ram CREDITS AND COLLECTIONS THE FACTORS INVOLVED AND THE METHODS PURSUED IN CREDIT OPERATIONS. A PRACTICAL TREA- TISE BY EMINENT CREDIT MEN Collected and Edited by T. J. ZIMMERMAN SECOND EDITION THE SYSTEM COMPANY CHICAGO 1904 , lift, G>pyright. 1904, by The System Company PKEFACE American business men hold that the only way to learn to do things is to do them. This opinion has had much truth and fact to justify it, but it has been undergoing a marked transformation in the past de- cade. For men are coming to realize that, although no one can learn to do a thing by merely being told how it is done, such precious knowledge greatly facilitates his learning how to do it when once he gets into practical work. It affords him a strong foundation, barren and useless in itself, but a firm basis upon which to build the structure of busi- ness experience. Book learning, abstract knowledge, is like a fertilizer: it does not, of itself, produce any- thing, but it stimulates growth and advance when the live seed, practical experience, is instilled in the soil of work. There is another feature in modern commercial life which has stimulated the output of business literature. Association for the accomplishment of common purposes is having an always greater im- petus, and it has been accompanied by another kind of co-operation the give and take of business ideas and knowledge. In other words, business men are realizing that no one man can know all; that every man can make a profitable exchange by giving his knowledge and ex- perience for that of others. For while he gives the knowledge of one man, and that without taking any- thing away from himself, he receives in return the iii iv PREFACE ideas and information of many. The business prin- ciple, "that exchange is the best which gives both parties the largest possible profit," has been found as successful in the exchange of knowledge as of com- modities. These two tendencies in modern commercial life have led to the projection of the "Business Man's Library," of which this book is the first volume. The foregoing analysis of these tendencies also serves to point out the purpose of the whole series and of this first book. It is to tell the "how" of things: the tech- nique of commercial operations, the specific processes and actual methods necessary for the accomplishment of certain work. And this all is told, these processes are described and these methods discussed, by business men actually engaged in this line of work men who have performed these acts, who have originated and used these methods, who know because they do. This series of books is intended, therefore, to teach the beginner the fundamentals and detailed methods of practical business operations, and to give him who has been long in the harness new ideas for application in his own business. Literature on the subject of credits and collec- tions is very meager. This is due to the fact that only recently has this work been recognized as a distinct and worthy department of business. Mr. P. R Earl- ing, who contributes the able introductory chap- ter of this book, was the first man to call attention to the importance of this subject, in his work, "Whom To Trust," published in 1890. This book focused at- tention upon credits. The suggestions laid down in it were largely followed and business houses began o recognize the significance of credits and collections. PREFACE v Mr. Earling carried credits to a plane a step higher when in 1893 he organized, under the auspices of the World's Fair Auxiliary Congress, the congress on "Credits, Collections and Failures," of which he was chairman. This congress had representation from business houses not only of America, but also of for- eign countries. The most important work which it did was to stimulate the formation of credit men's associations in the principal cities of this country and to encourage through these associations the dissem- ination of knowledge upon credits and collections. "Credits and Collections" attempts to give a com- plete treatment of the subject of conducting credits and making collections, and to that end is divided into three parts. The v first part treats of the general function of a credit department, its place in business and its rela- tions to the other commercial operations; it discusses the general management of credits and collections and the organization of a credit department, analyzes the factors involved, and describes the tools at the disposal of the credit man in his work. In the second part, the subject is divided and considered as to the different lines of business in which credit operations play an important part. Here is described in detail the management and conduct of a credit department in various classes of business, and actual specific methods of carrying on credit and collection operations. In the third part are described in detail actual sys- tems now in use for conducting credit departments in all lines of business, fully illustrated with repro- ductions of such blanks and forms as may appear in keeping the accounts and records of the department. vi PREFACE The unfailing courtesy and willingness to give suggestions and help, which the editor met in the preparation of this work, make the usual conventional task of thanking those to whom he is indebted es- pecially pleasant. To the business men and credit managers who have contributed the chapters which make up -this book, thanks are due, not only for the time and careful thought which they put into the preparation of this work, but also for the encourage- ment and careful advice they gave the editor. More specifically, the editor wishes to thank Mr. P. R Earling, the Nestor of Chicago's credit men, Mr. Dor- chester Mapes and Mr. Berthold E. Borges, for their valuable advice and for their assistance in reading the proof sheets of the book, and Mr. John Griggs, secretary of the Chicago Credit Men's Association, for his many suggestions. THE EDITOR. Chicago, June 1, 1904. TABLE OF CONTENTS Part I THE COMPONENT PARTS AND FACTORS OF A CREDIT DEPARTMENT Pa*, Chapter I. The general function and work of a credit department I Peter R. Earling. Vice-President of L. Gould & Co. Chapter II. The organization and management of a credit department 19 Dorchestet Mapes, President of The Dorchester Mapes Co. Chapter HI. The characteristics of a good credit man 28 F. F. Peabody. Vice-President of Cluett. Peabody & Co. Chapter IV. The function and work of a commercial agency 38 T. J. Zimmerman Chapter V. The interchange of ledger experiences 49 H. A. Wheeler. Vice-President of The Credit Clearing House Chapter VI. Credit insurance its purpose and worth 65 T. J. Zimmerman Chapter VII. Correspondence in the credit department 77 N. M. Tribou of Longley, Low & Alexander Pan II THE MANAGEMENT OF CREDITS AND COLLECTIONS IN DIFFERENT CLASSES OF BUSINESS Chapter VIII. Credits and collections _ in a wholesale house 65 Edward M. Skinner of Wilson Bros. Chapter IX. Credits and collections in a manufacturing house 1 02 Berthold E. Borges of The Sherwin-Williams Co. Chapter X. Credits and collections in a retail house 1 24 J. A. McConnell of H. G. Selfridge & Co. Chapter XI. Credits and collections in an installment house 135 E. F. Kennedy, President of The Kennedy Furniture Co. Chapter XII. Credits and collections in foreign trade 142 John E. Gardin of The City National Bank, New York Part III COMPLETE SYSTEMS IN ACTUAL OPERATION FOR CONDUCTING CREDIT DEPARTMENTS Chapter XIII. A system for conducting the credits of a wholesale house 151 F. E. French of J. V. Farwell & Co. Chapter XIV. A credit and collection system for a manufacturing house 1 58 W. S. Terrell of The Simmons Manufacturing Co. Chapter XV. A system for the credit department of a retail house 173 As used in Chicago's Department Stores Chapter XVI. A credit and collection system for an installment house 183 Henry Marcus of Spiegel's House Furnishing Co. Chapter XVII. A credit and collection system for a retail house 101 C. C. Parsons of The Shaw-Walker Co, CHAPTER I THE GENERAL FUNCTION AND WORK OF A CREDIT DEPARTMENT BY PETER R. EARLING ^ice-President, L. Gould & Company The handling of credits has undergone a radical change in the last ten years. The work is now being done under modern methods, with greater intelligence and a better knowledge of the subject on the part of the credit man. In fact, the dispensing of credit has been reduced, if not to a science, at least to a study on scientific lines. A close scrutiny of the losses from bad debts reported by the agencies from one year to another leads me to estimate that the present im- proved methods of credit management are resulting in a saving of at least $25,000,000 annually to the creditors throughout the country. And this estimate applies to normal industrial conditions; the saving in time of depression and panic would show a much larger sum. At first glance this statement might seem to in- dicate that we had curtailed credits and become hard and distrustful, but that is not a true inference. Credit is dispensed to-day as liberally as ever, but it is a more intelligent dispensation. By cutting off the unworthy from credit, we are in position to extend it to the worthy more than we ever could before The curtailment applies to those who are not entitled to 1 2 CREDITS AND COLLECTIONS credit, and it is from this source that we estimate the decrease in losses Prior to ten years ago the credits and collections of the average concern were delegated to people who did the work incidentally and without giving it much attention and study, and the results were necessarily unsatisfactory. The collection end of the business was particularly remiss. If a customer made a small payment now and then on account, he continued in good standing. All this is changed now. We sell goods with a definite understanding as to terms, and we rather expect bills to be met according to these terms. As for carrying accounts indefinitely, that is done to a very limited extent now at any rate not with the creditor's approval. One reason for this change has been that the decreasing margin of profit in business does not permit long-time credits. The business man of to-day must turn his capital much oftener than did his father to make a profit, and prompt returns for goods have become a necessity. It was no doubt this necessity and these conditions that made business houses recognize the importance of better methods in the handling of credits and collections. In asserting that the present day credit man's work is done on a more scientific basis, I do not mean that the matter of extending credits in any individual case is being governed by infallible rules. That could not be done. But the credit man can and does keep the average of his losses within a certain percentage of the gross sales from year to year, and to the extent that he does that he is doing his work on scientific PETER R. EARLING 3 lines. A life insurance company does not know how long any one of its customers is going to live, but it does know, absolutely, the average length of human life, and that we call arriving at a scientific basis on which to do business. A large part in this improvement in credit and collection methods in the past few years has been played by the improved facilities for carrying on this work more efficiently. The mercantile, reporting and collection agencies have all bettered their service to meet the demands made by the credit departments, and it can safely be said that the more we demand and are willing to pay for the more we may expect. Even the smallest wholesale houses in these days have their credit men and their more or less well equipped credit departments. The larger houses have elaborate systems and equipments, affording the credit man every facility for getting quick and reliable information and action. What a ^ e P s iti n f credit man is one of Credit Man great responsibility and is invested with Should Be dignity and importance. While his de- partment is not everything, yet he is recognized as being a very vital factor in a business, on whom a considerable share of its success depends. The credit man's office is distinctive and affords him opportunity to distinguish himself. Who is the best credit man? We cannot consider the credit man per se at all. We must consider him as the head of one of many departments of a business, and his department must work out that policy which! is best adapted to the business as a whole and which will bring the best general results. An identical credit and collection policy for all lines of business and all houses would not do. The choice of the proper policy is really a matter requiring careful study, and depends on all the varied factors which go to make up a business and its environment. But whatever the nature of the business, that credit man is the best who will approve the largest percentage of orders and still keep his percentage of loss down to a fair average. One credit man might refuse half the orders which came to his house, while another would accept 90 per cent of them, and both show the same percentage of loss. The 90 per cent credit manager would certainly be the more valuable man of the two. The credit department should be strong and ef- ficient. It pays to be liberal in supplying it with every necessary facility for securing accurate information and quick action. But this department should not make itself obtrusive, least of all offensive and dicta- torial. It should rather keep a little in the background, and a friendly and confidential attitude on the part of the credit man is much better than a distant and imperious bearing. While in some cases the inquisi- torial method of investigation becomes imperative, when doubts upset our faith or past actions call for explanation, yet the ideal manner for the credit man to meet the new customer is in an informal way, and not in the capacity of an inquisitor. The attainments of a credit man should be many and varied, though not at all marvelous or super- natural. He must needs be a thorough scholar, an apt correspondent, a fair lawyer, a practiced accountant and a good collector, besides being a sound business man. He must possess good judgment, be quick to read human nature and judge character, and, more than all, he should possess strong intuitive faculties. PETEE E. EABLING 5 After all, our impressions of men and things seldom proceed from logical deductions. They are intuitional and an ounce of intuition is worth a pound of logic when we come to reckon with human nature and its manifold ramifications. For young men working into the credit depart- ment I would suggest that they make themselves thor- oughly familiar with bookkeeping, accounting and ac- counts. A good credit man needs to be a proficient accountant in order to be able to analyze business con- ditions and property statements and reports with dis- crimination. There is a wide difference between the bookkeeper and the accountant. Of the former there are plenty, good, bad and indifferent mostly indif- ferent but good accountants are scarce. As a preliminary training the credit man should also have had a turn as house collector. The proper handling of collections plays a most prominent part in the credit man's work and his efficiency. With the present facilities at the command of the credit man, it is hardly excusable in him to make a His Attitude ^ a ^ cre( ^ a * the start, and I venture to Toward say that very few losses are made on the Customers initial credit. In this respect credit mak- ing has greatly improved in late years. The extension of unwise credit to applicants with bad or unfavorable records can be avoided by using ordinary care and industry in getting information from one source or other, all well known and com- paratively easy of access, and this requires no par- ticular shrewdness. Credits made to such as these are past rectifying and are inexcusable. Sagacity and dis- crimination are not called for in passing on this class, nor on the million dollar rating. The office boy could G CREDITS AND COLLECTIONS dispose of these. But between these two extremes of good and bad are ninety-eight out of every hundred cases which come before the credit man, which have no special earmarks. They cannot be classed among the discreditable, nor yet among the unquestionably good. As a matter of fact, the great majority of the men to whom we sell have for their principal capital only experience and energy and more or less ability. Their success is contigent on times and circumstances which they cannot altogether control, and the creditor is, therefore, taking a joint risk with them, and it is well to bear this in mind. Underneath it all there lies a fundamental prin- ciple which must govern us in making credits and which adds value to our accounts. Excepting the few notoriously bad and dishonest dealers, we have reason to assume that men in business will pay if they can, even though, as an abstract proposition, they may have no definite notion of honesty or commercial honor. Every man, nominally, must make a living for himself and his family ; he selects this or that business as being best suited to his circumstances and experi- ence; he invests what little money he had earned and saved in it. Now the success of this business, to the extent at least of making a living for him, is every- thing to this man. He does nof want to lose it. He understands it better than he does anything else, and the work is easier for him than any other. He has learned and knows that he can continue this business on one condition only that he pay his creditors, and with reasonable promptness. Honesty and good com- mercial usages commend themselves to him as be- ing necessary, or, in other words, he realizes that hon- PETER R. EARLING 7 esty is for him the best policy. All men, with rare ex- ceptions, follow out this line of reasoning. We say honesty is the best policy; to be honest is really the most politic thing a man can do, for it reduces the struggle for support and success to the minimum. It is stated as a law that all human action fol- lows the line of least resistance. This same law cer- tainly applies to business and to business men. We start in business to remain in it until we can retire honorably and in comfort. Changes from one business to another are not contemplated. The business or pro- fession which we have learned and followed is the easiest for us to pursue; we follow the line of least resistance. A liberal policy in credit making is necessary for the healthy growth and popularity of a house. To be popular is next to being successful; in fact, the most successful houses are the most popular the world over, and vice versa. But a liberal policy in credits need not mean an easy-going policy. This might, and in all probability would, work harm and ruin to the house in the long run. I know of a very successful house whose policy in credit extensions is wide open, in ordi- nary times at least, and yet its losses are exceedingly small. The salvation clause, however, rests in the col- lection department. This end of the business is drawn very tight. Credit is readily given with due discrim- ination, of course but settlements are expected promptly at maturity of bills. This is, in fact, the ideal system to follow. The house gains popularity and a name for liberal treatment, which it deserves. But when the bills come due, then it is time for the other fellow to do the proper thing. 8 CREDITS AND COLLECTIONS Accounts and collections being the essence of the subject under review, a consideration of accounts and Analysis and itiir analysis and the art of collecting is Consideration of supreme importance, of Accounts Dealers in merchandise are likely to have remnants left over with the utmost care in selec- tion, and so, dealing in credits, remnants are likewise unavoidable. Past due collections are remnants which did not clean up as calculated by the credit man. These remnants may be worth nothing, or they may realize full value, depending on the kind of effort made to clean them up. In any event, they are not just what we bargained for. That the credit man should have remnants is no reflection on his ability. He determines to his satis- faction, from the array of facts and information before him, that the credit he passes on is collectable; but no amount of human sagacity can determine whether bills will be paid on the day they are due. Up to maturity we have accounts; after maturity we call them collections. Another department of work is then made necessary, and involves the matter of facilities and services at our command for doing this work. Every account may be said to have three distinct stages of existence: First, before maturity; second, at maturity, and third, past maturity. We might add a fourth, and call it past recovery. Accounts before maturity rarely give us any un- easiness, and even if they do, we are not In a position to enforce collection at that stage. As a matter of fact, the losses sustained by the mercantile world on ac- counts before maturity are very small. There is rea- son for this. It depends, of course, a great deal on the PETER R. EARLING 9 alertness of the house in making its credits It is safe to say, however, that we seldom lose on bills not yet due. Accounts at maturity also do not disturb us. We make demand for payment when due. In a large number of cases the money comes without demanding, the debtor keeping close watch on his accounts pay- able and remitting promptly on the day due. Others not so methodical pay on request or they honor draft. Up to this point the work is easy, involving neither worry nor loss of sleep. Accounts past maturity are the things which per- plex and worry us, for we know that of these our profit and loss account is made up. Yet as to any particular account we may not feel specially uneasy. There will always be a considerable percentage of past due ac- counts, and no business house conducted on the ordi- nary lines is without them. However, as long as they are simply past due, and only our first request has been ignored, there is still no ground for alarm, par- ticularly when dealing with the smaller merchants. A great many men have peculiar ideas about paying bills, and some have no ideas at all on this subject. Delinquent customers are divisible into several classes careless, chronically slow, temporarily hard up and insolvent. Now, which pertains to our case? To decide this and do it right there comes the rub. This is the most critical juncture in the life of an account, and the most difficult problem to solve. The strictly correct solution is to ignore possible condi- tions altogether and say: the account is due and we must have the money and take peremptory steps get it. But there are two protests against this pro- cedure. The man may be all right, and policy says 10 CREDITS AND COLLECTIONS that we cannot afford to drive this customer away; and, then the matter of expense comes in. Further- more, to send the collection to a lawyer at this uncer- tain stage might be an injustice to the debtor. So long, then, as we presume the customer to be good for eventual payment, we are inclined to use only the coax- ing process. Because an account is not paid promptly when due does not signify that the debtor is no longer to be . . trusted, or that our claim is doubtful. Become Very many people in business do not know the value of punctuality, and are careless in meeting any or all engagements to a most aggravating extent, and yet we judge them, from past experience at least, to be good. They are simply care- less and unmethodical. The chronically slow man is no doubt most ex- asperating. He moves just so fast and no faster, and whether trade or seasons are good or bad makes not a particle of difference in his movements. He is even too slow to take offense. Sometimes we can reach a debtor by arousing his anger, but this class is fire- proof against anything so mild as words. As condi- tions of trade change this species is going to be less numerous. Of course, by bringing suit, this kind of a man will pay on the last day, and then be ready to buy of us again. He is slow to wrath, and a little thing like a suit does not disturb the even tenor of his ways. The temporarily hard-up customer can generally give some reason for his condition, and very often there are very good reasons for his being unable to pay his bills with his wonted promptness. Generally, too, these people feel the gravity of the situation, and are eager to explain to us. In such cases it wou'r! be PETEK B. EARLING 11 harsh treatment, to say the least, to push a man to the wall, when perhaps, too, the circumstances are beyond the debtor's control. Where there are extenuating circumstances, and when we know what these circum- stances are, we are forced to the course of forbear- ance and leniency from any standpoint from which we may look at the case. Where do the insolvent debtors come in? That is an unknown quantity. Insolvency in the strict sense means such a condition of a man's business that his property will not pay his liabilities. In actual business this definition is modified to a state in which this con- dition becomes an admitted fact, for in times of de- pression and panic very few of our debtors would be found solvent if the test were put of compelling them to pay all their liabilities promptly at maturity. As- sets, though considerably in excess of liabilities, are often not convertible into debt-paying factors. In the readjustment of things during panics, of conditions and values, time is an essential factor. Until it becomes an acknowledged fact, therefore, and until all payments have really been suspended, we cannot call a concern insolvent. From the stand- point of the individual creditor, the insolvent condi- tion, until legally declared so, does not bar us from col- lecting our claims. In all failures, except fraudulent ones, it always happens that payments are made, long after insolvency in fact. In most cases this is done through ignorance on the part of the debtor of his real condition. He hopes to pull through, and satisfies claimants as long as he can. A good collector is an artist. But to be that com- prehends a great deal more than is generally supposed or even apprehended by collectors themselves. As 12 CREDITS AND COLLECTIONS a vocation it is capable of being made as important as any that I know of, and yet very few ever take it Q I'fi t'ons u P as a b us i ness to be followed or to be of a Good studied. But usually firms attach no special importance to collecting, and it is turned over to an employe who can best be spared from other work, or to make a temporary place for someone, with no idea of permanency in that position. The employe himself looks upon this employment sim- ply as a stepping-stone to something else in the house, and as a consequence never acquires sufficient knowl- edge of the vocation to be called a collector at all. Let us take up the qualifications that should make a good collector: First of all, there must be an adapta- tion for the business. Before all else, a man must be a good judge of human nature. As this happens to be an intuitive faculty which men possess in varied de- gree, and as it is not a thing of experience or of train- ing, we must look first to this natural qualification in the candidate for collector. This faculty of intuition, of intuitive knowledge, is a prime requisite, for only through its discernment are we enabled to form opin- ions, or, as we say, impressions. It would be absurd to believe everything that everybody will tell us, and