Credit Management

As I repeated numerous times, I still meet SMEs and family businesses that fail to get the basics rights. If there is one area where this is the case, it’s credit management…..and in the current crisis the past failings of credit management (or shall i call it mismanagement) are now coming back to haunt businesses with a vengeance.

Every basic credit management system should be based on the following principles:-

  • Vet Customers Carefully: Make sure you thoroughly investigate customers’ credit history before extending them credit. Start by pulling credit reports from credit reporting bureaus. Ask them for their latest set of management accounts. Also in the current turbulence keep a watchful eye on the sectors they trade in and be weary if most of their turnover is coming from economic sectors that everyone knows are under stress at the moment. Extending credit to the wrong customers is probably the mistake that will cause you the most problems.
  • Set a Clear Policy: Makes sure your customers understand the terms of when they have to make payments, the amount of interest and penalties for late payments.
  • Be Flexible, but not too much: You don’t have to offer the same terms to every customer. For example, you might start off customers with 30-day terms while offering long-term customers 60 or 90-day terms.
  • Stay Organised: You need to constantly stay on top of things. Prompting initial signals of late payments as early as possible is extremely important, to avoid having a too huge a problem to get solved, further down the line.

So please, don’t extend credit without putting your credit terms in writing, don’t extend credit if your business doesn’t have significant cash flow, don’t extend credit limits that are greater than the risk your business can afford to take, don’t extend credit to every customer that your business acquires, don’t extend credit unless you have a collection policy in place that can manage and protect your accounts receivable. Please remember that once you start extending credit to your customers, you have to allocate the necessary manpower and resources to handle this extra work. The more credit you extend, the more limited your immediate cash flow. If you don’t plan properly, this can limit your ability to meet your own financial obligations and limit business growth.

A final word to late and slow paying businesses. First of all it is hugely unethical to literally abuse of the credit terms forwarded to you. Secondly, the fact that your business is facing difficult times does not automatically mean you have some “right” to stop paying your dues. Your suppliers or service providers also have bills and wages to pay. Dumping your problems on someone else is a huge sign of the unprofessional way you are running your business. The minimum you need to do is to have a sincere dialogue with your suppliers to try to find a workable solution for both parties.

What makes it worse if that any rightful prompt to have overdue balances paid is met with a hostile, often threatening replies, that payment will not be done and that custom will be withdrawn…. with the typical phrase “fittixni jekk trid”. In such circumstances, I always tell my business clients, that customers are those who buy goods or services and pay you in time (or within a reasonable time period). All the rest, that are falling short to abide by the credit terms extended, are not clients but thieves.

P.S.: This year has been a very difficult year for local businesses. I believe we can better survive this crisis if we support each other better than ever before and buy from local businesses and local suppliers. To this aim kindly click on the below link for suggestions on buying local for this upcoming Christmas:

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