Marketing doesn't make credit decisions

Marketing Doesn’t Make Credit Decisions Norton E. Marks Kamal Abouzeid Bill Long Most mdustrud executives cite mcreused sales as a reason for offermg trade credit And yet, lt appears that few sales andlor marketmg executives have any mput mto credit declslons Samples from lurge and smalljrms indicate that credit management 1s achlevmg more autonomy and moving up m the corporate hlerarchq However, marketing 1s not mvolved m the vast majority of credit declslons

INTRODUCTION When asked why their firms offer trade or wholesale credit to their customers, the malorrty of executives retort, “To increase sales’” Can we then assume that credit is a sales or promotional function? Not so, according to the research presented m this article All busmess enterprises sell goods or services and a large portion of these sales are made on credit [l] Commercial credit-the credit extended by suppliers-is necessary to support approxtmately 99% of these sales [24] When a sale IS made on credit, time IS expanded, goods are shipped, mventories are reduced, and accounts

Address correspondence to Norton E Marks, Dept of Marketmg, 5500 Umverslty Parkway, Cahfomla State Unlverslty, San Bemardmo. CA 92407

Industrtal

0

Marketrng

Management

21, 323-330

receivable are created, all m return for a promise to pay m the future [ 1, 51 In addition, credit is vital to American busmess for other reasons Without credit, serious gaps would exist between production and consumption [6]

Where Does the Credit Function Belong? When a commerctal credit department is organized or reorganized, the question of its place m the corporate hierarchy arises. should credit be a function of finance, marketing, accountmg, or perhaps some other department? Historically, the credit function has been placed under the supervision of corporate finance (the treasurer or controller), corporate sales (the sales manager or other marketing officer), or given separate, independent status 12, 6-81 Much of the research concerning credit and credit management was done before 1980 A preponderance of research during the 1960s and 1970s revealed that credit management in most companies was an integral part of the finance function, and that credit managers were most often responsible to corporate treasurers [2, 6-81 In the 1980s there was a slight movement away from this relationship as more compames realigned their credit departments, making them responsible to various sales executives (sales managers, vice presidents of sales, and

323

( 1992)

Elsevler Science Pubhshmg Co , Inc , 1992 655 Avenue of the Amencds, New York. NY 10010

0019-8501/92/$5

00

There are arguments vice presidents of marketing) [8] A growing number of researchers now emphasize that because of stronger competitive pressures and changing economic condltlons, credit management pohcles of the 196Os, 197Os, and 1980s ~111 be obsolete m the 1990s This new envlronment will require closer correlation between the functions of credit and marketmg, and a fresh look at the marginal accounts, which are predlcted to be the best growth areas for American firms [3, 4, 9, lo] This mformatlon points to the need to place credit management m the most advantageous orgamzatlonal posltlon m the firm A review of the significant hterature and research on the subject reveals several basic arguments on both sides of the question The arguments m favor of credit as a marketmg function or as a finance function are summarized below Subordinating the Credit Function Finance Department

to the

While the decision to extend credit often results m greater sales, it also requires additional Investment m accounts receivable and general operating expenses Extended credit affects the corporate financial structure and 1s evidenced m the balance sheet and income statement For these reasons, It can be argued that the treasurer or other financial officer IS m the best position to deal with the Investment and financmg declslons resultmg from the credit department’s activities [ 1, 3, 1 l- 131 The extension of credit also creates risks for the firm An increasing volume of credit sales could expose the corporation to risks attendant to reduced cash flow, as well as to losses resulting from uncollectible accounts Obviously, revenues from sales cannot be Invested until the accounts are collected Thus, receivables, until they

NORTON E MARKS IS Professor of Marketing, State Umverslty, San Bernadmo, California KAMAL ABOUZEID College, Lynchburg, BILL LONG Louisiana

324

IS

Callfornta

Professor of Finance at Lynchburg Virginia

IS

President of Sunbelt Research

in Natchltoches,

are mg the the

for both sides. converted to cash, cause operatmg expenses, mcludbad debt, to Increase This argument states that both hquldlty and profitablhty of the firm are affected by extension of credit [ 1, 1 l-141