how far we believe or disbelieve any statement depends on the impression made on us. and this impression is not a matter of willing or volition. On past due accounts the inventive genius for making ex- cuses and giving reasons is particularly active. Some- times reasons and promises given are pure fiction and sometimes they are honest enough, but based on too sanguine expectations. Sometimes promises are made with the intention of gaining time for the debtor's own purposes, and again promises are made to be kept. PETER R. EARLING 13 How are we to know? If the collector is not a judge of men he cannot know. No man in these things is in- fallible, of course, but there is a marked difference in this respect in men. Politeness is another quality which is necessary. To antagonize the man who owes us results in loss of his friendship; and it may do more we will probably get his ill-will besides. This does not help the collector and will not be a good thing for the house. Civility is always better than its antithesis; it will get more busi- ness and more money. Underneath it, however, the collector is supposed to keep in mind, first, last and all the time, what he is after, and bend every effort in that direction. Sympathy, too, for conditions must not be lacking, for there are circumstances many times where sympathy and leniency should not be withheld. The bonds of sympathy beget confidence, and confidence between men, whether in buying, selling or collecting, is an important factor. The collector should also be able to determine in his own mind the debtor's capacity and general ability as a business man and manager. He should have a quick eye for taking in the surroundings and general tone of the business. Over and above all, the collector should be a good judge of stocks of goods and of property generally as to value and convertibility. He must always bear in mind that at forced sale, or in the event of trouble, property will not bring cost, and that accounts are not worth their face value. The good collector also knows something about law. He knows what exemptions may be claimed by the debtor, knows the rights and privileges granted by 14 CREDITS AND COLLECTIONS the law to both plaintiff and defendant, and has a fair idea of legal procedure in general. If a collector be a good tactician, which he must be to be a success at his vocation, he will get the money or security or be thoroughly satisfied that further indulgence is safe, or, at any rate, the best policy under the circumstances and for the time being. The above outline for qualifications for a collector may seem somewhat ideal. Of course, everyone who does collecting would not pass examination if this were adhered to as a standard, but if it were we would have a corps of well-trained collectors, whose assist- ance to our credit and collection departments would be of immense value. Intelligent and unremitting persistence is the secret of success in collecting. The first thing to do when an account is past due and demand for payment has been refused is to have Successive ^ e collector get all the information he Steps in can concerning the debtor. Let him look Collections U p ^ e report on file, or have reports pro- cured if not on file. This gives the collector an idea of the debtor's resources, character and other details, and is a greal help to him in handling the case. Not that he will be governed by it. His next step will be to learn if the reports can be verified or not; for if they are wrong, the credit was based on wrong infor- mation to start with. It is important to know this. When an account becomes past due and remains unpaid, after proper efforts have been made to collect, the collector has then an entitled right to ask for and demand information concerning the debtor's business. Under these circumstances the debtor cannot refuse the demand with justice, and if he does so, the action PETER K. EARLLNG 15 is unwarranted and open to suspicion at once. The debtor asks a favor when he asks an extension of time, and in asking this, it bcomes a duty on his part to sat- isfy his creditor on the score of his responsibility and solvency. This right on the part of the collector is a very important one at this stage. The information gained up to date should be comprehensive and state what the assets are composed of, viz., real estate, per- sonal property, merchandise, accounts and bills receiv- able, and so on. A statement of the liabilities also is essential. A knowledge of these facts, corroborated, and of the general character of the debtor himself, places the collector in a position to determine intelli- gently whether it is safe to extend further time or not. There is always a time, and proper time, when we must know what to do and not guess at what should be done. The credit may have been ill-advised from the very start, or things may have intervened since making the credit that have affected the debtor ad- versely. In all these matters the collector is to find out these things in time, and without wasting time. Sometimes a debtor becomes pugnacious. The ordinary tactics being unavailable in such cases, there is then only one other step to be taken. The lawyer must come in and enforce collection by law, and that without any delay. The preliminary work has been done, and the lawyer is not asked to waste valuable time in running after the debtor. It is expected that the collector knows what he is about when the claim is turned over to the lawyer; he is supposed to know that at this particular stage the claim can be en- forced, although it may transpire that between the time of commencement of legal proceedings and execu- tion the debtor defeats our efforts in the end. 16 CREDITS AND COLLECTIONS At a certain stage in out-of-town collections the business man depends on the banks. Many houses, Banks and ^ aT S e an< ^ small, expect to pay demands Attorneys as through the banks by means of drafts drawn on them. The expense is nominal and the service is one of inestimable convenience to the creditor class, for without this accommodation on the part of the banks the creditor would be in a bad plight. In making our demands it must be done with- out antagonizing on the one hand, and on the other hand, there must be responsibility attaching to the people to whom we intrust the collection of our money. The bank supplies both of these requisites. The bank, in fact, is the recognized medium between creditor and debtor, and in making our demands through a bank we give no offense to our customers. So far as concerns those collections through banks which meet with prompt attention and payment on the part of the drawee, the business is conducted for all parties in the best possible manner. When we con- sider, however, collections which are not paid on pre- sentation or notification, on these the system and the service is weak, although not, let me add, from any fault of the banks. As a matter of fact, banks do not give themselves out as collection agencies. What they do for us must always be looked upon in the light of an accommodation, and so far as they can be of service to us without loss to themselves they are glad to do it. Nor have we any right to expect service of them which entails expense without adequate compensation. The truth is that few banks are making this department of business pay, and very few really solicit it; in fact, many decline it altogether. So far as collecting drafts goes, where only a simple notification or presentation PETER E. EAELING 17 is required, they can do this without addition to their staff, and up to this point the bank's service is all right. But when it comes to using their staff as col- lectors in the sense we use our house collectors, they cannot and do not give the needed service. A good many drafts are sent to banks, and after a shorter or longer interval of holding, the drafts are re- turned as unpaid collections. If the debtor states rea- sons for declining to pay, the bank usually makes the notation; but very often no reasons at all are given, simply "payment refused." The bank does not, in these cases, feel called upon to give its own opinion, and, on general principles, dislikes to be used as a mercantile reporting agency anyway. The bank is the natural and accepted medium be- tween creditor and debtor, without giving offense or in any way antagonizing our debtor. But this cannot be said of an attorney. We cannot make demand of our money through a lawyer without disrupting amicable relations. Worse than that, it at once antagonizes the debtor, and his attitude becomes one of resistance in- stead of compliance. That this is not a good mood to get our debtor into goes without saying. If we have concluded to drop him on the strength of positive knowledge that the claim cannot be made in any other way, of course there is no longer any room for hesi- tancy. But the trouble with out-of-town collections is that we do not act, and in this hesitancy is where the chief danger to our claims lies. Even after sending claim to the attorney, we fre- quently waste much valuable time, resulting in the loss of a great many accounts by a dilly-dallying process, partly our fault and partly the fault of the lawyer. When we have decided to send our claim to the at- 18 CREDITS AND COLLECTIONS torney, we have then practically broken off further re- lations with our debtor. We have set aside all policy in that case and have concluded to incur the expense of legal services, as nothing more is apt to be gained by waiting. We should instruct the attorney to enforce collection by law, without further delay, and not try to use the lawyer as a collector. We then place the attorney in a better attitude, too, toward the debtor. He has instructions and they must be obeyed, and neither personal friendship nor local interests can be allowed to Influence him. Attorneys are human, and generally prefer to col- lect by coaxing and waiting rather than precipitate a man's ruin, especially when attorney and debtor are good neighbors and personally acquainted, as is the case in small places. Now, the waiting and coaxing process would be all right but for one thing. The at- torney's education is not on commercial lines in so far as being a competent judge of values of merchandise or personal property. The lawyer must not be ex- pected to possess the keen insight into values of goods, business conditions and prospects of success in a busi- ness which requires mercantile training and experi- ence. His vocation is to practice law and to enforce the law. All other work should be done before the lawyer is called upon. CHAPTER II THE ORGANIZATION AND MANAGEMENT OF A CREDIT DEPARTMENT BY DORCHESTER MAPES President, The Dorchester Mapes Company The organization and management of a credit de- partment is not unlike the building and superintend- ing of a manufacturing plant; each requires architect, workmen, plans, material, tools, and all must be selected with an intelligent conception of the ulti- mate purpose. It is the little details that make or mar the ef- fectiveness of any structure or organization just as it is the little things of everyday life that make of life success or failure; nor does the likeness end there, for, as the life requires a sterling character, so the struc- ture must have a firm foundation, the organization a master mind. The demonstration of any proposition depends upon some accepted truth or fundamental principle, and so in dealing with this subject we must agree upon an axiom. Experience has convinced me that the prime essential to a successful credit department is that it shall have a head; a head who shall be man- ager in fact as well as in name, whose decision shall be final, and the results of whose judgment shall be accepted as predestined. Much might profitably be said on this point, but for the present let us accept it as our axiom, and for 19 20 CREDITS AND COLLECTIONS a corollary that the credit department and collection department must be so fused together and so con- ducted that each knows the other's movements and opinions that the two shall be as one. It is well-nigh impossible to treat the subject without going into the details of the methodizing of the department, but it is my intention to do so only in a very general way. The selection of the credit department manager is, of course, all-important, and, as I have elsewhere Position and sa ^> ^ e should be of unflinching deter- Duties of mination, yet open to conviction; quick Manager Q f d ec i s i on? ve t not hasty of judgment; he should have a faculty for discerning between truth and falsity, and still be neither credulous nor incred- ulous; he should be an accurate judge of human na- ture; he should be even-tempered, calculating and pa- tient, yet quick to act in an emergency; he must re- spect the position and the opinions of others, and must certainly command the respect and confidence of both superiors and subordinates, and especially of the sales department. The manager must recognize the importance of at least aiming to live up to the foregoing ideal, and in selecting his assistants he should look for those quali- ties which will tend to bring the entire department up to the same high plane. In treating with his assistants he should encour- age independence of thought and action and the form- ing of individual opinions, taking pains to explain his own course of reasoning, and differing arbitrarily only when reasoning fails. This habit will cultivate self-reliance all down the line and make the department strong to grapple with DORCHESTER MAPES 21 difficulties should they arise during the absence of the manager. Subordinates in the credit department, from the first assistant down, must have high respect for the manager and confidence in his opinions; otherwise there will be lacking that perfect harmony and one- ness of purpose which in this department of all others are absolutely essential to best results. "Eternal vigilance is the price of liberty," and it is also most certainly the price of success in the credit department, for, while the gathering of information and forming of credit opinions is, of course, its pri- mary function, its business is not finished until ac- counts are collected, hence there must be close and constant communion between the credit and collec- tion branches of the department. So necessary is this that, while the credit manager can seldom give per- sonal attention to the following up of collections, still if his opinions of each account could be constantly before the assistant to whom that duty falls, it would be a very great help. Having such information be- fore him, that assistant should immediately report any indications which, in the light of said opinions, appear significant. There are ways of accomplishing this close relationship, one of which I will presently outline. The manner in which an account of the average sort is subsequently handled by the collection depart- ment is quite as important as the original question of opening it, therefore I argue that (if we can sep- arate the two) the work of the collection department is as serious and demands as high a degree of clever- ness as does the work of the credit department. If I were asked to name the one qualification most 22 CREDITS AND COLLECTIONS needed in the collection department I should unhesi- tatingly say "decision;" indecision in the credit de- partment is often dangerous, while in the collection department it is frequently fatal. One may often, and all do sometimes, make wrong decisions, but indecision is wrong in any event. Delay in using vigorous methods to collect many times means a loss, while hesitation to grant an extension, if it is to be granted, or the granting of it with ap- parent unwillingness, annuls the good effect it might otherwise have. The credit department cannot have too much in- formation, but it nevertheless is frequently over- whelmed with a mass of voluminous reports contain- ing much that is of little importance or only what might be as well expressed in half the words. These reports, however, must be read carefully, lest some important fact be hidden away in a field of "words mere words." If our mercantile agencies would school their re- porters and compilers to give facts in the fewest words necessary to clearness, putting a premium on terse- ness, they might save themselves much expense and confer a boon upon credit men. To reduce the labor of reading through and through long reports from various sources, much of System for which repetition, to make sufficient Handling 1 the doing of it once in most cases, and to Credit Data bring about tnat c i ose co-operation with the collection branch of the department referred to, I have, in my own practice, worked out a plan which has proved so helpful that I venture to suggest it to others. Having in a given case arranged all your infor- mation in form convenient for consideration and sub- DORCHESTER MAPES 23 sequent filing, proceed to read, and let there be method in your reading; read on the lines and between the lines, making note of inconsistencies and exaggerations as well as prejudices for and against; endeavor always to discriminate between fact and fancy, and form in the meanwhile an opinion which, in the end, you are to formulate in the shape of a "brief," which shall in few words set forth the important or salient features of the case, preceded by a line of instructions to be followed in the subsequent handling of the account. With a little practice such briefs, even in com- plicated cases, can be made quite exhaustive and still expressed in surprisingly few words, and in very many cases stereotyped forms may be used. Transcribe this brief to a small blank, gummed on its upper edge, and paste the blank on the face of the latest or top report of the file, where it will remain as a marker between reports already examined and those which accumulate subsequently. Now, if this brief be also transcribed to the face of the ledger account, then every item that is posted and every move made by the collection department, and, in fact, every move made by anyone in connection with the ledger account, will be made with that full understanding necessary to intelligent action. Again, if the card-ledger system be used and it is being adopted by many progressive concerns mar- ginal space for the writing of the brief can be pro- vided, and this space will also be found very useful for other data necessary to an understanding of the account. By this plan of briefing information, coupled with the use of the card ledger, there can be evolved a system of credit department methods which will be 24 safeguarded at every turn and as nearly automatic and perfect in its workings as can be anything which depends upon human foresight and human watch- fulness. The treating of information in this manner is ben- eficial, even if for no other reason, just because it will cultivate a habit of watching more closely for the points, often seemingly trivial, which make the risk desirable or otherwise. If one reads with a view of writing an opinion, the reading will surely be done more understandingly. The first effort is perhaps a trifle greater, but the brief can be dictated and the transcribing done by a minor clerk, and, regardless of effort or expense, it pays, for it makes the subsequent handling of the account work like automatic ma- chinery; it strings live wires from every account so treated to the manager, and the least flaw or break is at once made known to him. In his work of passing upon orders the credit man can, if the above methods be adopted, lay to one side every order about which he has the slightest hesi- tation, whereupon an ever-ready clerk will presently return to him the orders, together with their respec- tive ledger cards, which will place before him at a glance the history and exact status of each case. This will enable him to act upon his own rather than upon the lesser intelligence of clerk or book- keeper conveyed through the usual reports of "Highest Credit," "Amount Owing," "Amount Past Due," which are often misleading, even if correct, and in themselves worth but little at best. A good memory is valuable, but it is often treach- erous, and may be a very dangerous thing if too much relied upon, especially in credit work. With training, DORCHESTER MAPES 25 perhaps without, the memory can be made to serve as a fairly safe guide to generalities, but a system must be provided which will look after details, and do it so easily as to make dependence upon memory quite un- necessary. Memory will often carry for years the general im- pression of "good" or "bad" in connection with a name, even though that name in the meantime has never been brought to mind. But it is unsafe to depend on memory beyond that point, for many of the "good" are good only under certain conditions, and very few are good regardless of conditions. Furthermore, the records and opinions of the credit department should be as an open book for the use of the house, for, while the credit man will always gather some impressions and form some opinions which cannot well be defined and for which he can hardly give specific reasons, still it is intrinsically wrong that so important a factor in the operation of any business institution should be subject to the life, health or caprice of one individual. The only scale by which any method or system can be measured is the scale of results; if through its use a full measure of the results aimed at is obtained, it is invaluable then and then only is it a success. The system here briefly described has been subjected to severe practical test for several consecutive years, and, measured by the scale of results, it has proved a pronounced success. Cordial fellowship and frequent consultation be- tween the credit manager and the salesman are indis- Belation of P ensaD l e - Each must recognize the valu- Credit Man able assistance he can derive from the to Salesmen other and be eyer ready to j end the re _ ciprocal service which he can certainly give. The 26 CREDITS AND COLLECTIONS credit manager can, if he will, make of every sales- man a picket to warn him of approaching danger, be- cause a salesman, if he be trained to view things from the credit standpoint, can glean information obtain- able in no other way. He meets the customer in his home environment, where he is free from those re- straints by which he is more or less controlled when on his guard, as he naturally will be in the presence of the credit man. The salesman thus has opportunity to observe and note those habits of business that make for or against success and those habits of life that go to make character, than which there is no more im- portant factor in the consideration. To accomplish this co-operation the salesman must be made to feel and to know and it must be a fact that the credit department is just as anxious as he to increase sales, but that, since the department assumes all the responsibility for the risk, its ambition must be always under perfect control. Any discussion of this subject would, in my opin- ion, be incomplete if it failed to touch on the value of association. The progressive credit man of to-day appreciates this value, and no longer prefers to hold aloof from his fellows. The National Association of Credit Men has be- come a power for good in the credit world. It has an enrolled membership of upward of five thousand, and its influence reaches to every corner of the United States. It has in eight years done more to advance general credit conditions, more to develop credit de- partment organization and more to develop individual credit men, than could, by any other means, have been accomplished in a century. I am firmly of the opinion that no credit department organization will be com- DORCHESTER MAPES 27 plete if it be not identified with the Credit Men's As- sociation, for in no other way can it have the benefit of, and be in close touch with, the best thought and the best effort, the combined thought and the combined effort, that are being constantly expended along the direct lines of its work. Nothing could be more demoralizing to the head of a credit department than that his work be harshly criticised just because, perchance, his foresight proves not so good, in some particular case, as some other man's "hindsight." The credit man, to do good work, must have the loyal support of his superiors, not only in the time of success, but particularly in times of de- pression, when his responsibilities multiply and his judgment, his nerve and his courage are most needed. I do beseech you, therefore, proprietors and higher officials, let the credit man at all times feel your con- fidence in him, or "let him out," CHAPTER III THE CHARACTERISTICS OF A GOOD CREDIT MAN BY F. F. PEABODY Vice-President, Cluett, Peabody & Company The title of credit men, as used in most houses, in- cludes far wider duties than the term itself defines. The credit man is usually the responsible head of the entire office work, with general oversight over the whole bookkeeping and record department, and is in immediate control of the collections, as well as of the credit department itself. He is often cashier, too, the man in charge of the moneys of his house and with his finger always on the bank balance, the bills payable and the accounts receivable. This multiplicity of duties is due to two causes. The credit man is pre-eminently the student of the busi- ness concern. In his particular work it is his duty to reach certain conclusions from careful investigation of the characters and conditions of men, through per- sonal touch with them, and through study of docu- mentary reports and historical accounts. He is the one important factor in the management of a business whose work is all on the inside. Therefore, the gen- eral management of all the inside work, the office work, is assigned to him, as being the one who can most conveniently oversee it, and who is the nearest to it, both territorially and functionally. More important than this is the second cause, 28 F. F. PEABODY 29 based upon the fact that the credit man is in closest touch at all times with the bookkeeping department, that control over its methods is necessary for the proper carrying out of the policies and system of the credit department, and that he has, as a rule, come up through this department. The tests of a credit man's success as measured by his employer are four: The average annual losses, the accounts receivable measured by the average number of days' sales contained in them, the average percent- age of discounts, based upon receipts, and the general office expenses, if he has the management of the of- fice in charge. The first is a test of his ability purely as a credit man; the second and third his worth as a collector; the fourth his capacity in executive work. For his purely credit functions, the credit man needs three distinct characteristics. First, a wide and Three general knowledge o/ business methods Qualities and business conditions. When deciding Necessary whether to open a new credit account, the credit man must know the general business conditions of the territory in which the applicant is located, in order that he may judge whether the latter's sales and collections are likely to be such as will enable him to pay his account when it is due. For instance, if a crop failure seems imminent in North Dakota, he must draw in his credits in that region and must handle his accounts accordingly; on the other hand, if a well- founded and legitimate boom appears to be starting in Oklahoma, he should