Welcome to the first of a series of articles on the thorny topic of credit that I hope you will not only read, but put into practice, for the benefit of your business. The one thing that determines the success of any venture is the amount of profitable sales that are made on a regular basis. Now, read that again, it says “profitable sales” – anyone can sell at a loss, and anyone can sell if they don’t get paid for the goods.
My definition is that profit is only realised at the point of getting paid. Some accountants record the profit at the point of sale, I disagree, and because of my definition I believe you should always invest in your credit control function to make sure it is up to scratch to make sure your sales are profitable, otherwise there is no point.
Know your customer
When some people think of credit control and credit management, they immediately think of debt collection, and while this can be a part of the process, it is only a small part, as long as all the other pieces are in place. In this article, we will focus on what should be the first step in the process – assessment. In simple terms, you have to know who your customer is. You need to know the exact entity you are trading with, and more importantly you need to know that they are creditworthy and you need to know that they are good for the amount of credit you are going to extend to them. So, without a crystal ball, how can you do this?
Have a proper new account application form and get it filled out in full for every new account. This will ensure that you have the correct information and you know exactly what every customer wants and expects from you.
Review all your existing accounts, to make sure you have assigned proper lines of credit and correct credit terms to every account. When reviewing accounts it is best to print off a list around the 27th of the month when the balances are at their highest rather than at month end when they are at their lowest.
Have a proper mechanism for getting trade references financial information and details of all other relevant
information to assist you in making your decision. These are valuable additions to whatever other credit checking procedures you have in place. Keep details of all references with the new account application form for future reference.
Consider different ways to mitigate your exposure, which could include: personal guarantee, parent company guarantee, bank guarantee, credit insurance or charges over assets, all have a place in an actively managed ledger. There are clever ways to use your payment methods, discount structures and credit terms to substantially reduce your exposure.
Have a simple system to review existing customer accounts, particularly looking at the line of credit you are prepared to extend to them. The last thing you want is for orders to go on hold and to have to spend lots of time releasing them. The solution is having accurate information at all times.
If all this seems too complicated for a small Hardware Store to cope with, I can assure you it is not all that complicated, and, if integrated with your current systems, it can become a profit-generating and business growth tool that will bring visible results over time.
With over 20 years’ experience, Declan has developed the Six Step Credit System, a method for managing credit, which is practical and comes with a step-by-step guide. Declan will be holding a training day on the 29th October in Louis Fitzgerald Hotel Click Here for more information.