Subordinating the Credit Function Marketing Department

to the

Both the marketing and credit departments m a firm have (or should have) the same objective-maximization of profitable sales [8] From a purely marketing perspective, financial officers often represent an obstacle to overcome In this view, sales are all-important Overly conservative credit pohcles enforced by a financially dnven credit department may cause poor customer relations, thereby reducing actual and potential sales [8, 121 Placing the credit department under marketing emphasizes the use of credit as a promotional tool Use of credit as part of the promotional mix can be important to firms that operate m highly competltlve mdustrles or envlronments characterized by sales-oriented policies that emphasize credit service to customers [3, 6, 8, 121 From this perspective, it can be argued that m the I99Os, credit will become the hottest sales tool and that credit marketmg, as described by Mills [4], will be the approach used to take advantage of developmg sales growth opportunities [ lo]

THERESEARCH Objectives Armed with the preceding arguments, and predicting a strong controversy over which orgamzatlonal function should handle credit m the future, we estabhshed three obJectives for this research 1 Determine what orgamzatlonal responslblhtles exist for makmg final credit decisions m the 500 largest U S mdustrlal corporations 2 Determine If there are differences between credit management pohcles and practices m large versus small firms

3

Identify specttves

alternative

credit

management

per-

Although credit management functions within the corporate environment are widely discussed m the literature, there has been httle research on credit management responsibilmes m U S corporations The research reported here IS an attempt to meet this need and fill an apparent void m the busmess literature This article reports an empirical mvestigation of the credit management structure and function m the corporate framework of a representative sample of the largest 500 industrial corporations m the United States. It also compares these findings with research conducted among a random sample of small companies m the United States

Methods Data for the large firms were gathered through a telephone survey m 1990 The research umverse consists of firms listed in the 1988 Fortune 500 Dwectory [ 151 Small firms were selected from the 1989 Mdllon Dollar Dwecrot-y [ 161 and were mailed a questionnaire that approximated the large-firm phone survey These data were also gathered 1990 The mstruments were pretested, modified, and validated Of the 500 firms m the large firm universe, credit managers or other credit department personnel representing 305 firms (61%) completed the survey questionnaires The positions held by the respondents are shown in Table I Nearly 90% (89 8%) of the large-firm respondents and over 7 1% of the small-firm respondents were credit managers, corporate credit managers, or regional credit managers Analyszs To determme sample accuracy among the large firms, the xZ one-sample test was used For the analysis, actual data reflectmg three test variables were chosen-geographical location, size of company measured by annual sales, and size of company measured by number of employees The xZ test is particularly appropriate because the entire universe was sampled, and because an overall response rate (probability) of 6 1% was established to determme the expected number of cases m

TABLE 1 Respondents’

Title Large

Small

Ftrms

Firms

Respondent’s Frequency

tttle or posltlon Credit mandgeridlrector

231

% 81 0

Frequency 142

% 69 6

19

61

3

I8

63

I2

59

PrealdentiownerlCEO

31

I8 I

Vice president

IO

49

Corporate

credit manager

Controller Credit rep/account Regtonal

rep

II

credit manager

Total Did not respond

6

I 5

39 2 I

285

204

20

6

each of the three test categories Since the computed x2 value of 5 60 with 9 degrees of freedom was obtained (cx = 0 OS), the null hyponthesis of no difference among variables cannot be rejected The same methodology was applied for determining representativeness of data for the variables. number of employees and size of company measured m billions of dollars In neither case was the hypothesis of representattveness reJected Results of the xZ analysis clearly mdicate that there was no significant systematic variation between the universe of the 500 largest U S mdustrial corporations and 305 respondents m either geographical location or size, as measured by sales volume and number of employees See Tables 2-4 for detailed statistical X’ analyses A total of 210 small-firm surveys were completed At the 90% confidence level (SE = 0 lo), the coefficient of variation is approximately 0 80 When the x’ method was used to test a hypothesis of representattveness, respective x2 values were insufficient to reject the hypothesis Based on these calculations, the two samples are reliable, given the stated dehmitations The study sought mformation regarding other aspects of credit management and reports responses to the following questions