attempt to extend his firm's business there, and should be rather free, perhaps, in granting credit. He must know the general financial condition of the country, in order to judge whether the prospects on which the debtor depends for paying his 30 CREDITS AND COLLECTIONS account will materialize, and whether his own firm can stand a further extension of its credit accounts in view of a coming financial stringency or industrial depression. Every business man must, of course, have a gen- eral knowledge of business methods. But the credit man must be somewhat familiar with the details of all the lines of business in which his debtors are engaged, in order that he may determine from the facts which he has before him concerning an applicant for credit whether his capital, his sales, his expenses, his past experience, are such as to give promise of his ultimate success. He must know at least the elements of com- mercial law, the statutes of exemptions, the financial responsibility of corporation officers and of the mem- bers of a partnership, the legal age of open accounts, and similar generalities. He cannot have a detailed knowledge of these facts, but if they are merely a part of his mass of general information, his credit making will automatically and unconsciously be influenced and strengthened thereby. The second necessary characteristic of the credit man is a keen insight and an analytical mind. The work of a credit man is a succession of decisions, each one of importance, but necessarily made hastily. These judgments are not arbitrary, but are based on a study of certain groups of facts, usually of four kinds: First, the general knowledge of the credit man himself; second, impressions gained by him from per- sonal touch and acquaintance with the customer; third, specific facts concerning the character, ability and resources of the applicant, gained in various ways, and fourth, if he is an old customer, his record with the house itself. F. F. PEABODY 31 It takes keen insight to at once fix upon the vital and decisive factors in this great mass of material, and sharp analytical power to sift the kernels from the chaff and to correlate those factors which are to be considered in connection with each other. The superficial credit man is liable merely to look at a debtor's quick assets, at his total outstanding debts, without going deeper, and especially without consid- ering his character and qualifications for success and his surroundings. The honesty, good habits and in- dustry of a debtor, the commercial condition of the locality in which he trades, and the esteem in which he is held there, are just as much a part of his capital as the cash he has invested in the business or the amount of his unencumbered property, and are even a bigger element in his chances for success These items are perhaps harder to discover and determine than the mere statement of his capital and debts, but the good credit man will lay much stress upon them. In a long report, on a merchant perhaps a thousand miles away, it needs the most astute reading between the lines and the cleverest putting together of two and two to arrive at the true condition of this man's affairs. The problem is up to the credit man. The credit man's third requirement is tact, and tact in the broadest possible sense. Tact means sym- Tact Most P a * nv witt ther people, the ability to Essential put one's self in their place and under- Characteristic gtand their con aition without being told in so many words. It implies an openness to re- ceive aid and advice, a willingness to learn new facts and change old methods. It carries with it the idea of caution and carefulness. No tactful man is impetu- ous; he weighs and considers all pertinent facts be- 32 CREDITS AND COLLECTIONS fore he comes to a decision. Yet the very word tact implies ability to decide quickly; an intuition, almost, of the right course to take. The man of tact must have a good memory, otherwise he will make errors and blunders; he must remember people's weaknesses and their sensitive spots, in order to avoid them; he must remember their interests and hobbies, in order to fraternize with them; he must remember their strength and their pride, in order to appeal to their vanity. Thus the tactful, sympathetic man will learn all he wishes from the customer who is being interviewed concerning his affairs so adroitly that he will go away without any loss of self-respect or any feeling of re- sentment, and yet leaving to the credit man the infor- mation he desires. The credit man has often to ask and do many things which are unpleasant and em- barrassing both for himself and for the debtor. If he can do these things in such a way as to keep the good will of his customer, and even make himself the latter's confidant and adviser, so that the customer will voluntarily keep him informed of his condition, that is tact. The ability to handle men is in part inborn. Some men we see who seem without effort to be able to in- fluence, to impress themselves upon their fellow men, while others appear always isolated, at angles with those around them. But a very good and a very true imitation of this ability can be acquired, and nothing should be so impressed upon young men as the neces- sity of building up within themselves an attractive personality, of virtually setting themselves to forcing people to like them. Only let me emphasize this the man who attempts to acquire this ability of handling people should remember that it must be based upon F. F. PEABODY 33 a real sincerity, a real sympathy with and human feel- ing for his fellows. Mere surface smoothness, mere exuberant good fellowship, will not accomplish the object. There must be an understanding and a con- tinuous study of human nature, a charity for human weakness, a fellow feeling of human interests. In this connection it should be especially brought before .the credit man never to take the attitude that man- kind in general is dishonest. This standpoint will more quickly kill his efforts and ruin his prospects than even the opposite extreme. It will hurt him with his trade; it will hurt him with his house; it will work against his success. In his relations with the other departments of his house the credit man can make or mar his record. Especially essential is it that he be willing and eager to receive information and advice from those other factors in the business which have opportunity to learn and see things pertaining to his work from a dif- ferent point of view than his. His relations with the salesmen of the house are particularly important and delicate. The amount of harm which a credit man with too exaggerated an idea of the importance of his office and its immense height over the realm of the salesman can do is incalculable. If only the credit man and the salesman will take each other into their con- fidence, will establish a reciprocal information and help arrangement, much profit will accrue to the firm in the way of reduced losses and added sales. Caution and carefulness in the performance of his duties have been dinned into the ears of the credit Time for Cau- man so mucn that there has been danger tion in Cred- of his going to the opposite extreme. But it-Making w hen it is considered that more losses re- sult from carelessness than from any other one lapso 34 CREDITS AND COLLECTIONS on the part of the credit man himself, the emphasis can hardly be made too strong. The place and time for caution are especially worthy of attention. In the granting of the first credit to a new customer, care is usually observed. The new name is probably wholly unknown to him. He in- evitably feels the need of full information, and as such information is comparatively easy to secure, he obtains it at once. He looks him up in the rating books; he obtains the mercantile reports on him and private statements from him. If he concludes that it is not safe to extend the credit asked he does not have that feeling of breaking a business connection and losing a customer which he has when he refuses credit to an old customer. There is only one consideration especially liable to undermine a credit man's caution in making initial credits the fear that if he refuses an account, a competitor will accept and profit by it. This phase of the matter should never be allowed to weigh with the credit man, for no course of reasoning could be more fallacious. Not only is he a very poor credit man who needs this consideration in helping him form his judgment, but it is also most illogical; if he believes the account unsafe in itself, and if he has the facts to back his opinion which he ought to have, he should be willing to let it go to a competitor to the latter's undoing for he will thus gain more than he loses. It is, however, especially when an account has run on for a long time, when a constant succession of orders promptly paid has lulled the alertness of the credit man, that carelessness gets in its work. The credit man, overwhelmed with work, pressed for time, will allow an order to slip through here and there re- F. F. PEABODY 35 garding which he is not absolutely sure, except that he knows the customer has been with the house a long time, and has a vague idea that he is good and pays promptly. It is on such accounts that he is most fre- quently caught. The credit man must be persistent and painstaking in his methods. By some means or system he should keep in touch with the trend of all of his accounts, both those of his good customers and those of the doubtful ones; lapses in the one should be caught and taken up as in the other. In testing the credit man's ability and success by the average amount of his accounts receivable, the Credit Man as ^ usiness man is really testing his ability Collector and as a collector. In the judgment of many, a clever collector is more important in most offices than a brilliant credit man. By ability to collect is not meant the power to extract money from a refractory and unwilling debtor, but rather the ability to impress and train the debtor, willing or stubborn, in such a way that he will unconsciously get into the habit of paying promptly. The prompt collecting of accounts has a triple compensation. It keeps outstanding accounts down, and thus requires less capital to run the business. The added value of a credit man who, by keeping his ac- counts receivable low, enables his employer to run his business with $100,000 less working capital than his competitor is earning more than his yearly salary right here. In the second place, the strict collector is the best salesman. It is an admitted fact that a cus- tomer who has a past-due account with a house will place his current order with another house; the loss is apparent. Finally, statistics and credit men agree that the great majority of losses occur among overdue 36 CREDITS AND COLLECTIONS accounts; a man who owes nothing cannot fail, and a man who pays every thirty days is most unlikely to become insolvent; the merchant who is held strictly to his payments will not be likely to over-buy, in fact, he cannot; collecting accounts when due will reduce the number of eggs which a house has in each of its cus- tomers' baskets; insisting on prompt payment will weed out the weaker brothers. In discussing the characteristics which the credit man must possess to satisfactorily administer fhe af- fairs of the general office, one point needs particular emphasis. The credit man of the past has often been accused, whether justly or unjustly need not be deter- mined here, of preferring old ways and opposing new ideas and methods because of the change involved and the trouble and expense incurred in adopting them. Many of the older school of credit men are moving along in the same old way, not realizing that the doubling of the volume of their firm's business more than doubles the details of their department. This type of credit man refuses to install some modern system for taking these details off his shoulders, for dividing his work, fearing, perhaps, that the work which he has been doing himself, if transferred to someone else, will not be done right. In thus giving his time to the performance of petty details, or even to the accomplishment of an overplus of important work, he comes to be looked upon as the busiest man in the house, an expression which is very often heard. For a man in the position of credit manager to be over-busy must surely be considered a mistake and an injury to the best interests of the house. A credit man who performs a lot of detail and cumbersome work, occupying all his attention and absorbing all his F. F. PEABODY 37 efforts, who allows a mass of unfinished work to ac- cumulate, thus necessarily slighting all his work, the most delicate and important among the rest, is prac- ticing false economy. A ten-dollar-a-week clerk and a well-regulated system, which would take merely the routine, not the responsibility, off his shoulders, could save him much nervous energy and irritation and leave his time and mind open for more valuable work, for real thinking, which is the great need of business, as of all lines of activity to-day. A business attains the best results when its credit department as repre- sented by the credit man keeps up to date in its work. The credit man of yesterday must realize that conditions have changed and that he must alter his methods to meet them ; the credit man of to-day should prepare for the same situation, for his conditions will also change. So the credit man must be modern in his methods. He must see that his credit department system and his general office system handle details quickly and accurately, and that this system sifts out of the details the vital facts which he should know and presents them to him quickly and in concise, comprehensive form, leaving him time for thought on problems which will always be present for his solution. CHAPTER IV THE FUNCTION AND WORK OF THE COM- MERCIAL AGENCY BY T. J. ZIMMERMAN The point at which the commercial agency enters into credit operations is between the receipt of the order and the shipment of the goods. Credit rests upon the seller's confidence in the buyer's ability to pay; confidence results from favorable knowledge of a man's character, ability and circumstances. In order to decide whether his house wishes to extend credit to an applicant, to determine the amount of credit which it is advisable to extend, and to decide upon the specific terms on which this credit is to be granted, the credit man must have certain general and specific in- formation. Such information the commercial agency has made it its function to furnish. The commercial agency is strictly a credit instru- ment a product of the credit regime. Were all trade and business done on a cash basis, there would be no need or place for it. It has grown and developed in the last sixty years as the result of a definite need and an expressed demand on the part of the busi- ness world. While the result of the credit system, however, it has in its turn been instrumental in the vast extension of credit transactions and the resultant increase of business operations in the last half century. The commercial agency had its origin in the panic of 1837. The immense losses incurred during this period of wildcat money and mushroom banks by mer- 38 T. J. ZIMMERMAN 39 chants all over the East, especially in New York, which at that time was the mercantile center of the country's wholesale business, made it absolutely incumbent on them to devise some means by which they could de- termine what merchants were safe credit customers. Although at the time selling on credit was not so widely practiced or plentifully supplied with determin- ing and safeguarding facilities as now, the fime of the individual credits granted was much longer. It was nothing unusual to give a year's time for the payment of an invoice of goods, and six months was the usual allowance. Before this the practice had been to keep repre- sentatives on the road whose duty it was to visit those Origin of ^ * ts cus t mers who were in any way ac- Mercantile cessible every six or twelve months, make Agencies a more or i ess care f u i examination of their financial circumstances, and report their infor- mation and conclusions to the house. Personal inter- views with customers were believed in and depended upon to a large extent in the determination of their reliability. For at that time the retail merchant, if he was within the confines of civilization, paid his regular annual or semi-annual visit to New York, Philadelphia, or whatever city was the mercantile center of his dis- trict, and did his buying in person. Thus the head of the wholesale concern was personally acquainted, and probably even a friend for they mingled social with business relations in these visits of many of his cus- tomers, and acquired a close familiarity with their circumstances and even established a personal bond between them and himself. The weakness of these methods lay in the fact that just those of a firm's customers concerning whom 40 CREDITS AND COLLECTIONS it most needed information, and who required the closest watching, were not reached at all. This was before the days of railroads and telegraphs. New York houses were shipping goods into the wilderness of Ohio and Tennessee, even away across the unknown continent to the coast. Nothing could be learned re- garding the status of these customers, the goods them- selves were in transit three or six months before reach- ing the consignee, and a year might elapse before the firm even knew of their safe arrival. But these two methods were not even satisfactory as applied to those customers reached by them. The firm's reporters were far away, they could make only a cursory examination, and only at long intervals and at great expense, while the impressions derived from personal contact with customers were not infallible. In response to needs of such conditions, made acute by the heavy losses of the panic of '37, came the commercial agency. It was not then what it is now. Its reports were meager. Its lists were incomplete. Its judgment and conclusions were necessarily often based on incomplete and false data. Time, experience and the momentum of long years, however, have remedied many of these defects, until now the commercial agency plays a most important and weighty part in the business world. It has realized that absolute disinterestedness and impartiality are necessary for the making of reliable ratings; it treats all, small and great, equally as to rating and service; its information is secured and judgment made from such information, by the most experienced, careful and unprejudiced men. The information which the agency affords is given in three forms: A quarterly Book is issued by the T. J. ZIMMERMAN 41 agency, containing the name, the business, the capital rating and the credit rating of every firm or individual Work and * n ^ n * s country or Canada engaged in the Service of mercantile pursuits. The agencies sup- ply no information concerning pri- vate individuals or such as do not follow a strictly mercantile calling. In the second place, daily sheets are published by the agency, in which are noted all failures or bankruptcies, new incorporations, the es- tablishment of new business houses and changes in ownership. Lastly, the agency furnishes what are called special reports concerning any firm or in- dividual engaged in business, on specific request from an agency subscriber. Any business man may become a subscriber to an agency by the payment of a yearly subscription, in re- turn for which he receives twice a year the rating book and the daily sheets; in addition, he has the privilege of requesting special reports on any individual or firm rated at a slight cost per report. Request for such reports must be made out on a special blank supplied by the agency, on the understanding that the informa- tion asked for is to be used for a strictly legitimate mercantile purpose, and for no other, and is to be kept secret. This pledge is necessary in order to prevent, so far as possible, those who are not subscribers from participating in the benefits of the agency's service, and to guard against the use of the information for some ulterior or malicious purpose. A special report contains the detailed information about a particular individual or firm: the character of the individual, or, if it is a partnership or corpora- tion, the individuals involved, as judged by his past history, life, habits and reputation; his ability, as 42 CREDITS AND COLLECTIONS judged by his business record and the present condi- tion of his affairs ; his wealth, not only that invested in the particular business under consideration, but any other property or interests which he may have; his debts, so far as they can be arrived at; his general social and business circumstances and connections information on all these subjects is presented. Then follow details more particularly concerning the busi- ness in question, as distinguished from the man or men behind it: the capital, the outstanding accounts, the debts and their character, the amount and nature of the business done, the firms from whom goods are bought and to whom money is owed, the existence, if any, of secured creditors, and general statements re- garding the business. The whole report is concluded by a general statement concerning the worth of the in- dividual, the extent to which he can be trusted, and the manner in which he should be handled. The credit man to whom this report comes sees not only the details presented, but his knowledge and experience tell him much more and enable him to read in the report facts not outwardly apparent, and to put the facts given into their proper re- lation. A special report is not intended to be a complete basis from which the credit man shall make his judgment; it is put in such a form that, combined with his own knowledge, experience and insight, he may reach a definite conclusion. How is this information, given to the credit man in the three forms of quarterly books, the daily sheets, Or anization an( * *^ e 8 P ec * a l re P or t s > secured by the of the agency? To tell this it will be best to Agencies begin with the last, the special report. The agency has an organization of thousands of T. J. ZIMMERMAN 43 reporters who are constantly gathering facts concern- ing mercantile houses. In the large cities of the coun- try, where independent district offices are located, a force of reporters is constantly at work. The work is specialized in these large cities : one man has charge of each line of business in the wholesale trade, and the territory outside of the business center of the city is divided up into districts, to each of which a re- porter is assigned. These reporters are kept at the same post for years and become thoroughly familiar with the detailed facts and conditions of their line of business or their districts, and with the houses and in- dividuals in them. They keep track of and report to their managers the latest mercantile developments, tendencies, rumors, and even impressions, which they obtain. Each of the district offices has sub-offices in lesser cities attached to it, numbering from two to eight, depending on the size of the territory and im- portance of its business transactions. Each sub-of- fice has oversight over the territory around it, organ- izes it into reporting districts, and keeps track of its commercial affairs just as the offices in the larger cities do in their territory. Thus, the sub-office at Peoria, 111., having charge of certain smaller towns and the territory around it, has several reporters al- ways attached to it, who constantly make the rounds of this territory, just as the city man does in his district. In addition to these district reporters, the agency has in its employ in the majority of towns where there is neither a district nor sub-office an attorney, whose duty it is to report into the sub-office straight news items, such as failures, new businesses and changes in 44 / CREDITS AND COLLECTIONS ownership, which cannot wait for the visit of the reg- ular reporter, and also to make special reports in urgent cases. These men do not, of course, give all their time to the work of the agency. Every hamlet, every mercantile business, no matter of what proportion, is thus covered by this system of reporters and repre- sentatives. The reporters make their reports regularly, the district city reporters daily, the country reporters periodically at longer intervals. The work they do, or the information they collect, may be divided into three classifications. First, they report the strictly news items which are used for making up the daily sheets. Such items, when they come up in sub-offices, must, of course, at once be telegraphed to the district office from which the daily sheets are issued. The agency has a telegraphic code of its own, which is always used in making reports of any kind by wire. This assures the absolute secrecy of the information and effects great economy in the expense of transmission. Second, the reporters give an account of what may be called their impressions that is, it may seem to them that a business is retrograding; that the owner or manager is growing careless; that the stock is being allowed to degenerate, or some man may tell them that his firm has put in a new line, increased its capital or made some other change. All these items appear in the periodic reports which the reporter makes. The third duty of the reporters is to make the special reports which are called for. Thus, if a re- quest comes into the Chicago district office for a spe- cial report on a merchant in Galesburg, 111., and there is no recent report on file in the office, this request is T. J. ZIMMERMAN 45 referred to the Peoria sub-office, in whose district Galesburg is situated, and a reporter from that office looks up the merchant and makes the report. Re- ports grow out of either a specific request from a subscriber, or, as is more generally the case when a new business is, organized, the agency at once sends a reporter to get a report on the new concern, not only that it may have a report ready should it be called for, but also that it may insert the new house, with proper ratings, in the next quarterly book. When these special reports come into the district office they are manifolded, and if they are of sufficient importance, that is, if it is probable that the firm investigated will seek credit in some other districts, a duplicate of the report is sent to those district offices, where they are kept on file and sent out in re- sponse to inquiries. The information in the reports is obtained from two sources, direct and indirect. A statement is ob- - tained from the individual or firm under Sources oC Agencies' investigation, who is asked a regular Information ser j es o f questions regarding his past history, capital, open accounts, debts, and so on. This information the reporter will judge, qualify and amplify from quick personal impressions which he gets concerning the individual and whatever part of the business he sees. Then some information is ob- tained indirectly, from other people, from the past knowledge of the reporter and the agency concerning the person in question, and from hints and impressions picked up here and there. Of late years the custom has grown of obtaining the signature of the individual investigated to the financial statement which he himself makes. If this 46 CREDITS AND COLLECTIONS statement is proved in any later developments to have been purposely falsified, the