Granting credit is an investment in customers and like any form of investment, it is not free and sometimes turns to be ‘expensive’. The firm must calculate the costs involved and opportunity cost while developing effective internal procedures to manage credit efficiently, effectively and above all profitably.

THE SALES PROCESS
Competition is aggressive and businesses invest heavily in the sales process to attract customers.
All employees, including those involved in credit, should strive for profitable sales, but they should also be aware that customers go through four steps before they commit to buy.
These four steps can be summarised using the acronym AIDA.

If a request for credit is rejected, all the efforts, investment and resources employed to get to the point where customer wants to buy, are lost. Thereafter, losing customers today may also mean losing future business and hits the reputation for the firm. For credit to be granted and extended, the company must incur the additional costs of acquiring profitable sales. A customer request for credit represents a sale in progress and the credit practitioner should find a way of saying ‘Yes’ to profitable sales.

SECURING PROFITABLE SALES - HOW?
When credit is requested, the supplier raises a Credit Application Form which guides the credit decision.

Completed in full by the customer, the form carries the basic details of the applicant, references and conditions of the credit sale.

Requesting a signed Credit Application Form, specifying trading terms and conditions is not bureaucratic, intrusive or officious in any way, and it helps to build a long-term customer relationship whilst caring for profitability. Both the seller and the buyer benefit from a clear business agreement - it prevents future disputes and promotes a sound business relationship.

Customer Information Required

DETERMINING THE CREDIT TERMS
Firms have different objectives and levels of risk-taking. However, the right customer information allows practitioners to determine the terms that maximise profitable sales and manage risk associated with the particular credit. To determine the credit terms, the product value at time of sale should also be established.

If profit margins are low, more cautious credit terms should should be established. If the profit margins are high, the expiry date of the product is short, the turning inventory is slow, and the capacity for offering the product is high, then the credit terms can be relaxed. This also applies to services. Services in high demand have a higher ‘product value’ and services in low demand have a lower ‘product value’.

SOURCES OF INFORMATION
The credit function should determine its specific information requirements to analyse the credit worthiness of the potential customer.

There are many external sources of information, but information provided by the sales team is recommended. The sales team is constantly out in the market. They know the customers well, very often on a personal basis, and meet other sales people too, sharing market intelligence.
Sales people sense the market and can help credit practitioners identify the most profitable customers.

Crucially, the sales team provides early warning signs that help the firm be proactive and monitor existing customers closely.

This requires synergy between the sales team and credit practitioners.

Terms and Conditions of Credit Sales

Written credit sales terms and conditions are important as they specify the obligations and responsibilities that the seller and the buyer have towards each other, signed and agreed, from the onset. Written credit terms and conditions safeguard against disputes and disagreements. Disputes harm the relationship and reputation of the business and lead to legal proceedings, requiring time, effort and money.

Terms and conditions are therefore an important element in credit sales and should include the payment period; interest and charges in case of late payments; discounts for early payments; and retention of title. Bank guarantees, personal guarantees and other liabilities may also be considered when the credit involves substantial amounts of money or when the credit practitioner thinks it is best to better manage the risk.

More importantly, terms should be communicated and discussed with the signatories of the firm (or trader) and upon agreement, signed by both the supplier and the customer, indicating the persons’ titles, date and place.

It is wise for both parties to retain a copy of the signed Credit Agreement Form together with a Welcome Letter. This ensures that the seller and the customer know what has been mutually agreed. As the Italian saying goes “Patti chiari, amicizia lunga”

Josef is the Director General of MACM and President of FECMA.
He obtained his MBA from Henley Management College, a Member of the Chartered Institute of Marketing (UK), and Fellow of the Chartered Institute of Credit Management (UK). Josef contributed to and delivered a number of intuitive credit management workshops and presentations & he is a regular contributor of business articles to international business press.