Finance 101

Have you ever stopped to think how important credit sales are to your business? Consider the process involved in generating one credit sale:

1. An order is generated
2. The sales person calls on the customer
3. It is vetted by credit control
4. A stock query is generated and if there is insufficient stock an order is sent to the manufacturing department
5. The order is “picked” in the warehouse
6. An invoice is made out
7. The goods are shipped to the customer
8. The credit department follows up to collect the money
9. If the customer is not satisfied a credit note may need to be generated

It cuts right across your business and is one of the most important of your processes. Clearly it pays to ensure these activities work efficiently.

New trends, new risks

During the past few years there have been some interesting trends:

• Many companies have increased their indebtedness which has resulted in bad debts rising strongly – a look at JSE companies over the past few years bears this out.
• Technology has increased our turnover base and given us access to customers around the globe. This has tended to do away with middlemen (such as agents) as we can communicate directly with global customers – this may improve our profitability, but cutting out middlemen exposes us to more risk of bad debts.
• Global connectedness has raised the possibility of contagion – for example, the collapse of Lehman Brothers in 2008 led to a worldwide liquidity squeeze which affected all businesses around the world.

So, how do you manage your debtors’ book? 

The starting point is to assess your appetite for risk – from this the system for credit control is designed and credit limits per customer are set. Most companies use credit risk agencies and these agencies tell you how much they are prepared to give in insurance cover per customer. Once these limits are in place it makes sense to have a system which vets each order received and tells you if the customer has exceeded the pre-set credit limit. Based on your appetite for risk and your knowledge of your customers, you could allow the order to go through or reduce your risk by, say, asking for a post-dated cheque.

You should never underestimate your understanding of your business and knowledge of the customers you trade with. Credit agencies provide a good guide but you have the experience and understanding of your business.

As our lives get more complicated, it is worth taking a step back to consider how risky is your industry and look at your customers on a more strategic basis – for example one of your large customers may be slightly more risky, in which case, why not offer this customer early settlement discount?

Managing credit is integral to your business. It pays to think through how to manage it to get the best possible results.

* This article originally appeared in CA(SA)DotNews and is reproduced with the authority of DotNews and Harry Curtis & Co. Chartered Accountants (SA), tel: 021 762 0255, email: curtisco@iafrica.com and website: www.harrycurtis.co.za.