party is legally liable for obtaining goods under false pretenses, since the acknowledged purpose of such a report, it is always understood, is to afford a basis for the extension of credit. The credit man who has such a signed state- ment before him in deciding upon the extension of credit has something tangible and sound to act upon, and his judgment is facilitated thereby. The special reports kept in stock are corrected periodically regularly twice a year. Except in spe- cial cases the agency does not undertake to give other than the stock report on hand when one is called for; nor is it expected, for generally special reports are wanted at once without delay; in most cases their value to a credit man would be lost entirely if there were more than a couple of hours' delay in securing it. The agency has other sources of information be- sides its reporters. In the district offices a force of clerks is constantly at work examining the state re- ports of incorporations and the court reports of bank- ruptcies, and even of suits brought against firms, for a man's financial standing can often be judged by the suits brought against him. Trade and financial publications and the newspapers are also examined carefully and systematically, and often afford infor- mation. The facts thus w obtained for the daily sheets serve as the basis and material for the corrections in the rate book issued by the agency in revised form every three months. As news of additions, changes or sub- tractions in regard to the business houses of the country are received, or as information warranting a change of rating comes in to a district office, the T. J. ZIMMERMAN 47 necessary corrections are at once indicated on the last rate book, and at the end of every three months these corrections are gathered together and a new book in- corporating them is issued. Two ratings are given in the rate book for each business house rated capital rating, which indicates H w th * ne a PP rox i ma te amount of capital in- Batings Are vested in the business, and the credit Determined rating> which is the judgment of the agency as to the confidence which can be placed in the individual or firm rated. These ratings are usually indicated, not by figures or words, but by short ab- breviations. The absence of either rating opposite any name does not necessarily indicate a very poor condi- tion, but merely means that for some reason or other the agency has not been able to obtain information upon which to base a judgment. How are these ratings made? This is the delicate and most critical point in an agency's business. The capital rating does not merely represent the statement made by the interested individual himself to the agency reporter; it is not even the amount of cash known to be invested in the business, nor, if it be a corporation, the amount of the nominal or paid-up stock. The capital rating is really the judgment of the rater as to the amount of commercial value or the par value of the assets which the firm rated may be con- sidered to have in its business, all things regarding the firm and the business taken into consideration. The capital rating really purposes to estimate what this business is worth in money, its realizable net value. The invested capital or the capital stock of a firm may remain unchanged from year to year and yet its 48 CREDITS AND COLLECTIONS capital rating may be changed time and again in the agency's quarterly book during this time. In like manner, the credit rating does not merely indicate a certain fixed percentage of the capital in- vested for which the average business man may be considered good. This rating, even more than the cap- ital rating, is the judgment of the rater, all things con- sidered, as to the confidence which can be placed in this man or firm. It is the result of a careful study of this man's character, his present social and com- mercial condition, his business history for a score of years past. It is the rater's opinion of the man's in- tegrity and resources expressed in terms of money. That the commercial agency fills a need and occu- pies a legitimate place in the business world is proved by the immense expansion of its functions and activi- ties in the last half century, the vast extension of credit operations in the same period, and the trust and confidence reposed in it. This description of its inter- nal organization, its scope and its volume of detail is the best evidence of the place it fills in the credit world; it is the most indispensable, the oftenest used and the most versatile tool with which the credit man is equipped. CHAPTER V THE INTERCHANGE OF LEDGER EXPERI- ENCES BY H. A. WHEELER Vice-President, The Credit Clearing House No subject is more prominently before the credit men of the country to-day than that of perfecting a system for the interchange of credit or ledger ex- periences. That it deserves first place among the topics under consideration is proved by the fact that, while the newest movement in the field of credit reporting, it is exercising a most beneficent influence over gen- eral business conditions, and, if indications point truly, is destined in the future to become a most potent factor within the reach of credit men in safe- guarding the credit hazard, preventing fraudulent failures and providing an impartial and effective medium for the adjustment of disputes between debtor and creditor. If these things be true, a careful study of the effectiveness of thia system will fully repay any grantor of credit who desires to provide himself with the best means for reducing his ratio of loss by bad debts. It will bear repetition that the purpose of the interchange system is to establish an impartial me- dium between debtor and creditor and between creditors themselves, providing a system whereby 49 50 CREDITS AND COLLECTIONS those who are interested in any account may freely and unreservedly interchange the facts contained in their ledgers, without the necessity of direct refer- ence each to the other, without divulging this in- formation under their own name, and at all times receiving in exchange for items contributed by them the combined experiences of all others interested in the account. Thus the reciprocity becomes perfect and the knowledge of trade conditions is shared alike by all who contribute to the report. The interchange of ledger experiences is not ex- ploited as a new idea; but the application of a method, or plan, whereby an exchange of these facts can be made, with the least possible labor, and the best possible result, is new in the field of credit re- porting. The movement which brought the organized interchange system into being is practically the only movement that has taken place in the agency world during the last half century differing in any measure from the methods employed and the character of in- formation furnished in the beginnings of the busi- ness. General and antecedent information is obtainable from a great variety of sources; different correspon- dents will have different ideas with regard to the worth and character and prospects of a merchant upon whom a report is being written; inquiry through different sources, or from different agencies, will prob- ably develop a differing line of facts or impressions, and in this sense may be valuable to the creditor. Trade information can be obtained only from the ledgers of the creditors; there can be no diversity, and a dozen interchange systems would only add to the labor involved in the credit office, without increas- H. A. WHEELER 51 ing the value of the service in the slightest degree. The seeking of trade information through direct application to references, if capable of development in the broadest sense, would doubtless be preferred over any other method; but its limitations must be apparent to any observer, and in this day, when every means is sought to shorten labor and attain the lar- gest result with the least delay and effort, it would be impossible to establish a system for interchange of ledger experiences between interested creditors upon the basis of direct correspondence. As an illustration, we will suppose that a mer- chant's account is active upon the ledgers of fifteen wholesale houses and in a given season he is seeking credit from five concerns that have never sold him before. We will suppose that all of the twenty houses are interested in anything that pertains to this merchant's credit, and, for the sake of argument, that each of the twenty knew the other nineteen to be interested, and, desiring a full trade report, were to dictate letters to all interested parties, asking for the condition of the account on a particular day, or within a given month. It will readily be observed that twenty houses will write to nineteen others for this information, and, including replies, will necessi- tate 760 communications, the postage on which amounts to |15.20, and the time of dictation and writing probably beyond fair computation. Could any credit department cope with the labor involved in this system? Could the necessary correspondence be properly answered or the returns cared for when received? Would not the files become so bulky as to be impossible to handle? Now, all that could be obtained as a result of 52 CREDITS AND COLLECTIONS these 760 letters would be contained in a single clear- ance of a complete interchange organization, when, in response to an inquiry, each house is asked for its experience; the twenty experiences are centered at the point of inquiry; the information tabulated in the proper form and a copy of the report passed back to every contributing house. Thus, by a simple oper- ation and at an expense of cents, where otherwise dol- lars would be required, every interested creditor is in possession of the full facts at the same time and under precisely the same conditions, yet with the added advantage that names of contributors are not known and the form of compilation permits a quick analysis of the information either by markets or by lines of trade. The president of The Audit & Appraisement Com- pany of America, in speaking before the Philadelphia Credit Men's Association recently, dwelt upon the short average life of business enterprises and the vital necessity for closely watching accounts on the ledger, if loss would be avoided. Organized interchange pro- vides the only means for thus watching accounts in the light of one's own and one's competitor's ledger, and is unique in that it brings to the credit office, vol- untarily, a number of reports many times that in- quired for, delivered because somewhere through the system the report has been revised and the interested creditor has contributed his experience. The value of this particular service cannot be overestimated, inasmuch as it draws the attention of An Automatic tne credlt man to facts tliat oftentimes Danger would never be discovered in any other way. Buyers invariably show decided favoritism in matter of settling accounts with certain H. A. WHEELER 53 houses. This is not to be accounted for, except that a buyer has fallen into the habit of promptly paying one bill, where he allows another to drag, or desires to establish a record for prompt payment for pur- poses of reference. Upon the ledger of the house which is being paid in a satisfactory manner the record shows only fav- orable to the buyer. There is no need for inquiry upon this account, because it is being carried strictly in accordance with terms of sale. It does not follow because the buyer is prompt in .one case that he will be equally prompt in all; but there is no especial rea- son for the house whose account is properly cared for making inquiry, and, therefore, the account is car- ried along, and perchance increased, without the usual periodical investigation. The interchange report forces upon this satisfied creditor a report on this buyer as often as such re- port may be called for by any house interested in the case, and some day there comes to the desk of the credit man a report which shows that his satisfactory customer is becoming badly involved with other houses. The information is timely, and enables him to lower his credit line and get the account down to a place where it may be safely carried and closely watched through future interchanges, to see that the unfavorable condition does not become an absolute menace to the life of the account. Fraudulent overbuying is discovered through an interchange system when no other agency system can lend the slightest aid. Every year brings its full quota of merchants who have built up a good credit by discounting all bills, who for some reason find themselves either in a position where it becomes nee- 54 CREDITS AND COLLECTIONS es&ary to largely increase their stock to overcome losses made outside their business, or to purchase largely for the exclusive purpose of disposing of the stock at sacrifice prices and making a settlement with their creditors en as low a basis as possible. That merchant who has sought to buy beyond his legitimate needs, or in other than his legitimate ter- ritory, is shown up through the compilation of orders placed, which clearly indicates excessive purchasing in its relation to the previous highest credit which he has enjoyed. It oftentimes happens that a merchant is led to buy excessively through the importunities of sales- men, who argue that prices will advance and that it is wise to provide a large stock in anticipation of a rising market. These men are often saved from their own indiscretion by the interchange report, orders be- ing cut down to a safe basis as a result of an accurate knowledge on the part of the credit man as to the volume of purchases in the respective lines of goods in which the merchant deals. Interchange information often preserves a mer- chant's life and continues him as a good customer, Possibilities w ^ en a ^ esser knowledge of the facts in Work of contained in the ledgers of the creditors Collections would perhaps cause serious trouble by an effort to enforce the collection of delinquent ac- counts at a time when the merchant would be pow- erless to pay. Where a clearance shows an honest merchant largely indebted, and unable because of un- fortunate local conditions, such as competition with bankrupt stock, or crop failure, to meet his obligations at maturity, the creditors, knowing the condition of each other's account, will be interested in getting to- H. A. WHEELEE 55 gether, arranging for joint action with regard to the case, all agreeing not to push their claims, but to give the merchant time to work out of his difficulty. In the end not only will they preserve a customer whose trade will have great value in the future, but they will receive one hundred cents on the dollar for their accounts. These are aids to the credit department not found in any other system of agency information, and pos- sible of development through the broader co-operation of credit men, to a degree that will make the loss account but a fraction of what has heretofore been regarded a legitimate and satisfactory figure. The assistance to the credit department in col- lecting chronically delinquent accounts is powerful beyond conception and rests entirely in the influence of an interchange system over the mind of a debtor, when he is advised that, unless an account is paid upon presentation of draft, or statement, the record of non- payment becomes a permanent record in the general interchange file, is made a part of every report as written, and must necessarily impair his credit with the houses whose goods are most to be desired. Equally strong is the influence of the interchange system in correction of trade abuses by demonstrat- ing the results which must inevitably follow the con- tinued practice of unbusinesslike methods, such as re- turning goods, countermanding orders, making un- just claims, taking more discount than entitled to, and many other abuses from which the wholesaler suffers constantly and which, if not checked by some united action, will still further reduce the margins of profit, already low enough from keen competition and ever-increasing expense of doing business. Now, it 56 CREDITS AND COLLECTIONS is not argued that this disagreeable feature can be entirely eradicated, but through a full interchange of experiences the guilty merchant can be taught, by making him familiar with the character and force of the report, that continuation of such practices will op- erate seriously against his success. An established system for interchange of ledger experiences must be the product of natural growth. System by Considering the complex nature of the Which. Facts proposition and the details involved, it are Gathered ^ practically impossible that such a sys- tem could be successfully planned and put into op- eration on a national scale, no matter Jiow wise the planning, or how great the executive capacity of those in authority. The establishment of a system that will handle, without friction, the resulting millions of experiences, could not be devised except as the ex- periences of each day taught how to handle the lim- ited volume of business and brought with it knowledge of the best method to cope with an ever-increasing volume. There exists at this time an organization that has been building for a period of sixteen years, starting with the smallest possible nucleus, in a single mar- ket, and extending year by year, market by market, trade by trade, until its connections reach out through the entire country, and the uniformity in method of gathering and distributing information makes simple what would otherwise be a most complex problem. Take its established chain of offices and watch the process of gathering and distributing information. We will suppose that a member of this organiza- tion has received a large first order from a merchant in some distant city, and before extending the desired H. A. WHEELER 57 credit wishes to learn how largely this merchant is already indebted for goods purchased and in what manner he has met his obligations with those who are now carrying the account. An inquiry is made at the interchange office, asking for ledger facts of the present date. Consultation of the file at the inquir- ing office will show not only the confidential num- ber of every local member interested in this particular account, but will show as well the volume of interest in all the other markets of the country and the con- fidential numbers of the subscribers in those mar- kets who have previously contributed to the general report. Tickets requesting the ledger experiences of the local houses are immediately made out and sent by messenger for reply. Upon the same day this name is passed forward by means of a daily exchange sheet to every market in which the interchange sys- tem is established, advising that a revision is being made and that all information obtainable is desired. Each market receiving this request consults its files. Tickets are made out and sent to the members inter- ested and to those in outlying cities also known to have sold this customer. In each market, as request tickets are made out, they are headed with the num- ber of the office revising the report, the date of the sheet and other necessary characters, which, in them- selves, indicate, upon the return of the tickets, pre- cisely where they are to be sent for compilation. In this way thousands of tickets will pass through every office, every day, out to the members and back again, the distribution becoming a simple mechanical operation based upon the series of figures written at the top of each ticket. At the close of each day's business, all information gathered from the members 58 CREDITS AND COLLECTIONS of every office is distributed and forwarded to the proper centers, and this continues from day to day, until all the information from the ledgers of interested houses has been gathered and forwarded to the in- quiring office, to become a part of the report now be- ing compiled. According to the distance of the con- tributing office from the inquiring center, the delay in all information reaching the point of inquiry may be eight, ten, or even fourteen days where the widest clearance is necessary. The receiving office does not wait until all the information is in hand before distributing it to mem- How Infor- kers 5 but will write from time to time the mation is information received. Each subsequent Distributed wr i t j ng contains all that has gone before, the late information being indicated by a special char- acter, so that the credit office need not consider that which they have already had. At last a final compilation is made and the fol- lowing system of distribution takes place: The local inquirer is served with his copy of the report as being the party most directly interested; the same day the mails carry forward copies of this report for the files of all interested interchange offices, and a copy for every member whose information is embodied in the compilation. ' These reports, immediately upon their receipt by the various branch offices, are distributed into the proper boxes for the members interested, and immediately sent by messengers to the credit offices of the contributing members, thereby placing in every credit file the full compilation as nearly as possible at the same time and under precisely the same conditions. In addition to the labor of gathering trade in.- H. A. WHEELER 59 formation, the party upon whom the report is written is invariably invited to file his signed property state- ment, which in every case, when received, is made a part of the report, without deduction or without com- ment. The best verification of the truth of a financial statement may be found in an examination of the merchant's estimate of his own liabilities as against the liabilities shown by the compiled report from the ledgers of the interested creditors who have con- tributed. Few clearances, of course, are absolutely com- plete, for it is not to be supposed that every jobber or manufacturer throughout the country is, or ever will become, a part of the interchange system; but in the making of a signed statement the merchant gives a detailed list of his creditors and the amounts owing to each; these checked back against the items con- tributed from the ledgers not only show whether the merchant has underestimated his liabilities, but also give a check upon the correct report of the member. The importance of this subject and its far-reach- ing future possibilities emphasize the importance of _ , considering all the sources through Sources of Interchange which this service can be rendered and Information Discovering, if possible, which is calcu- lated to produce the best results. The future of the interchange business, and it is a great future, lies in the keeping of one of four sources: First, interchange by direct correspond- ence; second, interchange through the use of the old line agencies; third, organization of credit bureaus by trades; fourth, interchange through some independent corporation, operated under the supervision of ad- 60 CREDITS AND COLLECTIONS visory boards from various trades, thus insuring ac- ceptable service and reasonable charges. In consideration of these sources it must be re- membered that successful interchange demands three things: First, complete reciprocity whereby the in- quirer must evidence his right to inquire through a past credit transaction with, or new order from, the party inquired about; second, that the results of a clearance be submitted only to those who have con- tributed to the report; third, that every contributor shall receive in exchange for his information the full report as delivered to the inquirer. We have already discussed the undesirable fea- tures of attempting a general interchange through direct correspondence, and if the objections are well founded it would be useless to look to direct corre- spondence with references as a means for developing the interchange system. There is a well-founded opposition on the part of a great number of credit men to supply ledger ex- periences to the old-line mercantile agencies. It is only a fair assumption that were ledger experiences to be given without reserve to the old line agencies their reflection would surely be found in the rating and report, salable to any member who may wish to inquire, irrespective of past or future interest in the account and independent of whether the inquirer had contributed to its make-up. It is argued that the system of interchange of credit or ledger experiences is of necessity a special line of work and that the information is of a class which should be developed by some institution ex- pressly organized and equipped for such purpose; that the equipment calculated to provide the best general H. A. WHEELER 61 or antecedent report is not capable of combining with effectiveness both kinds of service. It seems to me that these two fields of credit re- porting are totally separate and distinct and for either side to attempt to cover the other would end in lessened value of the special work in which they are now engaged. Interchange systems covering single lines of trade seem not especially complex of operation; first, be- Trade Asso- cause they are conducted by trades asso- ciation Bu- ciations with other objects for organiza- tion, each object having its particular value to some part of its membership; second, because covering but a single line of trade its membership is necessarily limited and is held together, in part at least, by the influence of the association movement; and, third, because trade terms and seasons are prac- tically alike for all and the demands for clearances at proper times more easily met. Hence the idea has found many advocates and would not be impractical if it were possible to establish the fact that there is no interdependence between the trades; that the ex- pense of maintaining separate bureaus for each trade in every commercial center would not impose a greater burden than could well be borne. If, however, in all but two or three centers of commerce the number of firms engaged in a given line of business would be insufficient to maintain accept- able bureaus, thereby necessitating clearances through a few distant points and involving aggravating de- lays and slow service; if, as is undeniably the case, practically every trade is dependent upon a series of other trades in securing even a reasonably complete record of orders and indebtedness of a trader inquired 62 CREDITS AND COLLECTIONS about; if, as must be admitted, a great element from which information must be obtained is located not in the large cities, but in manufacturing towns often far removed from such cities, then it becomes neces- sary to supplement the trade bureaus with a central clearing house, greatly adding to an already heavy ex- pense, and presenting difficulties in uniform handling of information which seem almost insurmountable. Each trade has its specific needs peculiar to it- self difference in terms of sale; difference in time of shipment; difference in relationship between the cus- tomer and the seller. If separate bureaus are main- tained, they will naturally be operated along lines of greatest value to their own class of business. If a dozen trade bureaus have been organized, each with their own peculiar need and under the management of an efficient board of directors, is it likely that these asso- ciations and these boards will cheerfully sink their individual ideas with regard to the manner in which an interchange system should be conducted into the will of a central