Any successful businessman knows that it is possible to go against the trend and grow your business while others are contracting – the trick is to do so without taking on more risk than you might otherwise be comfortable with.
Ivor Jones, Kredit Inform managing director, has for some time been advising clients that the way to flourish during the current consumer slowdown, is to be highly selective in who you give credit to.
“After many years of incredible credit growth, most South African businesses at this stage are generally still good payers. But we are at the top of the interest rate cycle, and with last year’s introduction of the National Credit Act, through no fault of their own, many payers now find themselves in a tight spot.
“Considering there is a three to four month lag before the full impact of an interest rate hike is fully felt, it’s going to get worse during the first quarter of this year before it gets better, maybe in the second half,” explains Jones.
Increase Sales, Not Risk
Jones recommends a way of increasing sales – without increasing risk. “Don’t necessarily look only to sell to new customers, but sweat your existing book. Only increase sales to those that pay within the stipulated time, and try to decrease sales to those that don’t, while stopping sales to those whose terms of payment are actively deteriorating beyond their limit,” he says.
So far, this sounds obvious, and Jones admits it. However, from working daily with clients in exactly this position, he says few companies have the data at hand to analyse their book.
Avoid Companies in Survival Mode
If a client used to pay in 30 days and extends it to 50 days, can you afford to carry the cost of stock for an additional 20 days? This is especially risky when trying to grow market share – the cash flow implications have driven many a small business into insolvency.
“We’re mostly concerned with companies that are only just surviving. Unless the business-owner is aware that in the current environment his customers will probably pay more slowly, it may be enough to drive his business over the edge. To survive, he needs to start increasing his book to those customers in a better position to pay and curtail sales to those companies that will not – or cannot – pay on due date, or which have a chance of liquidation.
“Increasing sales to good payers may be by incentive, or rewarding prompt payment, as long as the cost is not greater than the cost of capital. It’s essential this be done without prejudicing your profitability or even survival. So be selective,” adds Jones.
KreditInform offers a wide range of services that assist companies to avoid risk. It performs risk profiling of the entire book of a client, comparing those businesses against its extensive database of payments in South Africa.
The cost of the service – inexpensive, claims Jones – is certainly relatively cheap compared to the risk of bad debt.
“We attribute a credit score to every company on a client’s book, as well as provide a history of their total payment record. Each is significant. A company may have a poor payment history, but for strategic reasons has maintained a good track record with yourself. You may therefore be the last to know when it’s in trouble. You therefore need to know its total payment history.”
Then there is the problem that small business has in supplying Government. “A company may have a great credit score, but never pays on time. If you still wish to do business with it, you must know you’ll be carrying your stock for longer and budget accordingly. More importantly, you need to build that cost into your margin. You cannot take that degree of risk on a tight margin,” says Jones.
All a client has to do is hand over its ledger to the credit agency, which interrogates it, ensuring you are dealing with the correct legal entity, providing you with the credit rating and monitoring any change in payment patterns on a quarterly or monthly basis. A particularly risky customer or the entire book can also be insured.
Opt For a Total Credit Solution
“We provide a total solution, which includes consultation on your credit procedures and the installation of our credit software. This software sits on top of your accounting package and monitors the payment trends of all debtors.
“This not only tracks each client’s performance with you, but offers a risk profiling tool before offering credit terms to a new client. It tells you when to stop supplying a non-performing debtor until he gets back into line. It also sets authority limits, such as placing the onus of responsibility for bad debts on whoever authorised the credit line.
“From our extensive experience, we have conclusively proven that companies that have the discipline to stick to their credit policies do not get in trouble during times like these – its only those companies that lack self-discipline that do,” concludes Jones.