12 Credit and Collection Administration

Peter F. Szabo and C. Robin Szabo

Introduction

Every broadcast and cable company has a credit policy, though it may be unwritten. If a prospective advertiser or agency has been given payment terms, has been refused credit, or has been told that the company cannot accept its particular type of advertising, then a credit policy exists. Many credit policies remain informal and unwritten guidelines communicated by word of mouth to advertisers and agencies. However, because unwritten credit policies lack uniformity, conflicting information may be given from the same broadcast or cable company. Worse yet, advertisers and agencies may be treated differently even though no difference exists in credit qualifications.

Well-articulated credit and collection policies (a) minimize the risk of unfair credit decisions (and subsequent discrimination lawsuits), (b) help to establish a positive reputation within the advertising community, and, most importantly, (c) avoid costly payment delays that result from sloppy credit and collection procedures.

Have a Written Credit Policy

When disputes do arise, a written policy clearly establishes responsibility for payment. If your company’s clearly stated terms are 30 days, and payment has not been received within 45 days, you rightfully can begin to enforce your collection policy and trim the cost of carrying overdue debt.

Because a credit policy will benefit the Accounts Receivable and Sales Departments, representatives from both areas should be involved in the development of the company’s written policy. The credit manager should begin by developing a general outline of requirements and procedures, whereas the general sales manager should become involved in developing more-detailed points of policy that represent both departments’ interests.

Policy Objectives

The real challenge in creating a policy is balancing credit extension against collection operations. For example, one company might choose to balance a liberal credit-extension policy with a conservative collection approach. Another may opt for a tighter extension policy, lessening the need for strict collection procedures. And yet another may strive to achieve an equal balance between the two. In any case, the relative emphasis should be determined at the outset.

When two departments, such as Sales and Finance, with differing objectives are affected, achieving agreement on this emphasis can be difficult. Credit objectives generally include minimizing bad debt while maximizing cash flow. Advertising Departments generally favor guidelines that broaden, or at least will not restrict, sales efforts.

Credit guidelines might also address customer relations. An effective policy should embrace the principles of fairness, firmness, courtesy, and consistency in relations with customers. And, of course, assignment of the authority to administer the credit policy should be included.

Payment Terms

As part of an overall policy, payment terms should be described in detail: invoice dates; mailing dates; the number of days allowed for payment; procedures for collecting accounts, including when to send letters and make telephone calls on overdue accounts; when to send accounts to a third-party collection agency; and when accounts are to be written off. Samples of collection letters should also be included.

Once a credit and collection policy is in place, review it periodically. One way to ensure that policies always reflect the company’s current approach is to make a habit of reviewing and updating the credit policy each time the company changes its advertising rate card.

Upon completion, the policy is typically made part of a standard operating procedure (SOP) manual. That manual should be distributed to the general manager, sales manager, credit manager, and account executives for administration.

Fraudulent Advertising

The direct and indirect costs of fraudulent advertising can be debilitating to a broadcast or cable company. The direct cost is, of course, lost dollars from unpaid advertising. The indirect cost is a loss of reputation and audience, because defrauded viewers may associate the broadcast or cable company with a negative experience.

It is unlikely that an established business will risk the negative attention associated with fraud. Most such advertising is attempted by new businesses or individuals, or by an advertiser that has previously made similar attempts.

Advertising standards, which set the guidelines for acceptability, are essential to help protect against fraudulent advertising. Management sets the standards, which can vary widely among companies and are largely responsible for the company’s reputation among viewers.

Some standards are easy to formulate. Advertising that is clearly in violation of the law should, of course, be unacceptable. For advertising that is questionable, but not obviously illegal, the advertising and credit staffs must be given clear guidelines for determining its acceptability.

Advertising and credit staffers should be formally trained in the application of these standards and guidelines. Training for current employees may take the form of dissemination and discussion of changes or new policies. For new employees, a thorough briefing and understanding of the policies before beginning work is important.