board control, which would dictate the policy and procedures of all the associations? That which is applicable to one trade is wholly for- eign to another, and it is not likely that the board of directors of the clothing association would willingly abandon plans that have been found successful for their trade, simply because the needs of some other association demanded a different kind of treatment and a different co-operation in order to produce suc- cessful results. In different trades orders are passed upon at dif- ferent times of the year. Uniformity in dates of clearance is vital to the success of an interchange movement. A manufacturer of boots and shoes de- H. A. WHEELER 63 sires his credit information before he cuts his leather, and must, therefore, have clearances made for him or satisfactory information presented in the months of April and October, respectively, for his fall and spring shipments; while the clothing manufacturer desires his information as nearly as possible about the time of shipment. If the Boot and Shoe Associa- tion cleared a name in the month of April, the infor- mation acquired at that time is valueless in the month of July, the date when the clothing manufacturer will desire his information. Is it very likely that the Boot and Shoe Association will censent to specially revis- ing a report to satisfy the needs of the Clothing Asso- ciation, when their own needs have already been sat- isfied? If not, your report would contain information of various dates, would not show full present indebted- ness, and would be almost valueless as a basis for credit-making. Closely studying the means by which interchange of ledger facts is to be made of greatest general value leads to but one conclusion: Largest efficiency at lowest cost is to be gained through an independent corporation, abundantly capitalized, but whose very existence and success depend upon anticipating the needs of its clients and furnishing every possible means for perfecting its service. It must become in the very nature of things a public institution, com- manding the confidence and receiving the support of all communities and all lines of trade which desire to participate in the interchange movement. It will essentially belong to its supporters, but must not be dominated or controlled by any single faction. Its executive board should be composed entirely of men actively engaged in carrying on its work, but there 64 should be named by interested trades or communities, or both, advisory boards keeping in close touch with the executive control of the corporation, thus utiliz- ing the influence of the organization and enhancing its value in every possible manner. Results which would follow such a combination of interests would be inestimable. Lines of trade that have never heretofore enjoyed an interchange would seek such a relationship. Lines now possessing such service in a measure would seek to extend their facil- ities to a broader field. Credit men who have re- garded the contents of their ledgers as too precious to share with others would be constrained to recognize that the greatest safety lies in the broadest publicity regarding the transactions of all creditors with a given debtor, CHAPTER VI CREDIT INSURANCE ITS OBJECT AND WORTH BY T. J. ZIMMERMAN Credit insurance is the application of the princi- ples of indemnification for losses to the risk incurred in the extension of credit for merchandise sold. In the theory of its present practitioners, it is a guaran- tee to reimburse a business man for losses sustained from bad debts over and above a certain specified normal amount and within agreed limitations. In the treatment of this subject, consideration will first be given to the premises on which the idea of credit insurance is based A description of the plan and method by which it is actually carried out in prac- tice, and a discussion of its merit and value, its de- ficiencies and weaknesses, as thus practiced, will follow. The soundness and legitimacy of the general prin- ciple of insurance have been established. The founda- tion underlying all insurance is the same. It is an arrangement by which unexpected and uncomputable burdens and losses are equitably distributed among a large number. An associated group of men affords to each of its members protection against unlooked-for casualties; each must pay for having his risk assumed by the others; the official organization or company is simply the agent to collect the premiums and dis- tribute the losses. All insurance is based on the law of averages, Nothing is so uncertain as the future loss 66 CREDITS AND COLLECTIONS on a specific risk, nothing so certain as the average future loss on all risks. Insurance is based only on unexpected losses, such as cannot be computed in advance. Thus, insurance on property, called broadly fire insurance, insures against fire and against loss by cyclones, floods and other catastrophes ; but it does not insure against regular wear and tear, depreciation or a decrease in the value of goods. Insurance applies only to risks, not to specific circumstances. All pos- sible precautions are of course taken against such un- expected loss; buildings are built as nearly fireproof as possible, and provided with all kinds of appliances for extinguishing fires; regulations are enforced re- garding the storing of inflammable material and the operations of dangerous enterprises; efficient fire de- partments are kept up; care is even taken to guard against incendiarism. Yet risk remains, and while these precautions lower the risk, and hence the cost of protecting the risk, it must be insured against. Credit insurance has all the earmarks of fire or life insurance. Business operations to-day rest on The Principle cre drt- All credit operations involve a of Credit chance of loss, for any exchange of money or goods, in which both parties do not deliver their commodities at the same moment, entails some risk to the party who delivers first. Now, the business man of to-day, working against the most pressing competition and on a small margin of profit, must know his exact costs and expenses. His cost estimates must be so carefully computed that he can be absolutely certain, if he sells at a certain figure, he will make a certain profit. Other things being equal, his success will then depend on two factors: the accuracy of his cost calculation and his T. J. ZIMMERMAN 67 protection against unexpected losses. His losses can be of two kinds: losses incurred while his goods are still in his possession, that is, by fire this every busi- ness man will guard against by carrying fire insur- ance; and losses incurred after the goods have left his custody, that is, through bad debts made by extend- ing credit. What more logical than that this risk, too, should be protected by insurance? In both property and credit loss there is a certain normal which the business man charges into his cost account. Thus, necessary and unavoidable deprecia- tion in buildings and stock is taken into considera- tion in estimating total expenses, and in this item is included fire insurance premiums. This item will vary with the kind of business and its management, but the merchant knows from his previous year's record exactly what these items will amount to. In the same way there is a certain normal for bad debts, varying little from year to year, depending on the kind of business, the class of customers dealt with, and the perfection of the organization in charge of the credits. This normal loss, averaged from previous years' fig- ures, as unvarying as depreciation, is properly part of the expense of doing business, and must be figured in with total production costs. A certain prefigured normal loss is really not a loss at all; it is not felt in the business; it is expected and provided for like a weekly payroll. But, in addition to this, business done on credit is always open to unlooked-for excess losses beyond the natural expectancy in the ordinary course of trade, just as it is liable to unexpected property losses. The natural sequence is that this excess loss should be insured against just as is excess loss on a firm's prop- 68 CREDITS AND COLLECTIONS erty. Fire insurance, then, protects goods when they are in the possession and title of the seller; credit insurance protects them when title and possession have passed to another, without an equivalent having been received. The basis of both kinds of insurance is the same, the law of averages as applied either to fire or to bad debt losses, and the data for both bases are gathered in the same way and from equally reliable sources they are the general experience and exact average figures of the past combined with specific facts relating to the individual risk under considera- tion. The banker who, with $1,000 to loan, and the choice between a 7 per cent interest with poor security and a 5 per cent interest with gilt-edge security, takes the latter, probably does not realize that he is paying 30 per cent of his possible profit for collateral, and he feels and knows that he is getting value received. Or, putting it in another way, he is paying $20 a year for insurance on this loan. The credit insurance company stands in the same relation to the merchant as the indorser does to the banker. Credit insurance affords collateral on every bill of goods sold by a merchant on credit. In send- ing out a consignment of goods on credit, a house is really loaning money to the amount of the value of the goods; the insurance company puts up the collateral on this loan. Just as an indorser investigates the condition of a man on whose bond he goes, so the credit insurance company investigates the firms on whose credits it affords insurance, except that it does this by a different method. The plan of credit insurance, therefore, is based on the principle that there is always some loss from T. J. ZIMMERMAN 69 bad debts in every business; that, while in no specific case can the excess loss over this normal be cal- culated, it can be averaged for the aggregate of a large number of houses, and that, consequently, this excess loss can be insured against. This is the idea, the principle, of credit insurance, How is it carried into practice? What is the actual method of operation of credit insurance companies of to-day? When application is made for credit insurance, an underwriter at once takes up the investigation of aS * n ^ re i nsurance an un ' Present Methods of derwriter investigates the condition of Operation the p ro p er ty to be insured. Three de- cisions are to be reached: What sum is to be fixed as the normal loss of this house, above which losses will be indemnified; what is to be the per cent and fixed limit of indemnification, and what is to be the pre- mium per year. The mercantile agencies have through their long investigations gathered together a mass of reliable and valuable data, relating on the one hand to general facts, on the other to specific business concerns. Such careful statistics of failures have been compiled that the commercial mortality, classified according to dif- ferent businesses, different localities and different commercial conditions, is as thoroughly understood and tabulated as human mortality or average fire loss. These statstics the insurance underwriters have at hand. In addition, the mercantile agencies can give them specific information regarding the house in question the general condition of the house, the char- acter of its trade, the class and location of its custom- ers, all bearing on its credit conditions, 70 CREDITS AND COLLECTIONS Finally, the house itself is investigated from the inside. It must show a schedule of its losses during past years. The books are examined to determine the class of customers, the volume of business, the size of accounts, the terms on which goods are sold, the general credit policy and the run of collections. The real determination of insurance terms depends on these elements of live hazard entering into the policy. From all these facts, the normal loss, the amount of the bond and the premium rate are determined. For clearness let us cite an imaginary case: The gross sales of a house amount to $400,000; the normal loss is placed at one-half of 1 per cent, $2,000; the bond taken out is $10,000, on which the premium is 4 per cent, $400. In this case, if the aggregate loss of the house from bad debts is under $2,000, the firm recovers nothing; any excess loss over $2,000 up to $10- 000 is recoverable in full, within certain restrictions. These restrictions are regulated by the credit stand- ing and capital of customers to which a firm extends credit. "Rated" customers that is, those having a capital rating followed by a first or second credit rating are covered for 100 per cent up to an agreed percentage of their capital; "off-rated," those having a lower rating than the former, or none at all, are covered for only a part of loss sustained through them, up to the same capital percentage. Such is the present operation of credit insurance. Is it to be recommended for the use of the business Alleged Ad- man ^ to-day? Its followers allege many vantages of advantages. Credit insurance gives the business man control over his costs; se- cure through his insurance from excess losses, he need merely add his normal loss and his premium to his T. J. ZIMMERMAN 71 other fixed expense items to ascertain the exact pro- duction costs. He can thus compute his profits with absolute certainty. The last unknowable hazard is wiped out. He knows his resources exactly and what he can count on, since his book credits, formerly a doubtful quantity, are now a recoverable asset. The certainty and assurance which this condition of affairs gives him allows him to build more securely and far- ther into the future, and to meet competition fear- lessly and aggressively He can figure more closely, having more certain knowledge of his costs; not hav- ing constant worry of bad debts over him, his mind is clearer and cooler. The inevitable tendency of such a policy will be to increase sales in so far as they emanate from the credit department. Not only will the credit man be able to extend his credits in some directions not in all, as will be explained become more fearless and embrace wider opportunities because he has someone with whom to divide responsibilities and losses, but he will worry less and hence be more fit for his work. Once a decision is made, if the credit extended com- plies with the terms of his bond, the credit man knows he can sustain no loss. And if an unexpected and un- avoidable loss falls upon the house, he will not as often happens go to the opposite extreme of ultra- conservatism and turn down many good orders. The insurance policy, rather than making a credit man careless, forces him to keep closer watch of his customers and their accounts, and so tends to better his credit-making, since, to avail himself of the insur- ance offered, he will live up to the requirement of his bond. He must watch the changes in the capital and credit-making of his customers, for the insurance cov- 72 CREDITS AND COLLECTIONS erage is based on the latest information concerning these fluctuating items. He must keep close watch of the amount of credit given, as shown by his ledgers, for insurance ceases above a certain sum. The bond thus serves as a guide in making credit. Its require- ments will also make him keener on collections, more strenuous in holding customers to prompt payment in itself a guard against loss for he may not be able to grant further credit and be protected on it until back bills are paid up. The credit man's eagerness is thus held inside the danger line, and carefulness, the very opposite of recklessness, is induced. A further curb on the credit man's eagerness is the fact that he always has the endeavor to keep his losses inside the normal amount, for now more than ever will a small percentage of loss redound to his credit, for it will be pure surplus for his house, inas- much as the normal loss has already been calculated into the cost estimate. And he will not lose sight of the fact that on his present year's record will depend the amount of his future normal loss and premium rate. He will, furthermore, always prefer to collect from the debtor rather than the insurance company, for, as in fire insurance, a loss means much more than the money involved; it carries with it the trade of a customer, a stain on the credit man's record, a black mark against his house The value of credit insurance must depend largely on the man; its weak points appear plainly in the very Its Weak presentation of its advantages. It can Points and be abused much more easily than well Dangers uge( j To a cre ftft man the least inclined to shirk his responsibility or take too long a chance it will prove fatal and against the best interests of his T. J, ZIMMERMAN 73 house. The very fact thAt he is dividing responsibility and putting the possible loss on someone else will make him more lenient in granting credits. The spe cific facts in regard to a customer which the credit man must watch to keep within the requirement of his bond are not extremely significant; the bookkeeper or office clerks can keep track of them. And a credit man carrying insurance may even disregard them altogether, figuring that he can take the extra chance even though his credit extensions are over- stepping the stipulations of his bond. None of the arguments advanced as curbs on the caution of the credit man will stand examination. The credit man's house will not be liable to hold a loss from bad debts against him if it is covered by insurance, provided he can show that he has increased sales by taking this chance. Credit insurance companies themselves are compelled to confess that business men using their policies are apt to try to make money off them. That a high loss one year will raise their future normal loss and premium rate will not be likely to worry credit men. In short, the weak credit man is quite likely to be further weakened by carrying credit insurance and to substitute the security of his bond for good judg- ment. It is often questioned if credit insurance, as now conducted, has any value to the strong, able, watchful credit man, and whether it does not constitute a bur- den on him for the benefit of his weaker brother. Under the present insurance policy the credit man really does not make his own credits, and does not, therefore, make credits on a proper basis. On the one hand, if, hesitating to grant a doubtful credit, he does extend it because the case is covered by his bond, 74 CREDITS AND COLLECTIONS surely in this case it is not his judgment, but the pro- tection of the bond, that makes the credit. On the other hand, refusing against his own better personal judgment to grant credit because such extension will for some reason not come under his policy require- ments, here again it is not he who is making the credit. If the normal loss of a large firm for a long period of years has averaged a certain percentage of its gross sales, it may well wonder why it should pay out a considerable sum of money to be protected against a loss above this normal, for it is extremely probable that, even though in some one year its losses will ex- ceed this percentage, the average of the next decade will be no higher, and its premium will only be so much additional to be charged to the loss account. But these arguments are all against the present methods of operation in credit insurance, rather than against the principle itself. It is the methods of credit insurance companies of to-day that have come under criticism; faulty methods due in part, perhaps, to the fact that the movement is still young and that un- derlying principles and operative methods are still in an unsettled state, but also to what many consider the inherently wrong basis on which they are con- ducted. The great trouble with the present methods, and the reason that they have received so little What Credit commen dation from thinking men, is insurance their generality, a characteristic which Might Do destroys almost entirely their analogy to fire insurance. In the latter, the companies do not divide risks into a certain number of classes and place each piece of property insured in one or T. J. ZIMMERMAN 75 the other of these classes, but each risk taken is carefully investigated in itself and special regula- tions and figures applied to it. The fire insurance company knows exactly what it undertakes in every case. The frequently cited analogy of credit insur- ance to bank collateral and security can hardly stand; any indorser will carefully investigate each piece of paper he indorses, the character of every man for whom he goes security. If the credit insurance companies did the same, that is, if, when a credit man was considering the ex- tension of credit to a certain applicant and wished to be secured on the risk, the credit insurance company should come and investigate the risk, determine whether or not it wished to take it, and name a pre- mium rate specific to this one risk, then the insur- ance w r ould not interfere with the credit making of the credit man or even with his judgment, nor would the insurance company be working in the dark, as it vir- tually appears to be now. It seems absurd that the insurance company should take the ratings in the rating books as its foundation for operation, ratings which not even the publishers of these books them- selves will guarantee, and which every credit man veri- fies before he accepts. Much is claimed for credit insurance as a stimu- lator of confidence in trade and a preventive of panics. Since the wide expansion of credit operations, business prosperity has doubtless been based on confidence in the financial soundness of the debtor classes, confidence in the return of money for goods sold. Confidence is as real and important, although more intangible, a factor in business operations as the banking system itself. Anything, such as the guaranteeing of an ac- 7G CREDITS AND COLLECTIONS count, which will give to confidence a tangible basis, and will do away with that fecund cause of panics defined by the term, "the bottom dropping out," by preserving confidence and hence credit between seller and buyer, and will thus keep trade stimulated, is to be commended and encouraged. Not only this, but should a depression come, it is claimed its worst ef- fect, losses through outstanding accounts, would be nullified by the indemnification of credit insurance. Were it wholly true, as an admirer recently eulogized it, "that credit insurance weaves a mesh of tough fiber, confidence, which permeates the entire crystallized structure of our commercial body, giving greater strength and cohesion to withstand a strain," then it might unqualifiedly be called a public institu- tion working for the public good. But a panic is what the name signifies. It would be just as easy for the business world and the individual creditor to lose confidence in the resources of the insurance company itself, as it now is to lose confidence in the debtor, and the resultant crash would be infinitely worse. For, since credit operations would become even more extended under a credit insurance regime, the liqui- dation following a possible loss of confidence would be correspondingly greater. Considering that losses from bad debts in the last decade have approximated two billion dollars, to realize such an ideal as that painted in the statement quoted would require an in- stitution of almost incredible capital, power and prestige. CHAPTER VII CORRESPONDENCE IN THE CREDIT DEPARTMENT BY NAHUM M. TRIBOU Of Longley, Low & Alexander President, Chicago Credit Men's Association Letter-writing as applied to mercantile, as well as educational and social pursuits, may be an art. The limit of possibility in this direction has never been reached, nor will it be so long as we approach the individual through this medium in the endeavor to change his opinions or thoroughly imbue his mind with favorable' impressions already made. My obser- vation has always been that too little attention is given to this, the most important branch (after the capital has been supplied) in almost every business organization A prospective customer should know of us first through this medium, and, when he becomes a cus- tomer, never be allowed to forget that he has personal consideration in this manner as often as mutual in- terests can be served. Many houses never write their customers (with a few exceptions) unless it be a reply to a mail order that they are unable to fill in part or in whole. The main order is taken by a road salesman, and, when sent in, is acknowledged by a postal card. The next reminder that they are cus- tomers is a receipt of an invoice for the goods, and if they pay their bill before the credit man gets a 77 78 CREDITS AND COLLECTIONS chance to say "Please remit," the whole transaction is completed without a single letter, much less having engendered a friendly feeling. My idea is that a customer should receive a letter as often as circumstances and good taste will permit. men tal attitude of the writer should Writer's Attitude and be that of a promoter of a mutual interest, an enhancer of a value yet undetermined. He should be a man of rare dis- cretion ; should familiarize himself with the traits and character of the customer and feel that he is before him, framing a reply to be given as soon as the letter is finished. The customer's mental caliber, so far as it is ascer- tainable, should be well taken into consideration, and the letter should avoid .the appearance of form, or the attempt to impress the recipient with loftiness in a literary production. We should put ourselves in the customer's place and keep in our minds his relation to us, as well as our relation to him. More harm may be done by an ill-constructed letter than can be rem- edied by a tactful salesman in a year. The good physical condition of the correspondent is of most importance, for without it a favorable mental con- dition is impossible. A well-known author was once asked what preparation he made in beginning to write a book. He replied, "A good horse and saddle to regulate my liver." A high state of mentality at all times is out of the question, because the best balanced minds fluctu- ate and powers of impression vary from day to day, even from hour to hour, but strict observance of the laws of nature is conducive to a state of mind from which emanate thoughts of the clearer, higher order, NAHUM M. TRIBOU 79 which, transmitted through the medium of a letter, are bound to reflect credit and inspire the recipient of a letter with confidence in and respect for the opinions. Flattery is permissible only in the hands of the most astute and should be used only in very rare cases, and then only that flattery which appeals to the in- tellect or higher self, instead of that which appeals to the vanity and other weaknesses. We should take sufficient time to carefully read the letters which we receive, that we may fully com- prehend their meaning. Unless a letter of contract, the effect that it is intended to have on us is what we should receive. Business is transacted in too much haste, particularly so in the city. Our gauge in- dicates too high pressure, which is a heavy tax on the machinery. It may show great volume at the end of the fiscal year, but perhaps not the desired margin, which is the result. A reply to an inquiry once read, "Note good for any amount;" it should have read, "Not good for any amount," but the error was dis- covered too