image a tale of 2 christies

 “It was the best of lines, it was the worst of lines,”

What line? The proverbial ‘bottom line’ is often mentioned but not always understood. There is a danger of paying too much attention to the ‘what’ and not fully appreciating the ‘how’.

Allow me to tell you a story of The Nordic Frabistat Company. It was founded some fifteen years ago by businessman Kurt Nodd. When the business started taking off after a year or two, Kurt promoted his accountant, Charles Rigid to be the credit manager. His instructions to Charles were simple and clear. “You keep bad debt expense to a maximum of 1% of sales and we’ll get along fine.”

More than get along actually, because the incentive program for Charles was both lucrative and specific. With pressure from the sales team, Charlie might be a bit looser with credit granting at the beginning of the year, ‘they are good for it’, he was to hear often from a sales representative, but as the year went on and the results proved they were not quite as ‘good for it’ as the sales team said, credit granting got tight.

The company was profitable and Kurt Nodd was happy. So too was Charles, earning his incentive bonus each year. The income statement for the year he retired is shown in Exhibit 1.

Allow me to highlight the fact that Charles kept bad debts for the year at $100,000 which was 1% of sales.

In addition to his bonus, Charlie received a proverbial gold watch the year he retired. (Well, what with the price of precious metal these days, it wasn’t a gold watch, but the chain was gold. (Okay, not the chain, but the clasp.) If you are getting the idea that the owner Kurt Nodd was tight with his money – you’ve nailed it.)

There’s a new Sheriff in town

Early during his last year, Charles hired an assistant credit manager, Christie Caroline Hambly. Named after her grandmothers, she went by the initials CC before long, the energetic and hard-working young manager was fondly called ‘Speedy’ by the sales manager and many others in the organization.

Christie had started in customer service and then spent six months in sales before moving over to credit after earning her credit management designation via the Credit Institute. Speedy had often been frustrated by applications for credit or an increase in a credit line that was not approved by Charlie. She was young, knowledgeable, sociable and ambitious, she let it be known to everyone in Sales that she would not only be reviewing customers who had been declined during the last year but that the team should focus on bringing in many new customers as well. “I never say no to a credit application,” Christie explained at a sales meeting, soon after she officially became the new Credit Manager. “Don’t get me wrong, I may not always approve it, but if I can’t, it will be along the lines of – we would be please to set up a credit line for your firm if….” And then fill in the blanks from there.

How many times do you have to tell a sales team that is on an incentive program that you’re ‘open for business’? Just once. Am I right?

The income statement for CC’s first year showed an increase in sales (it was the best of lines) but take a gander at bad debts – more than double the previous year – up to $300,000 (the worst of lines at 2.5%).

A Carpet Ride

The sales team and others received their incentive bonus and even a bit more from Mr. Nodd. CC however was brought up on the carpet in his office where after nearly 20 minutes of shouting and foot-stomping (Kurt was old school), he ended his tirade with ‘What part of keeping bad debts at 1% didn’t you understand?’

She kept her job, but only ‘just’. GG was now on a very short leash, often hearing about how Kurt complained, “We might have hit a million before taxes if credit had done their job.”

A phone call from the Governor

That might have been the end of it or at least the beginning of the end for our intrepid young credit manager who, back in her cubicle, soon after leaving stepping off the carpet in Nodd’s office, began to compile a list of who she might contact for a new job. Before long, she crumbled the paper and tossed it in the waste can. ‘Not much point in trying for at least the next few months,’ she told herself, ‘fat chance of getting a reasonable reference from this company.”

Later that day, over lunch, she was sharing her tale of woe with Christie  Houston an accountant who had recently joined the company. (Yes, two Christies in a small company, but with the ‘CC’ or ‘Speedy’ moniker for the credit manager, there wasn’t much confusion.)  On her arm, Houston sported a small tattoo of a dragon with a $ symbol and displayed on his desk was a sign:

 ‘I am a tattooed accountant.
                It is the same as a regular accountant
                                   – but way cooler!

Houston would agree that numbers never lie, but that they do tell different stories. Pressed further, or given the chance, she might quote Warren Buffett who said that managers and investors alike needed to understand that accounting numbers are the beginning, not the end of a business valuation.

The accountant asked her a few questions of CC and then suggested she review the year-end income statements and some other financial information.  ‘Not sure if I can help, but leave it with me for a week or two.’

Just over two weeks later, copies of exhibit 3 were delivered to CC and to the owner of the company, Kurt Nodd.

A happy ending?

The great actor and director Orson Wells said ‘If you want a happy ending, it depends on where you stop your story.”

Readers with an accounting designation, tattooed or not, might have a few questions about variable costs and marketing and bad debt expense. Profits cannot ALWAYS be increased by increasing risk business. For our purpose, the significant feature of the story is Nordic Frabistat had a substantial reserve of unused capacity.

At this point, I will allow you to determine the reaction of Mr. Nodd. Did he react as though the blind could now see, scales falling from his eyes as he rushed to CC’s desk with a cheque for her incentive bonus and an offer to move her from a cubicle to an office – not a broom-closet sized one either, but a corner office with big windows….or would he remain firm in his belief that a fixed percentage as an objective for bad debt loss remained the only true measurement of credit department performance? As Warren was known to say, ‘numbers are the beginning, not the end of a business evaluation’ and as mentioned, I’ll allow you to reader to use your imagination.

The Rest of the Story:

CC was called onto the carpet and there was the distinct possibility of her losing her position as credit manager. She may have been following the philosophy that it is easier to get forgiveness than permission. In Mr. Nodd’s company, that might very well be the case and though she was right concerning company capacity and management of risk, as a professional credit manager, it was and is her responsibility to convince and motivate changes to the policy of the organization.

But, it is not her money.

Final decisions of such a dramatic change in policy need to include senior management, in this case Kurt Nodd. Perhaps with support from the cool accountant[1], she could have sold Mr. Nodd on ways and means to increase profit with the management of risk. But if Mr. Nodd does not agree to the change, she should buckle down and continue with the current policy while perhaps updating her resume.



[1] Of course, that is another story. Cool or not, the accountants should have been bringing attention to Kurt via monthly reports. The year end income statement should not be the time to jump out and yell, ‘surprise!;

exhibit one
exhibit 2
exhibit 3
image credit dynamics cover

A nod to Charles Dickens for the title of this article and the first sentence, but also to David Mapleton, author of Credit Dynamics. This story is based on the parable he shared in his book. Thank you Marjorie Mapleton, his daughter and a credit expert in her own right, for permission to use here.