Everyone who is owed money at the moment are getting the story “I can’t pay you until I get paid” this vicious circle is crippling most businesses and we know first hand from our clients and customers that it is now a major problem for everyone.
If there ever was any doubt that credit keeps the country moving we have proof of it now and lack of credit threatens our entire business structure, particularly in the SME and Construction sector, where the knock on effect of a number of large failures is still being felt and will continue for many months to come.
It is not a simple choice, if you are starting up in business and are looking to attract new customers, demanding cash up front will make it more difficult, in some sectors, to convert sales.
In the service industry and for online purchases there is an expectation that payment up front is required, and as such you should always aim to get paid as soon as possible.
The simple rule is you should only give credit if it helps you to sell more. If you think you could sell similar quantities without giving credit then – don’t give credit!
Withdrawing credit from your existing customers will have a major impact on your relationship with your customers and should be thought through before any action is taken, even on an individual basis.
I am a great believer in doing sums!
Work out the cost of bad debts – you know this figure and add the effect of late payments (this can be done simply using 1% per month as a guide)
On the other side calculate the loss of margin that will be experienced through the reduction in sales – and see which will give you a better return.
Work out how much your money is costing you and see if offering a cash discount or early payment discount would make sense for your business.
You should also look at other avenues – Invoice financing is becoming a major lifeline for some companies and if you require advice in this area I would be delighted to help. Credit Insurance when managed properly can also give comfort to business who are in fear of the potential exposure in their Debtors Ledger. In both cases calculate the cost, calculate the benefit and let the figures make the decision for you.
Too often I see companies offering 5% discount for cash or stopping an order altogether due to an unpaid account for an unknown reason. Each of these actions will have margin implications and to be successful you have to be aware of the cost of a certain course of action and the cost of NOT doing something, which is often hidden and not taken into account.
It is easy to give credit in the good times and say no in the bad times. Excellent Credit Management is about knowing when to and when not to extend credit.