late. It requires the time of one individual in some houses to investigate errors and write long explana- tory letters of apology. Independent of the expense, who can estimate the saving if this were not neces- sary? As soon as a house gains the reputation with a customer of making errors frequently, that cus- tomer is in good condition to listen attentively to a competitor. I do not pose as a pessimist ; we all know that there are houses which conduct their affairs in an enviable manner, increase their volume of business each successive year, with their losses through errors infinitesimal, but therein is the practical proof of my 80 argument. What man has done, man can do again and better. The treatment of salesmen while on the road is a subject for deepest consideration, and those who have experienced the vicissitudes of their occupation can best appreciate the truth of this assertion. The result of their efforts depends largely upon the state of their mind, which may be greatly affected by the character and tone of the letters which they receive from the house. They may have a great many things to con- tend with, and if the best results are to be obtained from the territory which they are covering, they should have all the assistance possible, and at a time when it will do the most good. Every single inquiry made by them in regard to the business should be answered by return mail, even if some of them appear to us entirely uncalled for. Every correspondent, in fact, is entitled to an acknowledgement, at least, the day his letter is received, even though the answer must be delayed. There is no greater abuse in the office of the manu- facturer or wholesaler than the form letter. It is in- Personal tended to use them applicably, but they Versus Form are not so used in such a large percent- age, that the harm, when misapplied, in a measure offsets the good effect. I refer now to letters mailed in anticipation of the salesman's visit, or letters sent out on receipt of an order, intending to have the effect of having been framed exclusively for the benefit of the individual. If they are gotten up so there are no contradictions, they are so palpably "general" that those customers of ripe judgment and mature experience, whom we are most anxious to im- press favorably, see at once the intended subterfuge. NAHUM M. TRIBOU 81 I would prefer a circular letter that is undeniably a general letter, or a personal letter, from which the recipient knows that he and he only was in the mind of the writer when it was framed. When you discover that you are reading a form letter, your first inclin- ation (unless you already have reason to think that there is something of interest in it for you) is to stop and throw it into the waste basket; there is a symptom of the sensation you experience in finding the name of a proprietary medicine at the end of a long and interesting article on hygiene. I am told of a credit manager in one of the larger Western cities who uses fourteen successive forms seven days apart in making collections before the account goes to the attorney. A delinquent who needs the time and is willing to take it would settle back in peace of mind about the time he had received the second form, after he had once been "through the mill." In dictating a great many letters each day, it is almost impossible to avoid repeating expressions, but one should not indulge in pet phrases. The ring of originality should be patent to the writer if he would avoid stereotypedness, and thus the subtle flattery to the recipient our attention this day to you is at- tained. A theory is being advanced as new along the lines of psychology in business correspondence; it is Ps choicer in as ^ as Business itself. We are all Business Cor- psychologists intuitively, just as far respondence ag our intellects will carry us. A Yankee horse-trader, if he were a good one, offered to the mind of his subject progressive suggestions from the time he attempted to create in his mind a 82 CREDITS AND COLLECTIONS greedy desire to get sight of his horse, until he made him think that it was not only the cheapest piece of horse flesh he had ever beheld for the money, but that it would, under its new environments, increase in value one hundred per cent. Just so in our busi- ness correspondence; we appeal to the intellect if we have ourselves intellect, inspiring the prospective cus- tomer with confidence in our ability and desire to be of benefit to him. When that has been accomplished, he wants to buy goods of us. For obvious reasons, many of the best houses have in recent years added a department for special correspondence with the trade, assisting the salesman by anticipating his visit to the regular customer, but more particularly for the purpose of working up new business through personal correspondence with mer- chants whom they have never had on the ledger. This, of course, requires a great deal of preliminary work in learning the names of the merchants and some good peculiarities regarding their business or business methods, that they may intelligently frame a letter which will indicate to them a knowledge of their affairs; not financial, for that is understood and must be determined upon before they are put upon the "list," but others of which they are equally proud. This may sound theoretical, but any proposition sounds theoretical to the firm that denotes additional expense, or to the employe, if it means more work, until it has been tried and proved otherwise. The older plans of general, circular and catalog advertising are still adhered to (particularly the latter), and have their places, but the personal letter, after careful and NAHUM M. TRIBOU 83 judicious preparation, is to-day an essential feature of the modern mercantile house. I desire to say incidentally that many salesmen, as it applies to their regular customers, strenuously object to this plan of what they call "superfluous letters from the house," believing that, if the house lends its assistance in holding the customer and sell- ing him, their personal interests are jeopardized. This, however, is sophistry, for if they cannot, in personal contact with the customer, hold their own, they are neither broad nor adroit. One may employ all the subtle subterfuges known to human ingenuity in writ- ing and make no very lasting impression as compared with the personal interviewer, other influences being equal. It requires tenacity of purpose to write a prospec- tive customer two or three times a season, year after year, getting, perhaps, nothing but a civil note in evidence that the time is not come when the "wedge may be put in;" and not doing business with him. we cannot fairly know how he feels toward our com- petitor from whom he is buying; therefore, as the unexpected always happens, we little realize as we, perhaps for the tenth time, write him a courteous letter, describing to him some of the new things which the salesman of that territory has wisely decided will prove a valuable acquisition to his stock, that bur opportunity has arrived. It is possible that he is stronger financially than when we first attempted to sell him and that his business has grown to much larger proportions; if so, by our continued cultivation of the men we have an additional margin in the profit of our correspondence any way we figure it, and when we first sell him we receive the dividends accrued, as 84 our bills are larger than they would have been had we opened the account at the date of our first letter. It is a characteristic of human nature that we must have what we want until we get possession, when our ardor cools and the tendency is toward neglect. This is true of our attitude towards our cus- tomers, unless we take every precaution and guard ourselves against getting into the very wide rut carelessness. A properly arranged department for correspondence is its greatest preventive. The name comes up periodically for a letter of such and such a character, and we are thus stimulated to put new life into each particular case. The manufacturer or wholesaler is a silent partner of the retailer to the extent that the credit given to the latter is to his total assets and liabilities, and as we encourage or discourage him through our corre- spondence, so we must reap the benefits or disappoint- ments. Hastily written letters in making collections, striving to "get out first," have not infrequently pre- cipitated failures, just as carefully constructed letters, after studious consideration of all the circumstances, have avoided catastrophes. CHAPTER VIII CREDITS AND COLLECTIONS IN A WHOLESALE HOUSE BY EDWARD M. SKINNER Of Wilson Brothers Ex-President, Chicago Credit Men's Association Credit is the name given to that business opera- tion by which delivery of money, merchandise or other consideration is made on the promise of future payment. Credit is based on confidence; confidence in a man's resources and ability to pay, in his char- acter and integrity; confidence in the stability of the locality in which he conducts his business, in the country itself; confidence in the strength of its gov- ernment and the soundness of its finances. Credit- making is an estimate or opinion of the ability and intention of business men to carry out their business contracts, and of future commercial conditions. The man who pays cash uses the profits made from past business conditions; the man who buys on credit an- ticipates the profits of the future; hence the man who sells on credit must foresee the business con- ditions which are to bring these profits. Credit-making can no longer be done on the old mathematical basis, nor with the old sweat-box methods. The scope of credit operations has so widened, credit-giving and credit-taking have become so common, that no man is so weak that he must stand brutal inquisitorial questionings into his most 85 86 CREDITS AND COLLECTIONS private affairs, no house so strong that it can alford to have an openly cold-blooded and harsh man in its credit department, who will antagonize customers and repulse trade. The object of the credit man is in the main that of the whole selling end of a business: to sell goods at a profit. If he cannot sell a man goods to-day because he cannot extend him credit, he must remember that this man may be in such condition to-morrow that credit can safely be extended him, and he must rule his conduct accordingly. The credit man comes into more intimate contact with the customers of a house than any other man, Purpose and his relations are most delicate, he Policy of the touches a man where he is most sensi- Credit Man t i ve _ on the ques tion of his character and his ability. He must pre-eminently be a man who can handle people, who can reach their real selves. Anyone can get information of a certain kind by asking direct questions in a direct way and putting them down in a cold, unfeeling manner, with a "I- know-you're-dishonest-anyway" attitude working the customer up to such a murderous frame of mind that the least he can do is to refuse to buy if he does get credit. But the man who can talk to a customer pleasantly and interestedly about his affairs and cir- cumstances, getting a fact here and an admission there, until he has all the information he wants, with- out a direct question, will secure more complete and reliable facts than those obtained by a brutal straightforward examination, and will add a friend and perhaps a customer to the house. Even if credit cannot be extended, the customer should be so handled that he will leave the office in a pleasant frame of mind. This is all a mere question of at- EDWAED M. SKINNER 87 titude and tact. It is due, not to increasing com- petition between houses, but to the development of greater kindliness, smoothness and tact in the outward show, at least, of business relations. This more human attitude on the part of the credit man is of even greater importance when it is a question of handling a customer who is in the debt of the house and has gotten into difficulties. Many an account can be saved by tactful, though always firm, treatment; more than this, many a business man or house can be saved to its debtor and to itself by a policy of advice and co-operation real and substan- tial instead of a policy of suspicion and attack. When a debtor house reaches this point, everything depends on the attitude and action of the credit man. The attitude which a credit man should assume is really a result of the object which he sets before himself. His purpose is to sell all the goods he can, at the least possible loss, with the least possible ex- pense, and with the least percentage of orders de- clined. It is easy for the credit man to show at the end of the year a loss of only one-tenth of one per cent if he makes his credits that way. When the head of a concern receives his credit man's report, he should also ask for a statement of the number and value of orders declined. It is a very easy task to turn down orders; it is simple to keep the percentage of loss down if no chances are taken. The question for consideration is not only how little money did the credit man lose through bad debts, but also how much did he lose in orders rejected; how many prospective customers did he kill for all future sales; how many present customers did he offend or lose; 88 CREDITS AND COLLECTIONS how much expense put into securing orders did he nullify? Of course, if a credit man's judgment tells him that it is unsafe to extend credit, he should refuse to grant it. But it is a far cry from refusing credit to losing an order or a customer. If he does not believe it advisable to grant credit, the credit man should try to fill the order on some other basis. He may be able to ship the goods under some guarantee of payment; perhaps he can get the buyer to pay cash in part at least; by working in conjunction with the salesman through whom the order has come, some satisfactory arrangement can often be made. If the credit man explains to the customer fully and in a tactful manner why he must refuse credit, expresses a desire to keep the account, and asks him whether he cannot sug- gest some other basis on which the goods can be shipped him, he may even receive the co-operation of the customer in making mutually satisfactory ar- rangements. Thus, keeping in touch with this man, the credit man, by advising and helping in his growth, may gradually bring his account to a point where it can be put on a credit basis. Even though a credit man does not see his way clear to opening a credit account with an applicant, the full reasons can be put to him in such a light, his own condition can be so analyzed to him, the at- titude of the house can be so laid before him, that he will go away knowing the credit man is right and he will come back again. Instead of saying, when credit is refused him, "I'll be hanged before I ever trade with that house," he will say to himself, "I'll show that house that I am worthy of credit from them." To make such an impression requires tact in EDWAKD M. SKINNER 89 handling men, and the greatest compliment which can be paid a credit man is to have a man to whom credit has been denied come back later. The exact balance to be kept between sales and safety is in large degree a matter of house policy. Th Cr dit ^ depends on the kind of business in Man Who which the firm is engaged, the class of its customers and the margin of its profits. Some houses cannot afford to run a risk; others figure it will pay them to take chances, not in an irresponsible manner, but with eyes open and after careful consideration. It is comparatively easy to judge whether a man is really entitled to credit; when to take a chance is the question whose decision requires experience and careful consideration. Losses come in taking chances so does volume of sales. That credit man excels who, taking what looks like a long chance, by such mental means and systematic methods as he possesses shortens the chance and brings it to the point of safety. That the person who can do this must be born with such abilities is a convenient belief for the man who fails to attain such excellence. The fact is that a credit man is made much more than he is born he is made by learning the rudiments of business thoroughly, by studying men, their strength and weaknesses, by allowing his experience to teach him. The good credit man carries consideration for other people; his manners are pleasing. The methods he uses are quiet methods. He has a definite knowledge and a thorough grasp of the business of his house and of his work in it. Opinions he has but he ex- presses them only when necessity demands, and then firmly. In short, the good credit man's qualities are 90 CREDITS AND COLLECTIONS the same as those of any good business man. If he is a good credit man, it is safe to assume that he would have been just as successful in some other depart- ment of business. The particular knowledge and training required for his peculiar work he must also have; but, given these general traits, he can acquire that. He must have a wide knowledge of business affairs and com- mercial conditions; it can be acquired. Familiarity with the laws and customs of many different local- ities is a great help to him; he can learn them. He must have experience, not so much in credit-making as in general business activities; he can gain it. As far as that is concerned, if the credit man makes each credit as it comes up on a sound and safe basis, he need not worry about general or local conditions. It is only the poor credits, the careless and doubtful extensions, that suffer when a commercial squeeze comes and then they are past worrying about. And this is a good opportunity for saying that the time to do worrying is before the goods are shipped, when the credit is in the process of making. Such worry is legitimate worrying. Worrying afterward, when the goods are beyond reach in the hands of the debtor, is only detrimental; it hurts the work of the credit man and unfits him for his responsibilities. The basis for credit, the information in ac- cordance with which the credit man forms his judg- Basis for ment, differs according to different Credit factors. The location of a business Judgment house, the kind of goods it carries, the general character of its trade, the particular form of credit it ordinarily extends all these modify the kind of information wanted, so that it would be futile EDWARD M. SKINNER 91 to attempt to set down even in general the facts used in making credit judgments. Credit men them- selves vary as to the particular facts they desire and find useful. Each puts emphasis on different points and facts as his experience dictates; one lays stress on character, another on ability, a third on past experience; this one considers especially the amount of capital, that one the volume of sales. No better statement of the essential information needed to judge of the advisability of extending credit could be made than this, quoted from Mr. Horace C. Bennett: "The bases for commercial credit are ability, integrity (absolutely essential), and prop- erty (not necessarily essential), and the truth regard- ing these is what the trade wants. "Ability is measured by age, health, business ex- perience, education, income by personal effort. The evidence of integrity is business and social honor, personal deportment, character of associates and reputation. We mean by property that which can be taken under an execution and, whether personally acquired or inherited, qualified by income and net wealth." While tangible assets are the chief basis for the extension of credits, yet it can be stated absolutely and it is an agreeable evidence of the large part which the human element, man himself, plays in the more or less sordid operations of business that the rock bottom foundation upon which the whole system of credit is based is character. Those characteristics of the man himself most significant to the credit man are rightfully identical with the most essential ele- ments for success in any man: honesty, good habits, ability, industry, economy and care in the conduct 92 CREDITS AND COLLECTIONS of business. Of these rightful assets none can be levied upon by law, but just as a man cannot at- tain success without them, so a credit man cannot give credit to a merchant lacking them. In fact, if a credit man could be absolutely sure of an appli- cant's honesty, all other considerations might safely be eliminated. Not that honest men never fail, for they often lack ability and other essentials, but as between the man with large resources and doubtful honesty, and the honest but financially weak man, the latter is entitled to credit, and to the former confidence should be denied. A very significant fact, very often if not gen- erally overlooked by a credit man in judging of a customer's title to confidence, is the volume of his sales, the amount of his expenses, and the relation between the two. It is not the amount of capital which a man has in his business, so much as the frequency with "which he turns his capital over, that affords an insight into his real ability and the actual condition of his business, that shows up the true color of his affairs and indicates the healthiness of his trade. The amount of his expenses is a true in- dex of his business management. These two figures give the closest line on a merchant's situation. No financial report is, therefore, complete without a state- ment of sales and expenses. A credit man should get all information possible regarding a customer. The first source of informa- Source of tion > as *>emg the easiest and quickest (Credit Infor- of access, is the rate books of the large mation commercial agencies, where can be found the capital and credit rating of every merchant. The next most common source of information is spe- EDWARD M. SKINNER 93 cial reports from these agencies, which give detailed statements of the character, resources and situation of a business man. These reports are of value, for they give certain definite data and specific facts, and sometimes include a sworn and signed statement from the man investigated. But these reports are rarely fresh, they are revised confessedly only twice a year, and then undergo a process of rehashing rather than revising. The service of these agencies is improving, but only in the same ratio as its clients demand. Never in my experience has a request for a report from an agency failed to bring one forth, whether the agency had anything new to report or not. That this is a mistake in business policy as well as bad business principle is evident. The client pays for this in- formation and should receive something of value in return. If an agency has no new or fresh informa- tion concerning a merchant the second time a client asks for information upon him, they ought openly to acknowledge it, instead of trying to pass off some old stuff in a new form. Local attorneys and banks can be put to very good use as commercial reporters, and are a valuable instrument to the credit man if used properly. But the practice of obtaining information from them gratuitously is a mistake. The laborer is worthy of his hire. Better returns are bound to come if the labor is paid, for, even though local attorneys are in the habit of rendering such service gratis in the hope and expectation of receiving collection work from the houses they serve, they will, naturally and conscientiously, put more care and work upon a report for which they are receiving direct payment. Attorneys can give the latest information and 94 CREDITS AND COLLECTIONS the most intimate facts, for they are familiar with local conditions, they are on the spot and get their information first hand, and they are often in personal touch with the subject of the inquiry. The value of the information to be obtained from banks depends much on the way they are approached. A clever correspondent, who presents his case as a business proposition and is candid in regard to what he wants, at the same time offering compensation and not expecting the bank to waste its time, can secure very good service. It is well when banks are used to make inquiry from several in the same town, so as to avoid getting a single report from the cus- tomer's own bank, the value of whose information and point of view would be doubtful, to say the least. Bankers are the highest grade merchants in the coun- try; high grade reports can justly be expected from them; and usually, when they do give information, it can be relied upon. The "credit clearing house" is one of the best instruments in the determination of credits in those lines of business represented by it It does not dupli- cate the agency and other reports, but is supple- mentary to them. It reports only figures and facts, and really gives to a membership house access to the ledger account of the customer under investigation with every member having the account. As the system is described in detail in another chapter, it need not be enlarged upon here. Salesmen afford a valuable source of information, if the credit man will take the trouble to educate them to the observation and collection of the kind of information he desires. It can hardly be expected that EDWARD M. SKINNER 95 the good salesman will also be a good credit man especially in the same transaction. It is not human nature; the two activities are along different lines, and, especially when applied to the same transaction, pull in opposite directions. But salesmen can be made valuable adjuncts to the credit department if the credit man has the tact to arouse a co-operative in- terest among them. To do this he must convince them that he is trying as hard as they to ship goods. He must show that he is willing to be educated along their lines, that he will do his part. Then they will reciprocate. No two departments of a house should work in closer co-operation or more harmonious relation than these, for the success of one is essential to the suc- cess of the other, and a mutual enjoyment of each other's experience and knowledge tends to the suc- cess of both, and hence to the profit of the house itself. No greater weakness can be pointed out in a credit department than a failure to build up cordial relations with salesmen and to secure and make use of the store of first-hand information regarding ac- tual facts and conditions which they possess. Once credit has been granted and a new account opened, the work of the credit- man has only begun. He must not only watch each account, To Keep in Touch With keep track of the amount due and over- due, the promptness in paying, the size of the orders all of which he can learn from con- stant study of his ledger pages but he must also watch each customer and his general condition, which is subject to constant and often rapid change. This 96 CREDITS AND COLLECTIONS he must learn from special reports, from salesmen, and from personal interviews. This part of a credit man's work is responsible for the fact that he is generally the head office man, in charge of the bookkeeping department and the collections. From the bookkeeping and collection records only can the credit man know how much each customer owes, how much he buys, and how much he pays. It is necessary, therefore, not only that he have constant access to the books and records, but also that he have control of the methods in which they are kept, in order that they may fit into his general system. He must also keep in touch with the sales depart- ment of the home office, for he should know what profit the various kinds of goods bear. A