The advertising staff is usually the first contact with prospective advertisers and agencies, and should bring questionable commercials to the attention of their managers. If the manager is unable to determine the advertisement’s suitability, the matter should then be taken before the Standards Committee.

Prospective advertising that makes it past the advertising staff should then be subjected to scrutiny by credit staff trained in advertising standards. Credit staff can challenge a questionable ad on issues of content and billing, and submit requests for additional documentation to support its legitimacy.

Credit

Even the most legitimate and responsible advertisements can be very expensive for a station when submitted by an advertiser that is not creditworthy. Among the numerous costly consequences are the expense of the sales representative’s efforts to get the order, the copy and production personnel to produce the commercial, and the traffic personnel to schedule the commercial, perhaps in time slots that other creditworthy advertisers and agencies may prefer. Additional expenses may include credit personnel to bill, issue aging reports and make collection efforts, and the potential of court fees to try to collect payment.

Many man-hours of company expense can be avoided by thoroughly checking a prospective advertiser’s or agency’s creditworthiness at the sales order stage. For all new accounts, the general manager and sales manager should demand signed and complete sales orders, credit applications, and payment agreements. This is unnecessary for clients that have a satisfactory track record, or that do business on a cash-in-advance (CIA) basis.

In fact, certain types of accounts should always require prepayment. Examples are accounts involved in bankruptcy proceedings or going-out-of-business sales, concerts and one-time events, most restaurants, and accounts for which creditworthiness cannot clearly be established. Ample time should be allowed for CIA payments to clear the bank before the schedule begins to air.

Political candidates should be covered by distinct and separate guidelines for campaign advertisements because their interest in advertising ends with the election (which may also be when the office that ordered the advertising is closed). For example, most media companies insist on cash in advance for all such advertising. Also, be certain that all political advertisements comply with current Federal Communications Commission (FCC) regulations.

Information Sources

As one of the first forms of media to be used by new advertisers, the local newspaper is a good source of credit information. Local or distant-market broadcast and cable companies that the advertiser or its agency has used are always valuable sources. Local credit bureaus and credit-information providers, such as D&B (formerly known as Dun & Bradstreet) and Experian, although not media-specific, can be utilized as well. However, media-specific information can be obtained from the Broadcast Cable Credit Association (BCCA). The BCCA Credit Reporting Service contains information on more than 25,000 agencies and advertisers, and will perform credit inquires if the information sought is not in its files. Additionally, information to supplement the reference and credit report findings can be obtained through various online sources, such as the agency or advertiser web sites, EDGAR (the SEC’s Electronic Data Gathering, Analysis, and Retrieval system), Google, Hoover’s, LexisNexis, and Yahoo! Finance.

In order that a timely credit decision can be made, all credit references and banks should be contacted, preferably by telephone, within one day of receipt of the credit application. Making these calls and quickly completing the credit evaluation will allow adequate time to receive a CIA payment or a personal guarantee from the business owner if the investigation turns out to be unsatisfactory.

Credit updates should be completed annually for all active agencies and advertisers, and should be conducted more frequently for those accounts that (a) have a history of delay payments, (b) have issued checks drawn against insufficient funds, or (c) have used questionable credit practices.

Liability

It is critical to determine ultimate payment liability in advance. The broadcast or cable company’s liability position must be stated in the sales order under “terms and conditions.” There are four liability positions currently in use by media:

Payment Agreements

A payment agreement confirms in writing that the advertiser or agency has agreed to make payments by certain dates. Ordinarily, payment terms are 30 days. If the advertiser or agency wants different terms of payment, these exceptions should be stated at the time the order is written. The broadcast or cable company can then choose to accept or reject these terms of payment.