How is the final credit decision

made? 325

Exclude marketing from credit decisions. Who makes the final credit decl\lon’) In your opmlon, should marketing make the final decalon’? Why“ Why not” To what corporate officer does your department report‘) Are there any departments, other than the credit department, involved m credit declslons3 If yes, what department(s) 1s mvolved’p How IS that department(s) involved m credit decislons? SURVEY

RESULTS

AND ANALYSES

Who makes the jnal credit dec lswn 7 When asked to identify managerial-level responslblhtles for makmg final credit declylons, 279 of the 305 large corporation respondents provided specific answers About 78% mdl-

TABLE 2 x2 One-Sample

Tests for Reglonal Dlstrlbution

Ldrge C0~0rdtl0n\*

Frequency

Region

Sample

PdLlhL Ed\t

South

Central

South

Devlatlon

Dewatlon’

Expected

Devlatlon’ Frequency

20

2Y

6

36

I 24

7

36

3

Y

7

41

2

4

1 29 0 57

fitldntlc

10

30

71

0

0

0 00

South Centrdl Mid-Atldnttc New Engldnd ,Zd\t North Centrdl We\t North Centrdl No Answer

2x x2 2x

2x 72 2x 76

22

23

0 IO 0 Y I

0

57

101 I73 20 I 277 300

0 I 0 I 0

6

6

1 otdl

6

0

0 XI I 0

27

IO I7

21 Y 22

21 30 52

6

Fd\t South Centrdl Mountdln South Atldntlc

10

26

7x

We\t

2.5

19

Y7

Ml&Atlantlc

32

34

New

Engldnd

I2

IS

Edat

North

4x

Y 2 IO

South

Centrdl

Centrdl

North Centrdl

Total\ 5 60

<

I6

92

thw

null

00 39 00 07 04

0 00 5 60

PdLlhC

*DF = 9, a = 0 OS, xL = tcu = 0 05. x- = 7 26

I00

10s

We\t

326

Expenenced Frequency

10

Y

We\t

Corpordtmn~t

Expected Frequency

21

Mountdm

Smdll

cated that final credit management decisions are made by credit management executives Only seven respondents (2 5%) said the final credit management decisions m their firm\ are made by the corporate treasurer or controller Comparing these results with those from small-firm respondents reveals significant differences For example, 35 8% of the 207 small business respondents mdlcated that final credit declslons are made by credit executives, compared with 77 8% m large corporations Treasurers and/or controllers of the small firms were the final credit decision makers m 17 9% of the responses, ac opposed to 2 5% for large companies Addltlonally, 35 3% of the small busmess respondents stated that final credit declslons m their firms are made by owners These responses are shown m Table 5 Should marketq make the jnal tredlt drc ISlOFl3 Usmg an unaided-response format, no respondents from the large firms felt that marketing officials