house can afford to take a longer chance on an order carrying a large profit than on one in which the margin of profit is very small, a default in whose payment would mean almost a total dead loss. Every credit man, aside from the information he obtains regarding customers from various sources at the time of deciding on the shipment of specific orders, should revise his information on his active customers regularly twice a year, each season before he ships goods. This serves to keep him in touch with all his customers and their accounts, even those whom he considers absolutely beyond suspicion; it rearranges and revivifies the facts he has stored in his memory, and his records are kept fresh and up-to-date. Personal touch between credit man and customer should be a valuable factor in the making of credits. If it is not, if the hold of the house on the customer EDWARD M. SKINNER 97 is weakened by such personal contact, it reflects greatly on the merits of the credit man. It depends entirely on the personality of the credit man as to whether a personal interview with his customers is going to be of value to him in judging of their con- dition, and of value to the house through the favor- able impression made on the customers by the credit man. It all goes back to the question has the credit man that most important qualification of any busi- ness man, tact, ability to handle men? The fact on the one hand that the credit man must know about payments of bills in order to pass The Credit on or( ^ ers > an( * that he alone has the Man as intricate knowledge of customers which Collector wil j j n( ji ca t e how to handle accounts for collection, naturally places the collection department under his control. A credit man, to be successful, must be a good collection manager, a good collector. He must know that prompt collection of accounts is more than half the game in keeping the percentage of losses down, and he must know how to educate his customers into prompt payers of their own volition. Customers who are perfectly good are often as slow in remitting as the more doubtful. The collection department should be strict with all alike; it should be after a debtor the minute a bill is due, no matter how good he is, and stick to him until the indebtedness is paid. A house which is a prompt collector and shows its customers thereby that their accounts, which con- stitute its business, are watched will command more respect than the careless house, and will invariably be paid first. This does not mean that annoying or offensive 98 CREDITS AND COLLECTIONS methods need be resorted to by a house the moment a bill is overdue. A statement before the account is due, marked with some excusatory phrase, as "For Correction," may be followed by a second statement for a reminder. After a reasonable length of time has elapsed, sight draft may be made on the debtor. This is no such infallible method now as it once was, when dishonor of a sight draft was a confession of insolvency. A sight draft has lost all its terror, and a merchant thinks no more of refusing to meet it than he does of putting off the payment of an ordi- nary bill. The change has come about gradually and is the fault of the creditor class; in this, as in many other phases of collections, they have been and still are too lenient. If a draft is returned dishonored, the handling of the account from this point on depends entirely on the credit man's methods and the nature of the customer, and no one course of procedure can be laid down as the correct one to use in all cases, nor would all agree on the handling of a single given case. Credit clearing drafts are very effective, because if such a draft is dishonored the merchant knows that this fact is going to be communicated to all the members of the credit clearing association, upon whom he must depend for his supplies, and he is only too well aware of how seriously this will impair his credit. A collection agency draft is similarly efficacious. It is often well, in w r orking on stubborn collections, to call the debtor's attention to the fact that he is hurting his credit, for there he is touched in a vital and sensitive spot. Great conservatism should be practised in the policy of granting extensions. Good and substantial EDWARD M. SKINNER 99 reasons, personal or local, should be demanded from the debtor to account for delay in payments before extensions are granted, and a thorough knowledge of his condition required. If more time is given, the creditor should seek to keep in closest touch with the debtor and his affairs. Sharpness and quick action are necessary when a debtor fails both to pay his account and to give any The Credit satisfactory reason for his delay in pay- Man and ing, after repeated letters from the the Debtor creditor have admonished him. If the debtor only knew it, the credit man is the one person to whom he should unburden himself under such circumstances, for he is generally as worried over the account as the debtor himself and as anxious to settle it, and is ready to meet him halfway. A credit man will never "turn down" a man who tells him the truth, and will alwaj^s do his best to arrange a satisfactory settlement. If such a customer but appreciated the liberal feeling of the credit department toward him, and would simply write to the credit man when his bills mature and he is unable to make payment, and would make some definite arrangement for the pay- ment of the account, he would be surprised to find how easy it would be made for him. The credit man always wants to help the honest debtor if he can; if the debtor will not let him, he is helpless. If he makes an offer and the debtor pays no attention to it, the credit man is at the end of his string. A customer ought never to feel that, because his bills are past due and he is unable to pay them, he will fail to meet consideration at the hands of the credit man. The worse the condition he is in, the more anxious the credit man is to help him, for he cannot 100 CBEDITS AND COLLECTIONS get his own money without helping the debtor. This may be a selfish motive, but for that very reason it is a powerful one. In all his efforts at collection the credit man should never give offense; let him throw the tuft of grass first, just to call the debtor's attention to what may come. If this does not work, the credit man may give him the rock but only as a last resort, for stringent methods, the collection of an account by legal means, will surely mean the loss of the customer in question. This is inevitable for three reasons: The credit man will always suspect, and justly, such a customer, for nowadays a man must treat his account pretty badly to have it put into an attorney's hands, and so he will hesitate to extend him credit again. Second, this will be a good account to drop anyway, for a man who has been sued by a creditor usually treasures it up against him and will take a joy in sticking him if ever opportunity offers. Third, the customer will very rarely himself come back to trade with a house which has sued him. Never to compromise an account seems to me a poor policy for any house to adopt The usual and fairest and most satisfactory method in the case of an insolvent debtor is for the smaller creditors to accept any percentage or other settlement thought fair and just by the larger creditors. The latter, having most at stake, will always investigate thoroughly and can be depended upon to make the best possible terms. It is fairest for all houses to be thus guided by the desires of the larger creditors, for it is a reciprocal arrangement. The most frequent source of commercial losses is probably the giving of too long a line of credit EDWARD M. SKINNER 101 to small new merchants because of a fear that a competitor may get the order. The larger proportion of a credit man's losses comes from carelessness; that is, not from bad judgment in granting credit, but from negligence and hastiness in extending that credit to further and larger orders without keeping in touch with the account and verifying his informa- tion on the customer. The account once opened, the busy credit man, getting the name of the customer in his mind, passes future orders through and allows the account to increase without proper knowledge and consideration. CHAPTER IX CREDITS AND COLLECTIONS IN A MANU- FACTURING HOUSE BY BERTHOLD E. BORGES Of The Sherwin-Williams Company In a consideration of the subject of the manage- ment of credits and collections in a manufacturing house, it will be found that the problems involved and the methods used are much the same as those of a wholesale house, for the tendency is growing stronger for the manufacturing house to deal directly with the retailer, and even the large consumer, without the intervention of the jobber. But even though we look upon the manufacturer as one who deals with the jobber, and the wholesaler as one who deals with the retailer direct, there would be very little differ- ence in their methods of conducting credits, for the same care must be exercised in extending credit to a large, well-known jobber as to a small, unknown re- tailer. The only difference is that the jobber's ac- count is many times as large as the retailer's and hence requires many times the care and often involves many times the worry that a smaller account does. The source of information, the method of gathering it, and the consideration of it, are the same in the two cases. It is in the attitude he takes, the object he has in view, his general policy, that the credit man of a man- ufacturing house differs widely from the credit man 102 BERTHOLD E. BORGES 103 of a jobbing house. The manufacturer works nation- ally and even internationally, the jobber locally. The manufacturer hails with delight an order from a far corner of the country; the jobber will look upon it with suspicion. The jobber has a particular territory in which he sells, which he tries to cover thoroughly, and he must sell to almost any one of any standing in his territory; the manufacturer need not sell in- discriminatety, he merely takes the cream of the re- tail trade, the big retailers who stand head and shoul- ders above their competitors and whom it is to his advantage to have on his list of representatives. He can, in a way, choose his own customers, selecting the best, and still dealing with the poorer risks through a middleman. The credit man, by simply referring the latter to a jobber, can refuse credit without ap- pearing to do so. There is, however, another consideration which sometimes compels the manufacturer to assume How an extraordinary risk. A jobber car- Credits ries various lines of goods. He sim- ply wishes to do a certain volume of business in a certain territory. If he can do this vol- ume of business in eight cities of a territory in which there are twelve, he will let the other four go. A man- ufacturer is usually putting out an advertised line of goods, and he desires to be represented, broadly speak- ing, everywhere. He cannot afford to pass over one large commercial center, for, having by his advertis- ing created a demand, there is possibility of loss in failing to supply the demand and danger to his reputa- tion by not offering facilities by which people can se- cure his goods. Thus, the credit man of a manu- facturing house, in order that his goods may be on 104 CREDITS AND COLLECTIONS sale in a certain town or district, is often compelled to take more dangerous risks to accomplish this ob- ject than a jobber would ever take. To demonstrate: A manufacturing house often has a new line of goods which it wishes to introduce. To do this, it must be willing to take extraordinary credit risks. The manufacturing house is the pusher of the goods, and often places them merely for the adver- tising effect. It is never the purpose of a jobbing house to merely get goods before the public. Its pur- pose is always to sell a staple with the required mar- gin of profit. A credit man of a manufacturing house must always keep a watchful eye on the stock, for in some lines of trade the goods left over at the end of the season are so much dead loss. One of his objects must be to distribute the sale of goods in such a way that at no time will the bulk of credit be in any one district, and that at no time will the bulk of sales be segregated in a particular period of the year and so conflict with a systematic, even output of the factory. This, again, is more the duty of the sales department, and yet the credit man can render marked aid. In most manufacturing business there are one or two seasons of the year when the consumers' demand is particularly heavy. The retailer will be most inclined to lay in a stock of goods just before these seasons begin. I need hardly make the point that a factory whose output is evenly distributed over the twelve months of the year will have a much lower production cost per unit than if the output is crowded into one or two periods of three months each. Now, by making the terms of payment to the jobber and retailer longer, a credit man can secure orders several months before BEKTHOLD E. BORGES 105 the consumer's demand begins. And if there be an understanding between the credit man and the sales department, by which the salesmen will secure such orders from the best customers of the house, the credit man can make his terms of payment such that cus- tomers will suffer no disadvantage through early ordering. In his direct relation with the sales department, the credit man should look upon it as he does upon Relation of ^ e jobber. It is merely a selling agent, Other Depart- and must be watched in the same way as a jobber as to terms, discounts, and prices. The credit man must really act as a tail upon the over-zealous sales kite. He should be the watch dog of the treasury. Whether it confesses it or not, the object of the sales department is to sell as many goods as it can snjuggle through the credit depart- ment, and the credit man must realize this. But the most fatal thing for a business is lack of complete harmony, good understanding and co-oper- ation between the credit and sales department. The credit man's object is, just as much as the sales de- partment's, increase in the volume of the sales, but he adds the saving clause, "with the lowest percentage of loss and with the least expenditure of money." As will appear in the course of this discussion, the sales- men can be of much help to the credit man in his own work, and he cannot afford, under any consider- ation, to be on anything but the most friendly, har- monious and co-operative basis with them. The relation of the credit man to the advertising department should also be close. He should always be broad enough to see that anything which conduces to advertising goods and to giving the public a good 106 CREDITS AND COLLECTIONS impression is worth while trying. He must often sell merely for the sake of being represented in a locality. Therefore he should be in close touch with the adver- tising department, in order to know what goods to push, and on what goods to take risks for the sake of publicity. For these reasons, he should have some- thing to say in regard to the advertising policy of the house. In the promotion which is done through corre- spondence and other means from the home office, the credit man should have an influential part. There can be no profit in promoting business with a dan- gerous credit risk. The credit department should have in its hands the classification of the firms which the promoting department is trying to interest. The credit man should be the head of the book- keeping department, at least so far as the accounting methods and treatment of customers are concerned. He is the most familiar with customers, and comes in closest touch with their accounts. The accounting methods should conform to his needs and to his policy of handling customers. With salesmen's records and purely financial records he need have no direct con- nection. The knowledge which the credit man of a manu- facturing house should have is of three distinct kinds. Knowledge In the first P lace ' he should have Necessary to knowledge of business operations and a Credit Man g enera j understanding of financial con- ditions all over the country. Inasmuch as the busi- ness of a manufacturing house is national, the credit man should know the condition of the whole country and the commercial districts into which it divides itself. Very often one section of the country is under- BERTHOLD E. BORGES 107 going an industrial depression, while another is en- joying boom times. He should be able to analyze such! financial conditions and to apply them to the pro- tection or furtherance of his business. In the second place, a credit man should have a thorough understanding of the actual manufacturing and operative details of his own business. He should know the value of goods, the margin of profit and the stock oh hand. He can afford to take a longer chance on goods which show a large margin. He should be able to estimate the amount of an order without having to look up each item; if he were com- pelled to do this, his day would need to be three times as long as it is. The very best man for any credit department is one who has grown up with the business. More than any other executive, the credit man should know the history, circumstances and possibilities of all its customers and accounts and the policy and purposes of his house. This he can only learn by long contact with them in the bookkeeping and collection depart- ments, and by an understanding, through experience, of the relation of the house to its customers. In the third place, a credit man should have some knowledge of the management and operation of any line of business in which his particular customers are engaged, even though the goods which his house sells may consist of the smallest part of the custom- ers' stock. A manufacturing house may sell the hard- ware man, the general storekeeper, the business specializing in its one line only, the manufacturer, and direct to the customer. The credit man must gauge the credit to which a customer is entitled in proportion to the ratio which his goods bear to the 108 CREDITS AND COLLECTIONS whole business. That is, if a buyer's credit line is $10,000, and my goods will be only one-tenth of that stock, he is not entitled to more than $1,000 worth of credit from me, for very probably he will receive at least $9,000 worth from other sources. If each credit man were careful to limit the extension of credit to his proper proportion, there would never be that overbuying on the part of the retailer which is so often the forerunner of insolvency. If the credit man has this knowledge, not only can he judge credits better, and can extract from the agency reports that come to him the exact condition of the customer's business, but when his relations with a customer have become intimate enough, he can act as an adviser. The credit man should finally be somewhat of a financier and something of a lawyer. He has his fingers on collections, the incoming money, and on credits, the source of incoming money. Even though he knows that a customer is good for a long line of credit, often the financial condition of his house will not allow of such favors. To work intelligently along this line he must, of course, understand the condition and policy of his house. He must, in fact, have such knowledge that he could, at any time, take over the duties of the treasurer. He must be able to grasp anything pertaining to figures, for it is often from a mass of figures that he has to deduce his conclusions. That he needs a knowledge of the law is evident. Primarily, he should know the law in so far as ex- tending credits and making collections are concerned. Further, not infrequently he has occasion to act as receiver and trustee for an insolvent business, and to BEKTHOLD E. BORGES 109 do this, more than an elementary legal knowledge is necessary. Character, estimated worth, volume of business and expenses these four attributes are the basis of Sources of credit. If a man is lacking or weak in Credit any one of these, experience only will in- Information CREDITS AND COLLECTIONS A credit man will often be sufficiently secure regarding an account to send out the order, and still think it advisable to get further information in order to be forearmed. In this case he passes the order through, but marks on a folder as before the report wanted, and the clerk goes through the same process as for the preceding case. Instead of putting these folders with the pile requiring daily attention, they are placed in another pigeonhole to await the informa- tion sought. This latter process applies especially to first orders from new customers. The clerk who opens the mail can recognize the first order, since the man send- ing it will have no index number. Such orders do not go with the general mail to the credit man's desk, but go immediately to his clerk, who makes out for the new order index and ledger cards and a report folder, writing on the cover not only the name and address of the new customer, but also the rating given by the mercantile agencies, which he immediately looks up. These folders then come to the credit man. Very often he decides from the ratings that he can venture sending the order at once, taking his leisure to look up the new man or firm in detail. This he will do only when the ratings are good and identical, a very significant consideration, for if the ratings are not the same, not only is one bound to be more un- favorable than the other, but it shows that the agency having the poorer rating has some information which the other could not obtain, and such information is always the most important to the credit man. As a rule, in such a case, he will hold the order for fuller reports. ALFRED TERRELL 167 The regular ledger cards are white. Two other shades are used to indicate specific conditions. When for any reason, such as payments becoming slow or local or general financial conditions adverse, an order is refused, the white card is immediately taken out of the ledger case, and a blue card, with the identical figures and information on it as the white card, is sub- stituted. This shows to the credit department forever after that this man at one time or another was in such a poor condition that he was refused credit. In the same way, when an account against a cus- tomer has once been passed up placed in the hands of an attorney a red card is substituted for the original white ledger card, and always remains in the ledger case, even though an account is again opened with the customer. It constantly warns the credit man that once he had trouble with this man and was on the verge of a loss through him, and the card stands as a perpetual warning. No stain or smirch is harder to eradicate than one on a man's commercial reputation; a fall, even a stumble or slight waywardness, is always remem- bered, not necessarily against him, but about him, by the careful credit man, and rightly. A man who has once shown instability, who has once failed to imeet his just obligations, who has once completely failed, has shown that there is some weakness in him ; something constant and permanent produced that weakness, whether it was in his character, his ability, his amount of capital, or in his location; very rarely does it happen that it was merely transient, although there are, of course, exceptions. Once a man's account is upon such a blue or red card, although he may come 168 to have it entered upon his brief that he has completely recovered and is now perfectly sound and trust- worthy, still always will his former weakness be brought to the attention of the credit man. The order O. K.'d by the credit man, it goes to the invoice clerk. He makes four carbon copies of Routine ^ e or< ^ er on *^ e machine. The first one, Collection called the quad sheet, goes to the collec- tion department; the second serves as the bill which is sent to the customer; the two others go to the warehouse for the filling of the order. When the order is filled, one is kept at the warehouse as its record and receipt of the goods shipped; the other is sent back and serves as the source from which to post the ledger. The first and second copies, which have been held by the billing clerk pending the shipment of the goods, are sent to their destinations. The one which goes to the collection department is divided into two parts by a perforated line, so that the part containing entry of the individual order number, the date shipped, the order number, the terms and the amount of the invoice can be torn off. This end which is torn off serves as the collection department's tickler; the remaining part of the bill is filed in its numerical order number for convenience in reference. Suppose this order was shipped on March 1st, and the terms are thirty days net. The quad will be filed in the tickler thirty days ahead. On the 1st of April, therefore, it will come to the attention of the statement clerk in charge of the tickler. He looks up the ledger account of the customer, and if he finds the bill is unpaid, he will send a statement of the account, which is made in duplicate. The original is ALFRED TEBKELL 169 Order Blank: four manifold copies aremade out. The copy here reproduced goes to the collection department and shows the perforated end which serves as the tickler mailed to the customer and the duplicate is put over for ten days. A stamp is used on the statement sent out inviting the dealer to remit by New York or Chicago draft, as the banks charge exchange on local checks, and saying that should we not receive prompt remittance, we presume you want us to make sight draft. On the 20th, if the ledger accounts show no remittance, draft is made. The draft is filled out in duplicate; the duplicate is sent to the bank through which draft is made; the original is kept for filing in the tickler, ten days ahead again. If the draft is returned dishonored, the account passes into the hands of the collection manager, who is very often the credit man himself. He usually enters into correspondence with the debtor, attempt- ing to place the matter before him in such a light that no more extreme methods will have to be resorted to. Often, when an account has reached this stage, orders are held up until some kind of satisfaction is secured. In this correspondence the debtor is always 170 CREDITS AND COLLECTIONS urged to offer some satisfaction, some form of settle- ment, however slow it may be; to unburden himself to such an extent that the house may know where it is at regarding the account. A very efficacious play in extreme cases is to telegraph rather sharply immedi- ately upon return of a draft, expressing surprise at the dishonor of the draft and demanding immediate remittance. This will, in the majority of cases, bring payment. If it does not, after one or two letters, an- other telegram, very sharp this time, will be likely to bring something. The main thing in these collection methods is to seek to impress the doubtful debtor that the house is watching its accounts sharply; that it wants its money when due; that it is bent on doing business on a business-like basis. If no satisfaction can be secured through specific means, forcible legal methods must be resorted to. Before any legal steps are taken concerning an ac- count, the matter is referred to the credit man, and is left in his hands. He may make a further effort to secure payment through peaceable means, or may at once hand the account to an attorney for collection. When