If the prospective advertiser or agency is a corporation with credit determined to be unsatisfactory, the broadcast or cable company may choose to accept the advertising with either a CIA payment or a personal guarantee. A personal guarantee is meaningful only if the owner (stockholder) has the resources to pay. The guarantee must be signed by the owner as an individual, and not as an officer of the corporation.

Sales and Credit

Conflicts of interest between media Credit and Sales Departments are inevitable, and sometimes can erupt into angry confrontations. When dealing with questionable accounts, the credit unit that is responsible for minimizing past-due receivables and bad debt losses will insist on prepayment terms. At the same time, sales representatives, focused on meeting quotas and increasing commissions, may try to circumvent the system in order to salvage existing accounts and sell new ones. Reconciling the divergent interests of these two groups can seem like a formidable, if not impossible, task; however, by recognizing and focusing on the shared objective—keeping credit losses below a certain percentage of sales—instead of conflicting ones, the Sales and Credit Departments can form a profitable partnership. At the heart of an effective sales/credit team effort is good communication. Informal communication between departments as issues arise, as well as formal communication in regularly scheduled meetings, prevents potential problems from becoming reality.

Formal credit meetings should be held at least once a month, with the participation of the sales manager, other sales personnel as appropriate, the business manager, and other management personnel as requested by the broadcast or cable general manager. These meetings should encourage understanding of the reasons behind credit policies in general, as well as decisions about specific accounts. Sales representatives may not realize that the broadcast or cable company suffers increased costs until payment for advertising is received; that is, unpaid advertising is more costly than unsold advertising. Credit staffers can also broaden their perspective by trying to understand the pressures that sales representatives face each month; these pressures increase greatly in economic downturns.

Communication is particularly critical when implementing changes to the credit program. If the credit function has been lax and disorganized, sales personnel may balk at policies that seem radical in comparison to previous credit operations. If involved in the process, however, salespeople are more likely to accept change.

Of course, their acceptance of the policy will be limited if the interests of the Sales Department are not being served sufficiently. “Enlightened self-interest” will most effectively benefit both individual and company; therefore, incentives should be included to further motivate sales representatives to cooperate fully with the Credit Department. These incentives should be designed to focus the Sales Department on the new policy or policies. As such, the incentives will be most effective if they are outside of normal compensation. They could include a bonus, a contest, prizes, or something else; local sales management will know how best to get the attention of the sales team.

Sales and Credit Departments can cooperate to maximize collected revenue in a number of ways, such as making sure that credit applications on new accounts contain complete information. In return, the Credit Department should reciprocate by quickly approving an advertiser’s credit upon receipt of the proper credit information to assist the sales representative in making the sale. When required by credit policy or when appropriate to the situation, salespeople should collect prepayments.

Because the sales representative maintains continuing personal contact with advertisers and agencies, he or she is in the best position to become aware early of management or cash flow problems that could make collection difficult. Sales representatives should be alert to such situations, and report the information to the Credit Department immediately. Additionally, sales representatives should review accounts receivable reports on a regular basis. They should formulate a plan with the Credit Department to collect on delinquent accounts before or at the same time as soliciting new advertising from a troublesome client.

Management may also choose to withhold commissions on sales until the money is collected. Although this approach successfully responds to a typical problem among sales personnel—to concentrate on the immediate sale without concern for its long-term collectability—withholding commissions separates in time the sale from the reward. But as any student of psychology knows, timely reward for effort is a great motivator. Management might instead opt to advance commissions to the sales rep the month sales are made. If a sale is not collectible, the commission advance can then be charged back.

Of course, the “carrot” of getting a bigger commission check will always win out over the “stick” of a subsequent chargeback. With adequate controls, though, the chargeback method can make overzealous sales employees aware of the cost of poor credit procedures.

Credit applications on new accounts should be submitted and approved by the Credit Department before the advertisement is aired. The customer’s credit limit and payment history should be reviewed prior to any advertisement’s running.

