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Macm.org.mtThe economic UpdaTe SEPTEMBER 2012
SEPTEMBER 2012 The economic UpdaTe
• Type III Debtors:
The chal enges posed by overdue customers are different from a. Debtors who try to avoid payment. Managing Credit Effectively
those of prompt payers. Customers fal ing under this category b. Debtors who may be operating fraudulently, with no may differ in their payment behaviour. Therefore, this category of customers should once again be segmented to help the credit practitioner understand the reason why the customer is paying One has to note the difference between ‘Customers’ and late and also to take the appropriate actions according to the ‘Debtors’. The Type IIIs are referred to as debtors and not customers. Customers, unlike debtors, have genuine intentions to trade honestly, thus pay their suppliers as appropriate. Therefore, credit practitioners should do their utmost to minimise risk by avoiding Type III customers at the onset. • Type I Customers:
Good credit management practices suggest to evaluate the a. Customers who may not be well-organised or whose credit worthiness of the prospective customers before granting account payable function is slow moving credit and to monitor changes in the payment pattern of the b. Customers who may be extending credit from their existing customers. The Maltese business community, members suppliers as a form of short-term financing of MACM, have the necessary systems available to take the most profitable credit decisions in an effective and efficient manner.
Type I customers are profitable customers. It is advisable Good credit management practices also acclaim that to build and keep good rapport with the persons responsible after taking any possible action to recoup money from these for payments. Big firms fal ing under this category may pay customers in-house, it would be wise to take legal action at an their suppliers late to secure sound cash flow of their business. early stage (only if such actions are justified) and, or refer them Although this may sound unwarranted by suppliers, the latter should acknowledge that these customers can stil be profitable and hence, it is recommended to keep them buying and paying as their contribution may be significant to the bottom line of the • Type II Customers:
Monthly contributor Josef Busuttil tackles yet Nevertheless, there exists no perfect world! a. Customers who don’t pay due to disputes with their another aspect of Credit Management, which Late payments occur when sel ing on credit, and the best way given the current economic climate, has truly to being both effective and efficient in managing credit is by b. Customers who may not be able to pay by due date but categorising the credit customers and take the appropriate action can and will pay in the near future proactively in respect of each and every category.
c. Customers who cannot meet their liabilities and will A compendium of studies argues that repeat sel ing is much It is commendable to categorise the credit customers according less expensive than sel ing to new customers. Hence, gaining to their payment behaviour. Categorising customers helps the and sustaining long-term customer relationships is important credit practitioner to get to know the customers better and to The credit practitioner should resolve promptly any disputes to minimise the cost of running a business. This may entail understand the customers’ different attitudes and behaviour, and misunderstanding with customers. Customers wil not pay sel ing on credit to satisfy the needs and expectations of while deploy the limited resources where they are effective most.
until disputes are resolved, and rightly so! customers, which sequential y requires the necessary resources Credit customers can be divided mainly into two groups: Other customers fal ing under this category may be to manage this credit effectively in order to secure sound cash • Prompt payers – those customers who pay within the
suffering short-term cash flow difficulties. These customers flow for the business. But resources are often limited and should be identified and supported continuously. This should maximising the available limited resources is inevitably vital. • Overdue Customers – those who do not honour the
be considered as long-term investment by suppliers to their Type III customers should also be referred to MACM as In business terms, this is usual y referred to as the effectiveness customers. Nevertheless, suppliers are to ensure that customers overdue accounts, so that other members would know about Both groups offer chal enges to the credit practitioner! are not overtrading, which is the recipe of business failure.
them and take the necessary decisions and actions. Exchanging To this effect, people employed in the credit function should It is unfortunate to note that few credit practitioners are Some customers may also have cash flow difficulties due to information of these Type III customers would help the local be skil ed and trained to strike a balance between the credit aware of their contribution towards prompt paying customers. various reasons that would ultimately lead to business failure business community to stay away from sel ing on credit to demands of the customers and the profit imperative of the firm Prompt payers are those that require the credit practitioner to and bankruptcy. Some of these reasons may wel include these customers in order to prevent further fraud. Exchange of that s/he works for. Best credit results are achieved by credit sustain long-term customer relationship by means of striving to undercapitalisation, overtrading, lack of adequate resources, overdue debtors’ information would not only help the particular staff that possesses good interpersonal skil s, complementing continue meeting the customers’ needs and expectations. It may lack of proper management, and inability to change and meet supplier but also help the economy at large. their numeracy and literacy. These ingredients make a credit not be easy to retain this long-term customer relationship due to market demands. In such scenarios, it is recommended to stop practitioner able to sustain long-term customer relationships various internal and external factors. Therefore, it is critical for sel ing on credit and proceed to ‘Cash on Delivery’ credit terms. Josef Busuttil is the Director General at the Malta
while keeping the customer current and paying according to the the credit practitioner to deploy efficient and effective working Whenever possible, suppliers may also obtain guarantees to Association of Credit Management (MACM)
practices by which competitive advantage in their respective www.macm.org.mt
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