an account has been placed in the hands of an attorney, a red ledger card is at once made out for the debtor, and the balance of his account is entered in a suspense account. At the end of each year the balance on the suspense account is examined and an estimate made of the probable percentage of collections to be obtained. Thus, if the credit man thinks that twenty-five per cent of the claims in the suspense account are collectible, seventy-five per cent are entered in the profit and loss account for the year; the other twenty-five are left in the suspense account. ALFRED TERKELL 171 Whenever a collection is made in this account, it is credited to it. The object of this suspense account is to keep bad debts off the books, without, at the same time, charging them into profit and loss account at once, and so necessitating the opening of that account in the course of the fiscal year, a procedure replete in possibilities of errors and concealments. It is thus apparent how the credit man, through his connection with the collection department, which K i Jn reports to him all accounts overdue more Touch With than thirty days, and also all accounts on Accounts which drafts have been dishonored, keeps in touch with delinquent accounts. His in- formation is rendered still more accurate from the fact that he handles the remittances in the mail and examines many accounts in the course of a month. In the particular business in which this house is engaged, most of the heavy buying is done at two distinct periods of the year. Just before these buy- ing periods come around the credit man goes over all his accounts and the reports on all his customers and revises them, getting fresh information and reports in all cases where it appears in the least necessary. In some few cases, of houses on such a firm foundation and reputation that their commercial honor is posi- tively unassailable, it would be a waste of time and energy to get fresh reports. In other cases reports may have been obtained only a short time ago, and so will serve for the coming season. The semi-annual revision gives the credit man a new hold on his ac- counts and a clear survey. It is true that this system alone cannot make a credit man; nor can it make a very careless credit 172 CREDITS AND COLLECTIONS man entirely careful. The credit man must do his share; the system will meet him more than half way; in fact, will educate him into careful, conservative habits. This system will work carefulness into a credit man; he will never go ahead when in doubt. Every man must face some losses; he cannot escape them if he does his duty by the sales end of the business. In describing this system, it should not be understood that the taking of no chances at all is advised. Such a course would be as bad as being too free with credit; but if the credit man does take chances, by proper judgment in picking his chances and by proper care- fulness in setting the terms on which he takes them and the guards he puts about them, he can reduce his chances almost to certainties. CHAPTER XV A SYSTEM FOR THE CREDIT DEPARTMENT OF A RETAIL HOUSE. As Used in Chicago's Department Stores The two chief desideratums to be reached in the accounting end of a retail credit department are ex- pansibility and promptness expansibility, because the great retail houses now carry anywhere from five to one hundred thousand accounts on their books, some of which are intermittent, others very heavy; promptness, because it is much more important in retail than in wholesale business to train customers to prompt paying, and this can only be accomplished by submitting bills regularly and quickly. Accounts are usually opened in a retail store in an indirect way. A customer who is making his or her first credit purchase does not generally make a direct request for credit, but simply has the purchase charged. The clerk who makes the sale, not knowing of course that this customer has no charge account, makes out his usual charge sales slip, indicating that the sale is to be charged. The ticket is passed up to the stamper like any other, and he, not finding the customer's name in his book, knows this is a new customer, and sends the matter up to the credit office. If the customer wishes to carry the goods away with him on the first purchase, he is usually re- quested to see the credit manager at once; if the goods are to be delivered, the credit manager has time 173 174 CREDITS AND COLLECTIONS to investigate the case at greater leisure. When such a first charge slip comes to the credit manager, or a direct request for credit is made, he sets the ma- chinery in motion for investigating this new cus- tomer. In the first place he may request a personal in- terview. In this the two things he seeks to discover The Basis are tlie integrity of the applicant and his Of Credit resources. The first he must discover through his powers of observation and his ability to read human nature, and also from the consistency of the facts which the applicant gives him. His resources he must find out from direct ques- tions as to the position, income and the property of the applicant. These facts the applicant's name and residence, place of business, or, where the wife ap- plies, the husband's income and property the credit manager enters on a blank. He then proceeds to make use of outside sources of information. He verifies the residence and the place of business of the applicant. He applies to the local mercantile agencies for reports upon the in- dividual in question. These agencies in one way or another accumulate a great mass of information and can afford reports on many individuals, especially those questionable persons against whom they have held accounts for collection, or previous queries, and therefore concerning whom they have collected in- formation. The character and scope of the services of mercantile agencies in this direction are improving, and information on almost any individual of any standing is obtainable. These agencies gather in- A RETAIL CREDIT SYSTEM 175 formation almost entirely on individuals and not, as a rule, on firms and corporations. The regular commercial rating agencies can be appealed to in case the applicant is a man engaged in any commercial pursuits; in this case the credit man will receive the same information that a whole- sale credit man would get the complete facts con- cerning a man's business record, integrity, property and credit standing. The credit manager receives every morning the mercantile sheets and legal bulletins which give the bankruptcies and failures of the previous day, the suits which have been brought, both in the higher courts and justice courts, the mortgages foreclosed and chattel mortgages recorded. These sheets are an- nually compiled into a year book, and into a decade book, so that one book will give the names alpha- betically arranged of all individuals against whom suits have been filed, or who have gone into bank- ruptcy, or against whom mortgages have been recorded or foreclosed in the ten years past. This is a very important source of information to the retail credit manager in a large city. In the majority of instances a personal interview with an applicant for credit is not necessary, this outside information affording all the data essential for the formation of the credit manager's judgment. Usually the applicant is not even aware that an in- vestigation has been made. It may be said that in a great majority of cases where credit is asked, it is extended. This is done because, in a retail more than in a wholesale house, credit can be graded and quali- fied according to the customer's status. 176 When the credit manager has determined that ex- tension of credit is advisable, he places a definite How Facts li m it on the monthly credit of the new Obtained customer; for instance, he determines Are Used from hig k now i e( j ge of the individual's reputation, income and resources that he is entitled to a credit of, say, $50 a month. This does not mean that the customer will never be allowed to buy beyond this sum, although no one but the credit man- ager has discretion to extend credit beyond this sum, and he will do so only after careful investigation; the customer never is told that such a limit has been set. When an account is opened, the name of the customer and the salient facts regarding him his residence, business address and credit limit are spread on all the indexes in the hands of the stampers throughout the store. The duty of these stampers is to approve of all charge sales, and the names and limits in these indexes afford the basis on which they pass on sales. The limit is also entered at the top of the customer's ledger page. 'All information collected concerning the cus- tomer his own statements, reports from agencies and other facts is placed in a folder, which is filed alpha- betically in a vertical file cabinet. In this folder is placed also all subsequent information; for instance, if the customer becomes notorious for slow paying or for complaints, or if his account has to be placed in the hands of an attorney for collection, these facts find their way into this folder, and it becomes a complete source of information upon every credit A RETAIL CREDIT SYSTEM 177 customer of the house. These records are kept in credit manager's office. A credit manager's source of information for credit customers of whom he has a list is therefore threefold. He has in the first place his personal im- pression of the customer, in the second place he has all the specific facts regarding the customer's history and character in his folder files, and in the third place he has the customer's accounts. Information on all but the gilt-edged customers should be revised at least once a year. For this the credit manager has his original sources of income to draw from, and he should in addition go over all accounts in the least doubtful. Now let us go back and follow the course of one charge sale through this system, on the supposition Method of *^ a * * ne cus t mer making the purchase Passing on has an open account with the store. Credit Sales When the gales ticket for a charge sale has been made out, it first goes to a stamper to be approved for delivery. There are twenty-five of these stampers scattered throughout the store. Each has an index in which is listed every one of the store's charge customers, in good standing or otherwise. Opposite each name is set a certain limit of credit. These limits must be revised daily, for the limit here set down is not identical with the custom- er's regular credit limit, nor is it wholly determined from it; it depends also upon the amount the customer already owes for the current month, how much he has overdue and his general standing. As a further safeguard, the stamper is allowed to pass through sales up to only one-fourth of this limit. If the sale 178 CREDITS AND COLLECTIONS calls for a greater sum than this, the ticket must be sent up to the credit office for consideration. It must be remembered that the purchases made by a customer in one visit may go to half a dozen different stampers, so the limit of each stamper must be small. The credit department, having complete information at hand, can determine intelligently and safely whether credit above this limit can be extended. To take a concrete instance, suppose a customer's total credit limit is $50. Suppose it is the 20th of the month, and the customer has already drawn upon his account to the extent of $20. On the morning of the 20th the credit limit placed beside this customer's name in each of the stamper's books will probably be about $20, and each stamper can pass sales through for sums up to $5. If a purchase exceeds, it is referred for approval to the credit office. When an account is opened the new customer is given a card with merely his confidential iden- tification number upon it. He must present this card whenever he wishes to carry away purchases which he has charged. This prevents one person buying fraudulently under another's name. The salesman attaches this card to the sales ticket and it is passed first to an inspector one of whom is in every department who has a book with these num- bers listed in them and has discretion to pass through sales up to a limit of a few dollars. If the purchase exceeds this limit, the inspector refers it to the floor walker, and if he considers the amount too large for him to pass on it goes up to the stampers, and must pass through the regular routine. At the end of each day, all charge tickets are A RETAIL CREDIT SYSTEM 179 gathered together and go into the credit sales section of the bookkeeping department, after they have gone through the auditor's office and been checked there. The charges are immediately posted upon the ledgers. Loose leaf ledgers are used in this system, and the accounts are arranged alphabetically. The sheets are ruled off for three col- The Ledger and Billing umns: In the first column are entered System eac}l day the debit c k a rges; in the second column are entered, in red ink, credits, in the third column is entered the balance due. This column is balanced every time an entry is made in either of the other two, so that a glance at any ledger page will show at once how the account stands. When a ledger sheet is full it is transferred to the transfer files, also arranged alphabetically, and is filed away in vaults with its predecessors. This enables an establishment to keep together in one place the entire account of each customer, no matter how many years it may have run. After the posting is completed, the sales slips are passed on to the billing department, and the charges are immediately entered on bills; that is, bills are not made from the ledger account at the end of the month, but sales are posted direct to bills day by day. Therefore, if, on the first day of the month, Mr. Smith makes a purchase of $10 and has it charged to his account, the morning of the 2d this slip with all the others comes to the bill clerks, and a new bill for the month of June is started for him, upon which first charge is at once entered. The billhead is ruled for three column entries: In the first column are en- tered the debit charges, not in totals, but with each 180 CREDITS AND COLLECTIONS article of the sale itemized; the second column is used for totaling these individual articles by daily sales; the third column is used for entering credits. The bill clerks keep the bills arranged alphabetically during the whole month, and each day they post the charges from the previous day's sales tickets. On the last day of the month, therefore, the bill clerk has merely to post the charges of the day, and, without any further work except to total up the columns and subtract the credit from the debits, the bills are complete and can be sent out on the evening of the last day of the month. The bills are made out in duplicate and the carbon copy is filed in an individual folder for each customer, in a vertical filing case, where are kept all the duplicate bills for the previous twenty-four months. Retail customers, even more than the customers of the wholesale houses, must be trained to prompt Collection payments. This is true not only because Policy and a retail house sells on a close margin and considers after all that it is merely doing a favor by extending credit at all, but also because it is impossible to get the close information and the firm hold over a customer that the wholesale house can. The retail house deals principally with women. For this reason collections must be made in a more adroit and less coldly businesslike way. When an account is opened with a customer, espe- cially if she be a woman, she is given plainly to understand that bills must be met between the 1st and 10th of the month, immediately upon receipt of statement If they are not paid by the 15th a second A RETAIL CREDIT SYSTEM 181 statement is immediately sent, calling the customer's attention to the oversight and asking for an im- mediate remittance. The customer's charge sales are not stopped at once unless the account in question is very large, for and here again because the customers are chiefly women it is a fatal policy to refuse a woman credit when she has been accustomed to receive it. She is apt to regard such action, which a business man would look upon as an ordinary condition of busi- ness, as an insult, and promptly withdraw her patron- age. It is also impossible to dun this class of custom- ers in the same cold-blooded and insistent way that a wholesale house can do. If the second statement brings no result, personal collectors are sent out. These are all under the juris- diction of the credit manager. For, as has been said before, this is not purely a business transaction. There is a personal and human element in it which must be taken into consideration. It cannot be de- termined on business principles. It must be carried on with an understanding and consideration of human nature as exemplified in this class of customers. The credit manager of a retail house must above all remember that most people are honest and want to be honest, and that even a greater majority will be honest if they are helped along in the right direction. He must study the personalities of his customers, their social and business conditions especially, so that he will know when it is well to let an account run for two, three and even six months without making ex- treme demands upon the customer. On the other hand, when a retail credit man has once made up his mind that he cannot afford to get any deeper with 182 CREDITS AND COLLECTIONS a customer, he should act quickly and promptly. The customer must be made to understand that he is not treating the house fairly by not paying his account, and that, although the store wants his ac- count and is glad to have his business, further credit must be refused him until a settlement is made. The collection system of this store is, therefore, very simple. It uses the two statements mentioned, and after that treats each case individually through collectors under the instruction of the credit manager. A retail store must be chary of bringing suits for collection. Bringing a suit means the loss of a customer in a double sense. The retail credit man always has to keep in mind that his object is to in- crease sales, and that anything he may do to lessen cash trade is superlatively criminal. If a customer is not worthy of credit, the credit man should at least not turn him away from the paths of cash buying. A suit will mean the loss of a customer's cash trade as well as his credit trade. Then, too, habitual suit bringing will give a store a bad reputation. The out- side world, not knowing the circumstances of the case, will frown upon a store which is known to bring suit frequently and quickly. It has been found that constant pounding by correspondence, by repeated statements and col- lector's visits, is much more efficacious than stringent measures in bringing payment in the case of the re- tail house, where a debt is looked upon more as a thing of honor and less as a thing of business. CHAPTER XVI A CREDIT AND COLLECTION SYSTEM FOB AN INSTALLMENT HOUSE BY HENRY MARCUS Of Spiegel's House Furnishing Company It is doubtless true that in every business the collections are a vital part of the credit department, but in no other business enterprise are the collections so prominent and vital a feature as in a business con- ducted on the installment plan. In a credit system for the installment house, therefore, the point of em- phasis, the heart about which structure must be built, is the collections. Such a system, to be successful, must accomplish four objects. First, it must provide a quick means by which the responsible head of a credit department may approve an account. In a retail installment business sales are made to customers personally in the store, and accounts must be opened almost on the spur of the moment, with little investigation, and, what is even more important, without giving offense or annoyance to the customer, who is probably stand- ing at the credit man's elbow while he is deciding on the advisability of extending credit. In the second place, the system must afford ade- quate security for the goods sold, and in this way make up for the almost entire impossibility of choos- ing customers. Thirdly, since the amount involved is relatively small to begin with, the installment pay- 183 184 CREDITS AND COLLECTIONS ments themselves are, of course, still smaller. The bookkeeping required for a single purchase is con- siderable, and the system must seek to reduce and simplify it as much as possible. Lastly, the system must provide a cheap and simple but efficient and al- most automatic method for making the collections. This is its most important function. The system here described is in use in a large furniture installment house, and has been found to fulfill these four objects. When a sale which is to be paid in installments is made, the salesman makes out an order blank, such Orders as * s s ^ own m Figure 1. On this blank Taken and he enters the name and address of the customer, the amount of the cash payment which is always insisted upon as evidence of good faith, the amount and the time of the monthly installment, and the salesman's name. In the spaces below are then entered the various items of goods bought. The order goes at once to the head of the credit department, or preferably to a member of the firm, for approval. If approved, the purchaser gives to the house his note for the amount of the sale less the cash payment. This note is secured by a mortgage taken by the seller on the goods sold. The mortgage must at once be taken by the customer before a justice of the peace to be sworn to, and before a county re- corder to be recorded. The goods are then shipped to the customer. This sale order has been made out in duplicate, one to be kept in the office as the original record, the other to be sent to the various department heads, in order that they may find out at once whether they HENRY MARCUS 185 have the goods desired in stock. In the office the order is given an order number, by which this sale is known forever after. A clerk now makes out a new order sheet (Figure I) in triplicate from this sales blank, entering thereon the same data as was on the order blank, except that the price goes only on the first sheet. This sheet remains in the office; from it all the office records described below are made. The other two go to the shipping department. One of these, identical with that shown in Figure I, serves as the shipping clerk's assembling sheet. As the various items on the order are loaded on the wagon after being assembled, he checks them off his sheet. Those articles ordered which he has not in stock, and shipment of which he must delay, he circles on the sheet, and at the same time enters on a back order sheet. This he keeps on file and checks off the articles thereon as he receives them from the manu- facturer and delivers them to the customer. The third sheet serves as the driver's receipt (Figure I); he carries this with him, has it signed by the customer and returns it to the shipping clerk. When the goods have been delivered, the two sheets which were used in the shipping department are returned to the office and filed numerically for future reference, in case complaint is ever made of non-delivery or delivery of wrong goods. From the sheet which is left in the office, two cards are made out, one the ledger card, the other the collector's card. All ledger accounts are kept on cards which are filed alphabetically, according to the name of the customer. On the ledger card (Fig- ure II) is entered the name and address of the cus- tomer, his occupation, the name of the salesman, date o o Spiegel's House Furnishing Co. Orterl Name- !IM Prp.t ' Monthly O Received of SPIEGEL'S HOUSE FURNISHING CO, THI fOLLOVlHO MTKHJtf IH OOOO Orp*x AHO ffltftOT ' Nam* Addrat* Driver O o SPIEGEL'S HOUSE FURNISHING CO. ORDER No. Namo Addrea* When Salesman Date How Figure: Upper form ia salesman's order blank; lower is one of triplicate copies made out in office; middle the driver's copy. HENRY MARCUS 187 of the sale, the order number, the amount of the pur- chase, the amount of the first payment, and the bal- ance due. In the blanks provided underneath are entered in red ink the dates and amounts of the in- stallment payments to which the customer has pledged himself, and spaces are provided for the entry, in black ink, of the date and amount of the actual pay- ments and the balances due after each payment. By comparing the black and the red entries at any time the exact condition of the account can be seen. Whenever a sale is made, the amount of cash paid down is entered on the cash book, while the amount of the charge, that is to say, the amount of the sale, less the cash payment, is entered in the jour- nal and the folio on which this account is entered is also recorded on the ledger card so that it can be re- ferred to at any time. The collector's card (Figure II) has recorded upon it the same data as the ledger card, but is placed in Method of a t^kler cabinet, according to the date Making on which the next payment falls due. Collections Thus, in the cards reproduced here- with, a sale was made on February 1st amount- ing to $100, of which $10 was paid down and the first installment is due March 1st. The col- lector's card would be filed in the "I" pigeonhole of the tickler. On the morning of March 1st the cards in this March pigeonhole, all with payments due this day, are pulled out, each is compared with its cor- responding ledger card to see if the payment due has already been made by the customer; if the ledger card shows that the payment was made say two days before, the amount of the payment and the date are 188 CREDITS AND COLLECTIONS entered on the collector's card, and it is thrown ahead into the pigeonhole of the next payment, April 1st. The cards of the customers who have not paid are given to the manager of the collection department. He first looks through them carefully to see whether any there are regular, good payers, and not therefore to be dunned. The cards of these customers he takes out and files in the tickler a few days ahead; if by the time these cards come to him again the payments nave not been made, he will send the collector to the customers. The rest of the cards the collection manager class- ifies by districts into which he has the city divided for collection purposes, and to each of which a col- lector is assigned. Before the cards are given over to the collectors, the name of each customer and the amount due is entered on a book, which serves as a check on the cards while they are out, and a receipt from the collectors for the cards which they carry. The collectors call on the customers whose cards they hold, and when they return to the store in the evening they record opposite the names in the book mentioned what each customer has done whether he has paid, whether he has promised to pay on some future date, or whether he was not at home. A clerk then takes this book, the collector's and the ledger cards cor- responding to them. Where a collection has been made he enters it on both cards and files the col- lector's card according to the date of the next pay- ment; if a customer has promised to pay, say in ten days, this fact will be entered on the collector's card, which will be filed for March 10th; if a customer has promised to call, this fact is entered on the card and HENRY MARCUS 189 SWCl'S HOUSE H}R!tl$HtH