The Business Office must review each credit application and perform appropriate credit checks to assess client risk. Credit applications should be processed on a timely basis, and notification should be furnished to the sales manager. The general manager’s approval should be required in order to override the Business Department’s rejection of client credit.

Collections

Even when effective credit policies and procedures are in place and properly implemented, there will be a need for collection efforts in any organization that extends credit. If a broadcast or cable company never has bad debts, it probably means that the firm’s credit policies are overly strict and that it is denying itself business.

Reasons for Nonpayment

Some collection efforts result, unfortunately, from errors or omissions on the part of broadcast or cable company personnel. A typical reason for nonpayment is that the sales order was not authorized by the advertiser or agency. Orders must be signed to ensure their validity. Commercial copy and tape not approved prior to the commercial’s being aired is another common reason for nonpayment. If the broadcast or cable company produces the commercial, its company personnel must make sure that the advertiser or agency has accepted the final version before putting it on the air. Wrong airtimes or dates are another common reason for nonpayment. It is the responsibility of the Traffic Department to ensure that schedules run as requested unless proper authorizations for change are received. And finally, advertisers and agencies may refuse to pay if invoices and required supporting documents are incorrect or are not received on a timely basis.

Lost billing that results from broadcast or cable company personnel’s errors or omissions should be charged to a sales allowances and billing adjustments account instead of to bad debt expense or the revenue account. Although it is lost revenue nonetheless, billing adjustments and allowances segregated in this manner will be more likely to come to the attention of the general manager.

More common than errors by personnel are nonpayment situations in which the broadcast or cable company has acted correctly in all aspects of filling the order and invoicing the advertiser or agency. Success in recovering these slowly paying accounts receivable depends on consistently following structured policy guidelines. These guidelines should clearly indicate to the collection manager what steps should be taken and when, including the criteria to consider turning the account over to a third-party collector.

Collection Etiquette

All stages of the collection process should be conducted in a professional, courteous, and tactful manner. To do otherwise is simply not good business sense, and may expose a broadcast or cable company to legal consequences. Certain types of collection activity are prohibited by law, such as threats of violence or physical harm to a person or property, obscene or profane language, negative statements about a person’s character, false or misleading representations of identity or of the debt, and relating false credit information about one person to another. Although it is permissible to give requested credit information to legitimate reporting agencies and parties, the information must be limited to the facts of the experience. Defamation of character, libel, and slander are serious offenses punishable by law.

Legal ramifications of particular collection tactics aside, abusive behavior accomplishes little, and can irreparably damage relations with the advertisers and agencies who intend to pay and to continue to advertise with the broadcast or cable company. In the beginning stage of the collection effort (from 30 to 60 days after the invoice date), the advertiser or agency should be given the benefit of the doubt that the invoice was not received, was misplaced, or that nonpayment was due to a simple oversight. The intention at this point should be twofold. First, motivating the advertiser or agency to pay on prior invoices, and second, maintaining a cordial relationship that encourages the client to continue advertising on the station or cable system. And although the primary purpose of the contact is to collect the overdue amount, an important secondary purpose is to “train” the client to adhere to the agreed-upon payment schedule.

Many advertisers and agencies require only a simple one-time reminder to send payment. Others need to receive several more letters or calls. Each successive letter or phone call should become firmer and create more pressure to pay. For a few clients, the threat of legal action or turning the account over to a third-party collector is necessary in order to obtain payment. One of the most effective approaches to the collection call or letter is to appeal to the client’s sense of fairness and pride. If this approach fails to result in payment, an appeal to self-interest—that it would be to their own benefit to pay in order to avoid legal action or third-party collection—is often successful. In any case, persistent and consistent requests for payment will achieve faster results than will casual, erratic efforts.

It is the choice of each broadcast or cable company to determine whether communication by letter, telephone, or a combination of both will best suit its needs. Either can be an effective means of collecting overdue accounts. What matters most is that collection efforts are carried through on a timely basis.

