Credit Department Strategies for Record High Petroleum Pricing
Looking back on articles I’ve written for the Below the Line Club, I noticed an article I wrote in April 2020, “COVID19: Proactive Credit Management in Times of Economic Disruption.” Today, April 2022, I’m going to change the headline just a bit to read “Record High Petroleum Prices: Proactive Credit Management in Times of Economic Disruption.”
The beginning of the pandemic in 2020 and how it was going to affect petroleum distributors was jaw clenching, to say the least. However, for many distributors 2020 turned out to be a record- breaking year for profitability. Fast forward to 2022, and today’s record high prices of oil and refined products are also causing heartburn as jobbers are shouldering record high receivables associated with the spiking prices.
Credit departments are currently managing a book of customers who are potentially buying the same amount of product at 50% (or more) higher prices. Credit limits are being stretched, and the accounts receivable aging is growing in both dollars and past due numbers. Managing and mitigating risk takes more staff time and effort at this point, so let’s take a look at some A-team strategies to manage current conditions.
#1. Develop a “Top 10 Watch List.” Management can avoid surprises by being in the know on what customers are causing concern with credit or collection staff. Who is asking to delay drafts? Who are the big dollar customers showing slower payment habits? Who is no longer available to take collection calls? !is watch list is not necessarily customers in the >90 day category, but those showing early signs of distress.
#2. Re-check customer credit limits. Do existing credit limits still make sense in today’s unique environment? Do not take on the laborious task of reviewing and adjusting every credit limit in the whole book of business, or increasing everyone by a certain %, but take a look at those higher risk guys already under the microscope and ask, “do we need to adjust these credit limits?” Who are the top 20% of high volume, perhaps high risk, customers? Credit limit adjustments can be made for a period of time and reviewed again as prices level out.
#3. Perform credit reviews on customers of concern. Run a new credit report, review your own historic payment history, review financial statements, benchmark against the initial credit analysis. Setting a goal of scheduling five of these credit reviews a week is a good way to get this project moving forward with an already busy credit staff.
#4. Educate sta!. Inform and train them that this is a changing landscape. At the moment, it is not business as usual. Credit personnel, customer service, dispatchers, sales, your other warehouse or bulk plant locations that are, rightfully so, very big on customer service need to be clear that product release is not going to be as free flowing as they are used to. !ere could be additional levels of approval needed. Customer credit limits might have been impacted.
What about a customer who suddenly swoops back in after 3 years of no orders and needs product? Is it because they stopped paying their other fuel supplier? Are they just trying to leverage supply? !e current environment calls for a higher level of risk management, accountability and trained employees.
#5. What are you going to be willing to do to keep customers rolling through this time of stress? Be prepared to negotiate work- out situations, credit card payments, accepting a note receivable.
Don’t shy away from asking for financial statements or personal guarantees where you’ve not done so before. !is sort of risk management needs to be discussed ahead of time, before collections staff are on the phone with a customer in stress. Work with your collections staff on what they have the authority to negotiate, and what needs to be referred up the chain of command.
Increasing credit department efficiencies and retooling internal processes is always a good exercise, no matter the outside pressures. Get with your A-team today to review suggestions above and develop a game plan to manage the changing landscape of the 2022 pricing spikes.