting up an accounting department and selecting an accounting system.
SAM FENSTERSTOCK is SVP of Business Development at AG Adjustments, a provider of commercial collection services. Previously, Sam was Director of Business Development at PredictiveMetrics, a statistical-based credit and collection scoring and modeling company that he helped grow and sell to SunGard (FIS) in 2011. Sam can be reached at email@example.com.