One recommended schedule is as follows:

Collection Letters

The collection letter can be an effective tool in the majority of cases, and particularly with smaller accounts, because a letter takes less time, effort, and money than any other means of collection. Also, a carefully worded letter can be the least offensive collection communication, serving as a “gentle reminder” that will often produce the payment.

A broadcast or cable company should develop its own series of collection letters, taking into consideration the special conditions that exist in the industry and its own credit policies. Two or three variations of the same message can disguise the letter’s appearance as a standard form and add flexibility. Guidelines can be drawn up to help credit staff personalize the letters without altering the message.

Collection letters that work best follow several principles for writing effective business letters:

All correspondence should advise the advertiser or agency to ignore the letter if indeed payment has already been sent. Collection letters are an annoyance to clients and can foster bad feelings, particularly if the client has already mailed payment. It is also wise to have an attorney review collection letters before use, in order to ensure compliance with federal and state legislation.

Telephone Collections

Although the approach to telephone collecting is basically the same as with collection letters, there are some significant differences. Collecting by telephone can be effective if it is possible to talk to the person who will authorize payment of the invoice. If that person is never available, credit personnel can make countless phone calls to no avail. The advantage of telephone collecting, however, is that the caller receives immediate feedback on the reasons that the bill has not been paid. Problems can often be resolved in the course of one telephone call.

Telephone collection calls require precall planning to be most effective. The account should be researched thoroughly to make sure that the money has not, in fact, been received, and that the account was billed correctly for the service actually rendered. It is also important to be aware of any previous collection activities—calls, letters, or personal visits—and their results. Finally, the advertiser’s or agency’s past record of payment should be checked to determine whether a pattern of delinquency exists.

This extra effort in advance should prevent the necessity of having to make repeated calls to the client and gather additional information. Avoiding the embarrassment of being told that payment has already been received, or that the client should not have been billed in the first place, is strong motivation to perform the advance research.

The caller should begin the conversation by first making sure he or she is speaking with the right person. The caller should then identify himself or herself, identify the name of the broadcast or cable company, and state the reason for the call (to determine when payment will be made). An example of an effective, simple, and clear statement is: “Mr. Smith, the amount of $3,000 is outstanding on your account and is 15 days past due. Will you mail a check for $3,000 today?”

After completing this statement, the caller should stop talking and wait for a response. This is the time to listen carefully, to make notes, then to follow with questions that will circumvent excuses (if necessary) and uncover the real reason for nonpayment.

The caller should then state that a commitment is needed now as to when full payment will be made (partial payments might be agreed to eventually, but only if they seem to be the only option). Upon completing the phone call, the caller should send, on the same day, a brief letter confirming the agreement reached on the phone.

Unfortunately, for all its advantages, telephone collecting has one serious shortcoming. It is impossible to physically collect money over the phone. The only way to make sure a telephone collection effort is complete and effective is with prompt and determined follow-up. The follow-up date should allow sufficient time for the check to get through the mail and for transmittal to take place. It should not be so far in the future that the customer senses that collection of the invoice is not a priority.

Final Options

The chances of collecting deteriorate rapidly after 90 days. If, after 120 days and a series of phone calls and letters, the bill is still unpaid, it then becomes necessary to follow through on threats of legal action or third-party collection. It is far better to recover some of the account due than none at all. For that reason, the cost of an attorney or third-party collector should be considered a cost of doing business. Action should be taken quickly, or the risk of losing the entire amount increases.

In Conclusion, Have a Current Credit and Collection Policy, and Keep It Current

A written, formalized, well-thought-out credit and collection policy that includes specific terms of payment and procedures for collecting delinquent accounts is the cornerstone of successful credit and collection administration. Once the policy is in place, communication and cooperation between the Accounts Receivable and the Advertising Sales Departments, as well as timely enforcement of policy procedures, are critical if broadcast and cable companies are to minimize costly payment delays and losses.