hypothew

3h I 2s

I 71 0 1I I I4

4

I6

0 62

6

36

131

2

4

0

I46

3

Y

0 60

52

I98

4

12 210

210

3

cdnnot

be rejected

I 5

I6

Y

I 90 I2

0 31

0 7s 7 26

Rate

TABLE 3 x2 One-Sample

$ BIllIons < $1 bllhon $1-5 bllhon > $5 bllhon Total

Test for Size of Company

Frequency

Expected

17 105 86 268

Frequency 89 89 89

Experienced

Frequency

89 I78 261

DF = 2, 01 = 0 05, x2 = 4 60 < 5 99, thus null hypothew

12 16 3

Employees i

5,000 5.OOC10,000 10,00@30,000 > 30,000 Total

DevlatiorY

Dewatlon’/ Expected Frequency

Ratio

I 62 2 88 0 IO 4 60

144 256 9

cannot be rejected

financial aspects of credit management Second, the most important reason for not allowing marketing executives to make final credit decisions, 1 e , that they have “too much interest m making sales,” was specified by a large majority of the small business respondents (75 5%), compared with 21 1% of the large corporatton respondents These results are summanzed m Table 7 To what corporate oficer does the credit department report? In the large-firm survey, 277 executives answered this question Confirmmg research by Benz m the 1970s and the National Assoctatron of Credit Managers m the 1980s [6], 73 3% indicated then department reported to financial officers holding the followmg postttons. treasurer, 27 8%, vice president-finance, 24 9%, and controller, 20 6% The data indicate that m terms of reportmg responsrbthty affecting credit, America’s large firms operate today much the same as m prevtous decades Another salient findmg 1s that 15 8% of credit managers m the nation’s largest mdustrtal firms report directly to the corporate president, chief executive officer, or corporate vice president That this amount of credit managers have reporting relattonshtps to top management mdependent of the finance or marketmg functions 1s indeed stgmficant Thirty (10 8%) of the large firms’ credit managers stated that they report directly to other corporate officers, mcludmg marketmg (Table 8) Compared with large firms, 54 9% of small busmess

should make final credtt dectstons Among small firms, 5 5% stated that final credit decrstons should be made by marketing people The data clearly indicate that among large American mdustrtal corporatrons, the marketing function does not have the final votce m credit decision making Over 98% of these large firms said their marketing executives are not mvolved directly m the final credit determmatton process Analysts of responses in Table 6 shows that 90 of the 305 respondents (29 5%) chose not to answer this questton, while 1 9% responded “do not know” or “no opmton ” Why should marketrng be excludedfrom thejinal credit dec lslon 7 One-hundred fourteen (37 4%) of large company respondents and 155 (73 8%) of the small firms responded to this questron This portion of the research produced two notable results First, both large and small firms stated that marketmg had “too much interest m making sales” to be given final credit authority This can be interpreted to mean that because sales, per se, are so vital to marketing people, then Judgment would be clouded m making credit dectstons The answer that ranked second m number of responses was, “the credit decision should be a Jomt decision including other departments as well as marketmg ” The thud htghestranking response descrtbed the marketing department as “not knowledgable ” This response implies that marketing people are not aware of (or knowledgable about)

TABLE 4 x2 One-Sample

Deviation

Test for Size of Company

Frequency 84 75 53 60 272

DF = 3, a = 0 01, X’ = 8 74 <

Expected

Frequency 68 68 68 68

Experienced

Frequency

68 I36 204 272

Deviation I6 7 I5 8

Devlatlon’ 256 49 225 64

Expected

Devtatlon’l Frequency 3 0 3 0 8

Ratlo

7-I 12 31 94 14

I I 35, thw null hypothew cannot be rejected

327

TABLE 5 Fmal Credit Decwon

TABLE 7 Why Marketing

Maker Large Firms*

Tltle/Posltlon

Frequency

Credit mandger Corpordte credit mdndger Vice prwdent

93 12

Tred~urer/controller

7

Credit account mdndger Credit andly\t

6 -i 0

Owner Depend\ on dccount \,ae

20

Other

23

Totals

279

Detaded \t&cttcal = 464 I

I

Frequency

Large Firms* %

44 30 IX 37 0

21 3 14 s x7 17 9 00

I I

0

00

dvdlldble to mdrketmg

0 0

73

75 3

72

0

0 0

x2

5

100 0

24

207

100 I

3

analyala I\ avaIlable from the author\

DF = 8 (Y = 0 01 The null hypothesis of equal trequencle\

wds rejected tx’

Reason

41 2 33 3 43 25 22

26

Did not respond

*x’

Small Flrmst %

I IS

Should Not be Involved In Final Credit Decwons

wd\ rejected

%

Frequency

%

II7

7.5 5

24

21 I

Credit department.5 Job

I7

I4 9

3

I9

Marketmg

I9

I6 7

7

4.5

I9

I6 7

5

32

Jomt declvon of \everdl

21

IX 4

I4

90

department\ Fmancldl risk, other reason\

I4

I2 3

9

58

Total\

I I4

loo I

I55

Did not respond

I91

Too mtere\ted m mdkmg \dle\ not knowledgeable

Credit mlormdtmn not

don’t know 99 9

55

Detaded btdtlstlcal dndlycls I\ dvdlidble from the authors *x’

