Gapitalize on the industry turnaround with a wel l-defined credit pol icy

tTt"u LUMBER INDLSTRy appears to

I have weathered the Great Recession. Lumber demand, prices and output are all increasing. As the pendulum finally swings toward industry growth, lumber sellers should remain disciplined in the area of credit management, or risk hampering the opportunity to grow profits with uncollected receivables. Companies that remain vigilant in their credit policies and procedures will be well positioned to capitalize on the industry's recovery.

When extending credit to a customer there are two key considerations a credit professional must consider: the buyer's financial position and trading practices. The buyer's financial figures will provide credit extenders with an indication of the company's overall financial strength, through a review of its overall debt structure, working capital, and equity position. Trading methods will reveal how the company conducts itself within the business community.

The due diligence put forth to investigate a prospective customer before making a credit decision can go a long way in determining how much credit to extend while also protecting your bottom line. A customer should not be granted credit without a reasonable degree of certainty regarding its ability and intention to honor the terms of the sale.

Unfortunately, no standard formula exists to determine the creditworthiness of a company. Although some have tried developing software for "scoring" companies, according to

Phillip Lattanzio, president and chief operating officer of the Rolling Meadows, Il.-based National Association of Credit Managers, it always comes back to the need for a "human element" in making the final decision.

The process begins by determining a company's creditworthiness or ability to repay debts. While some companies have a formal policy with strictly adhered to rules. many maintain an informal process. Even with more informal policies, it helps to at least have some procedures in place to deal with customer evaluations, setting credit limits, terms, and conditions, and late payments.

For example, say a lumber company is approached by a firm it has done business with for a number of years, asking for a substantial increase in its credit limit. If the lumber company has no procedures and/or checkpoints in place, the absence of these determining factors may result in an approval delay, pushing the customer to go elsewhere for its purchase. This results in not only a lost sale for the lumber company, but a lost opportunity for luture business.

Investigating a potential customer's creditworthiness can be both an art and a science. Credit professionals agree that securing financial figures is optimal to determining if the company has documented profits and steady growth. Liquidity and the ability to generate cash are key indicators in its abilityto pay. Furthermore, it is a good idea to check not only the most recent yearend financial breakdown but also prior statements to identify a financial trend. Additionally, comparing the position of a company during its "peak" or interim periods will demonstrate the current year's performance versus the company's historical strengths or weaknesses.

Equally important in evaluating a customer's ability to pay are the trade responses of suppliers who have a history of dealing with the company. Lattanzio says credit professionals should gather as much information as they can from as many sources as possible. "A credit professional is like an investigator. It is not wise to make decisions based on one piece of information, whether it be a credit report, financial statement, or credit group report," he says.

When dealing with a new customer, as opposed to one the company has done business with in the past, many credit professionals agree that a trial period-limiting and closely monitoring credit limits and payments-is a good idea. A longtime Blue Book Member explains, "Trial periods are used whenever we determine that a new customer's integrity or credit worth is questionable. Depending on the seriousness, we may decide to reduce payment terms to one week or even go on a load-by-load basis (meaning payment for an outstanding load must be received before we ship the next load). There is no hard and fast rule as to how long the trial period lasts, but certainly the customer's cooperation and timely payments will speed things up. Once the customer demonstrates an ability and willingness to make payments promptly, he/she will be given the same terms as our more well-established customers."

In the case of a new company, there are other considerations to take into account. According to one credit professional interviewed, "You may be faced with a new company made up of principals from a previous organization you were doing business with. Or the company you may be considering does not have a credit rating yet. Ifour salesperson had a previous relationship with this firm, we will extend credit cautiously and then build it up gradually. It happens all the time."

In many cases, a firm's strategic, financial, and operational plans directly impact its credit policy. According to Lattanzio, credit policies should mirror the company's philosophy. "If the powers-that-be want to ship anything and worry about collecting money later, that's one philosophy," he says. But the credit policy should not only start at the top-in the executive suite-but be compatible with the company's long-term goals and philosophy.

As lumber demand grows, sellers will see an uptick in new credit inquiries and requests for limit increases. To avoid the sting of uncollected receivables, wise credit professionals will not only have an established credit policy in place, but maintain highly disciplined credit approval procedures.

- Ken Schultz is vice president of rating services at Blue Book Services, the leading credit and marketing information agency for the lumber industry. He has over 20 years experience with Blue Book Services and is a certffied credit executive. Contact him at (630) 668-3500 or kschultz@bluebookservices.com.

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