Within your company, who makes the decisions on customer payment terms - Sales or Accounting or Both
Answers
Why would it not be both? The
If the strategy is to penetrate new markets, maybe extended terms make sense.
If the strategy is to improve cash flow, then tighter terms are more important.
In organizations that I have been associated with, the Sales Agent proposes the payment terms to the Head of Sales, who approves, denies, or modifies the arrangement. Sales and Finance work closely; but day to day decisions are not vetted collectively. To me that would be inefficient.
In our organization,
In my experience, sales wants to set payment terms because they want to appease the customer. Sales is focused on making sales, not the corporate bottom line. Not even gross margins, which can vary by product mix alone before considering the cost of special terms, bad debts, etc.
As a finance officer, my interests are in what's best for the agency overall and not a particular customer or sale. The bottom line matters.
This can lead to a conflict of interests. Particularly when commissions are tied to top line sales.
I've worked at several direct sales companies where top line sales took precedence over everything else. A CFO trying to buck that organizational mindset directly was a futile exercise.
Instead, we tied all aspects of a sale to the sales commission paid. An easy way to implement this is to run per sale profitability analysis and provide it to the other execs. When they see that special terms on a given sale reduce margins and overall profitability, they quickly begin to support any efforts to tie commissions paid to the net value of each sale, rather than simply allowing the salespeople to profit from the top line and outsource additional costs of special terms and deals to the overall organization.
Even payment terms have costs. The time value of money for one. That's why many small businesses offer a lower price for cash payment at the time of sale. It's also why so many of our vendors at my current employer won't accept credit card payments from us.
And, that sure beats going out of business while rapidly growing sales with lots of giveaways, freebies on directs costs accounted for indirectly. BTDT too. ;-)
Payment terms (anything aside from a cash transaction) is a CREDIT
Approving authorities differ from company to company. It can be individuals or it can be a committee or for bigger transactions, even the Board. It really depends on the risk appetite, market you are in and culture of the company.
The role of Sales is finding clients willing to buy/avail of services that the company is offering and most importantly (and often forgotten).......the company is willing to extend credit (payment terms) to.
Accounting sets the standard, but the sales director can set custom terms as part of contracts.
I appreciate all the responses and they do reflect the conflict internally. It is a matter of working together but as Regis points out the day-to-day decisions are not made collectively so who should it be. In our organization it has been Accounting but because Sales did not like the results on a few accounts they are asking for a change in process. When there is disagreement between the two who makes the final decision?
1
Ding business with a firm and granting credit (payment terms), should still depend on credit quality or credit worthiness of the client.
Firms should have set standards or policies depending on the creditworthiness of each client. (Ex. Do you just sell to a firm in bankruptcy? Do you sell to a firm that has multiple negative credit reports?) These policies should be Board approved and a product of collaboration between the CEO, CFO and the CMO/CSO in line with financial goals and the overall risk appetite of the company. Within these policies, necessary LEVELS OF OPERATING APPROVING AUTHORITIES for deviations should be included.
Ex.
In NO way that a Salesperson should be able to approve deviations. He can request it and justify it, but NOT approve it. The levels of approving authority reflects ACCOUNTABILITY, in case the account turns sour.
I do NOT agree that "Accounting" setting the standards. Accounting should ENFORCE the standards. Credit risk (doing business with a client) is a strategic decision and should be developed as such.