= 222 70 DF = 8. OL= 0 01 The null hypothe\l\ of equal frequencle\

Frequency

Small Flrmst

= 3 06, DF = 5, a = 0 01 The null hypothe\ls ot equal frequencies

wd\ rejected txL = 386 36. DF = 5. cy = 0 01 The null hypothe\l\ of equal trequencles wd\ rejected

credit managers report directly to the corporate president, chief executive officer, or corporate vice president, while 38 2% report to either the treasurer/controller (25%) or the vice president of finance (13 2%) Are other departments Involved m the credit dec lslon 7 If yes, which departments are rnvolved? The study’s final questions sought mformatlon regarding which departments, other than credit, are involved m credit declsIons, and what level and type of mvolvement occurs One important result of analysis of responses to these questions IS the demonstration that large and small firms differ significantly m their credit-making processes wrth respect to the mvolvement of marketing and other departments Among large corporations, marketing 1s placed at the top of the ranking, while accounting de-

partments are the most important sources of credit mformation and mput among small companies (Table 9) How are other departments mvolved m the tredlt deusion 3 When executives responded to the previous questlon concerning the type of mvolvement In credit decision making by other departments, they provided the following responses “Recommendations” was specified by 29 8% of the large firms, compared with 21 7% of small firms “Analyze data” was specified by 20 2% and 21 7% of large and small firms, respectively “Gather mformatlon” and “input” were specified by 25 5% of TABLE 6 The Corporate

Officer to Whom Credit Reports Large Firms*

TABLE 6 Should Marketing

Corporate

Make the Final Credit Decision Large Firms’

Response

Frequency

Small Flrmst %

Frequency

%

Officer

Frequency

Tredwrer Controller

77 57

Small Flrmst

%

Frequency

21 x 20 6

51 I

Vice president-hndnce

69

24 9

27

I3 2

27

97

I 02

50 0

Vice pre\ldent-ddmml\trdtlon

I7

61

IO

4Y

0

0 0

Y

44

0

00

II

55

21 I

98 I

I63

x1 I

No depdrtment

4

I 9

27

I3 5

Other

30

IO x

s

Total\

215

100 0

201

100 I

Totdl\

277

YY 9

204

Did not respond

YO

9

Detdded \tdtl\tlCdl dndly% I\ dvdllable h’om the duthor\ *x’

= 404 57. DF = 2, CI = 0 01 The null hypothev\ of equal trequencle\

Did not respond

2x

25 IOU 0

6

Detdded \tdtlWcdl dndlyw

I\ dvdlldbk from the duthor\ *,$ = 122 45 DF = 6 OL= 0 01 The null hypothev\ of equdl trequencle\

wd\ rejected t,$ = 208 24. DF = 2, (Y = 0 01 The null hypothe\l\ of equal Irequencle\

wa\ rejected tx’ = 206. DF = 5 cy = 0 01

wa\ rejected

wa\ rejected

328

25 0

CEOipre\ldcnt

No Don’t know/no opm,on

Ye\

%

The null hypothe\l\

of equdl frequencies

TABLE 9 Other Departments

Involved m Credit Decwons

Department

Frequency

%

Large Fxm\* Marketmg

50

51 5

Accountmg

I8

18 6

Fmance/Trea\

16

I6 5

I

Purchwng None

0

Total\

97

Did not respond

10 12 4

I2

Other

00 100 0

208

Small Flrmst Accountmg

22

23 7

FmdncelTred\

IS

16 I

Mdrketmg

14

15 I

Purchasmg

I

I I

Other

6

65

None

35

37 6

Totdls

93

loo I

I17

Did not respond

Detaded statlsttcal andlysls 1s avadable from the author\ *x’

= 103 56, DF = 5. a = 0 01 The null hypothesis of equal frequenctes

was rgected tx’

=

46 82, DF

=

46 82, cx =

0 01

The null hypothesis of equal

frequencies was rejected

large firms and 36.7% of small firms “Consultation” was specified by 13 8% of large companies, and 15% of small companies

DISCUSSION The primary objectrve of this research was to mvestlgate the credit management department’s function and structure m the orgamzatlonal framework of large and small companies m the United States, and to determine whether the finance function, the marketing function, or other busmess function(s) are responsible for credit management declslons In presenting results of a survey of credit executives m 305 large and 210 small U S companies, we seek to shed light on the confusion which abounds m this area, as well as to provide a better understanding of the corporate credit management function We present data and analyses m three major areas 1 Final decision-making responslblhtles 2 Reporting responslblhtles 3 Involvement responslblhtles

