FIrst appeared in Business Goa
Recently I went to a store where I go
regularly to get consumables. This time I need some items which were
more capital in nature. I asked the owner if he would accept my
cheque. He said he does not accept cheques but I could go to the ATM
next door and withdraw cash.. Since it was upward of 20K I was
reluctant and two, I am ATM challenged. So I did the next best thing,
I drove to another store, a few kilometers away, he accepted my
cheque and concluded the business.
Is this not a dilemma entrepreneurs
face day in and day out. Are there any easy answers? Is it dependent
on an ability to take risk especially when the supplier has no way of
checking credit worthiness of the customer quickly. In the above case
on can say the the first supplier lost business, on the other hand
what if the first supplier has burnt his hands giving credit. That
would explain his reluctance to give credit or accept a cheque, he
may have decided it is better not to give credit and lose the
business (read profit) rather than give credit and lose money (read
cost and profit).
Bad creditors add another dimension, ie
heart burn. One has to keep calling them up, a non value adding
activity. Relationships usually sour if the time taken to recover is
more than what was committed. Very often we see a sign announcing
credit is given to only those above 80 yrs accompanied by both
parents. Does this mean “Credit” is a bad word?
First we have to accept CREDIT is part
of the business system. How we handle, how much credit to give and
for how long is dependent on experience and policy and can vary.
There is a myth that supplier credit is the cheapest as there is
usually no cost. Believing this myth everyone tries to maximise it by
delaying payments which is not the best way to do business or build
trust. Ask any defaulter, they will have a hard time getting
suppliers to give them material, and if they do it will be at a
higher price.
There is a big cost but unseen.
Customers who misuse the credit system are most likely to get
effected in times of shortages with the supplier preferring better
paying customer. Suppliers factor the delayed payment and adjust
prices accordingly. A customer who delays payment usually scarfices
his ability to negotiate. More importantly the customer should expect
his consignments to be delayed. In short supplier credit is not
cheap.
We have seen suppliers support us
during the times we had cash flow issues because in good times we
ensured payments were made in time. Once the cashflows eased we would
bring the payment schedule back on track. It actually works both
ways. We believe in doing anything for our customers, and customers
must do one thing for us, PAY IN TIME. This must be applied to the
supply chain, there the company is a customer and supplier is looking
for ontime payment.
The best way to do business in in cash.
At the end of the day when you close your sales book there is no
outstanding. The second best way is to give credit. Be clear of the
payment terms you are offering. We used to give our dealers a credit
limit based on monthly sales, what we forgot to add was “Rs30,000/-
or 30 days which ever is earlier”. A few dealers when asked for
payment would say but we have not crossed the limit even if the
payment was outstanding more than 30 days. BE CLEAR
Customers agree to pay on a certain
date. If there is a default, then next time the credit facility is
withdrawn with the clear remark that earlier promise was not
honoured. A PDC is another way to go. This is because the laws are
now more in favour of the depositor in case of dishounour.
The chinese method which also acts as
an instant credit check with an unknown customer is by offering a
discount say 2% for cash payment in lieu of 30 days credit. This
translates to an interest cost of 24%. If the the customer cannot go
out and borrow @ less than 24% p.a (today interest rates vary from 12
to 18%) from those who know him, it means you were better off not
giving him credit.
An entrepreneur must know that the
decision to give or not to extend credit should not be made at the
spur of the moment, it must be well thought out and must become
“policy” for that Company. This ensures that employees know
exactly how things work and what has to be done. Do not change the
policy based on the size of the order. The owner who refused to
accept my cheque had a policy in place and more importantly respected
it, irrespective of who and how much.
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