Credit Worthiness of Customers
Safe Selling
How to analyse the
credit worthiness of customers
"No sale is complete unless the payments are realized in full."
The very purpose of selling is for realizing payment in some form and is also to make profits.
That being the case, non realization of the payments against any sale is not justified and not healthy for the very purpose of business.
Most times we are anxious to acquire new customers. There has to be a process to decide on the credit extended to new customers both in terms of the value and period.
The risk of credit exposure towards the customers can swing fortunes of any business.
In practice, credit to existing customers is extended based on their performance and relationship.
Even when supplying to existing customers one has to *keep the antenna raised to observe changes* in their environment.
Understanding the reason for delayed or non payment will help us to frame systems and policies to avoid the same.
Possible Reasons for delayed payment:
- Not delivering what was promised
- Quality issues
- Short supply
- Service pending
- Variations in the specifications
- Gap in the understanding of deliverables by seller and buyer
- Rarely factors like tiff with individuals, ego, etc.
- Cash flow Problem at Customer's end
In addition to few of the reasons cited above, there are two others which could lead to non payment against supplies.
- Customer is a habitual defaulter
- Customer is having financial challenges in his business
To understand and analyse the risk proposition with new customers, the following have to be studied:
- Is this the first time the customer is buying a similar product?
- Where were the customer buying so long, if they had bought these items before?
- Possible reasons for the customer to change the vendor.
- What is their size? Are they Small/Medium/enterprise category?
- If the customers are big enough, what is their reputation with regard to payment pattern.
- Is the seller extending an open credit?
- Is the credit extended for part of the supplies or the entire value of the supply?
- Does the supplier have any hold on the customer in the event of default?
- Is the transaction through negotiable instruments like cheque/LC, etc.?
- Above all, does the vendor have the back up to protect himself in the event of delay/non receipt of the against the credit extended to the customer?
- What is the sales cycle of the product?
- What is the expected number of supplies before the first credit is realized?
- What is the total exposure?
Comments
Post a Comment