Final Decision-Making Responsibilities The results of this study cannot confirm current hterature and research, which emphasize that credit manage-

ment responslblhtles are made by corporate treasurers and other financial officers Conversely, final credit declslons are most often made by credit executives alone m the maJonty of companies surveyed Financial officers are responsible for making final credit decisions m only 2 5% of large corporations, and m 17 9% of small firms Another finding that does not support existing research and literature 1s that none of the large company credit executives and only 5 5% of small-firm respondents believe that marketing executives should be responsible for final credit decision making, they are “too interested m making sales” was the leading reason listed by most respondents of large and small firms

Reporting Responsibilities Although the majority of credit executives m large firms have autonomy for making final credit decisions, they must report to the treasurer and other financial officers This finding supports previous research [2, 6, 81 It might also explain the controversy concerning the place of the credit management function m the corporate hierarchy Most reported research does not differentiate between decision-making and reporting responslblhtles Results of the small business survey, however, do not support existing literature Only 38 2% have reportmg responslblhtles to the treasurer and/or financial officers This significant variation between the credit management practices of large and small firms appears to have two explanations First, most exlstmg research deals with credit management m large firms, while this study addresses the subject m both large and small firms Second, credit executives of small firms most often report to toplevel corporate executives. 50% indicated that they report to the president/owner

Involvement Responsibilities Credit management executives have a third type of responslblhty mvolvmg other departments concerned m credit decisions It was surpnsmg to find that the majority of credit executives m small and large partlclpatmg companies involve no other departments m making credit decisions Of those reporting other department mvolvement, however, marketmg, finance, and/or accountmg were often mentioned Gathering mformatlon, analyzing data, consultmg, and glvmg recommendations comprlze the areas of mvolvement Finally, the results of this study refute recent research emphaslzmg subordmatlon of the credit function to the

329

finance department In addltlon, they do not valldate recent research which holds that the credit declslon-makmg function IS mcreasmgly bemg assumed by the marketmg department There IS evidence of slow movement away from subordmatlon to finance, but not toward marketmg Instead, the data suggest that the credit function IS movmg toward more Independent status, and that It more often reports directly to top management such as the president, CEO, or vice president of admmlstratlon m large companies, and the owner/manager m small firm\

CONCLUSIONS

AND IMPLICATIONS

Based on this research, we conclude that the credit management department m most U S corporation\ IS not an Integral part of either the finance or the marketmg departments The typical credit department makes Its own credit decisions and, although many credit managers report to the treasurer or other financial officers, a slzeable number are achlevmg mdependent status and report dlrectly to top management We also predict that more credit departments will gam independent status m the future Three developments will facilitate this movement Increasing global competmve pressures, especially from Japanese compames, which tend to emphasize market share as a long-term ObJective, 2 Increa\lngly sophlstlcated and readily avallable computerized credit mformatlon, 3 The use of credit a\ a marketmg/promottonal tool I

We proJect that credit executive\ will soon be on the same orgamzatlonal levels as treasurers and marketmg vice presidents More emphasis ~111be placed on the use of commercial credit as a promotIona tool, without \ubordmatlon of the credit function to the marketmg area New goals ~111 be establlshed for credit departments These goal\ will be consistent with those of the finance function (profit maxImlzatlon) and the marketmg function (sales maxlmlzatlon) as Integral portIon\ of overall corporate strategy

330

Fmally, since credit management departments ~111 lmk the finance and marketmg functions, and because credit declslons can make or break a sale, financial and marketmg officers ~111 provide mput m developing goals, ObJectIves, and processes for the credit department m harmony with corporate financial pohcles The credit management function will mcreasmgly seek to maxlmlze sales and profits, cooperate with Internal and external departments, and mmlmlze bad debt losses [3]

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Mills, Robert B I985

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Buklc\,

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Homewood.

Illmo~s

IYXY

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Mdrkctmg

1980) ServlLe