CREDIT MANAGEMENT FOR THE 21ST CENTURYOr MAINTAINING THE LIFE BLOOD OF A BUSINESS
Government statistics for 1999 show there were 3.7million businesses of which 2.3 million are either sole traders or partnerships without employees. 1.3 million employ less than 49 persons. This means that 3.6 million of businesses in the United Kingdom are classified as small businesses.
The small businesses often state they have difficulty in collecting their debts. Entrepreneurs who have vision in their particular field and often believe that people will pay their debts without too much chasing mostly run these businesses. It is this mistaken belief that is one of the main reasons for late payments. If you don't ask you don't get!
Most small businesses are unaware of the various legislation that relates to the credit management function that has to be complied with. The following is a small part of that legislation: -
Consumer credit legislation, the Misrepresentation Act 1967, the Trade Descriptions Act 1968, the Supply of Goods (Implied Terms) Act 1973, the Unfair Contract Terms Act 1977, Contract Law, the Companies Acts, cheques and bills of exchange legislation, the Business Names Act 1985, the Data Protection Act 1984, the Insolvency Act 1986, the Insolvent Partnerships Order 1994, the Sale and Supply of Goods Act 1994, the Late Payment of Commercial Debts (Interest) Act 1998, the Data Protection Act 1998
Complicated?
Cash flow is the lifeblood of a business and without managed cash flow this can lead to or hasten the failure of a business.
To cope with all this legislation and cash flow management it may be better to outsource all or part of the credit management function to a professional company. A professional outsourcing company can reduce the value of the outstanding debts. Every debtor day saved could mean a saving of about £219 interest with an interest rate of 8.00% on a turnover of £1m. This saving is a reduction in costs that goes straight to the bottom line to increase the profit. The time saved by outsourcing all or part of the credit management function will enable resources to be targeted to the core business that will enable expansion and increased profits.
So, every business- small, medium and large should consider these simple questions: -
1) If you were starting your business today, would you really choose to build all or part of the credit management facilities inside or would you first look at what specialised outside providers could do for you? .
2) Are you so good at credit management that other companies would employ you to do it for them? .
3) Will tomorrow's Managing Director come from the Credit Management area of your organisation?
4) Are these activities, skills, knowledge set so highly regarded that it is where tomorrow's Directors/Senior Management are being groomed?
If you can answer, "yes" to all these questions then certainly continue to do the work within your organisation. You have identified a core capability. If you cannot answer, "yes" to all these questions then outsourcing is an option that must be put on the table and investigated.
But lets take this process a little further. If you add a funding facility either to fund your expansion or you just want to have a facility that is not repayable on demand, and by adding this funding facility to the credit management outsourcing then you have Factoring also known as Invoice Finance. A facility than can trace its origins back to Babylonian times.
But what is meant by the term Factoring?
Perhaps this can be best described by defining what is a factor? A Factor is a person that purchases a debt for a discount owed to another, in order to make a profit by collecting it.
So factoring is the sale and purchase of debts.
Factoring is one method by which a business can increase its cash flow to fund expansions. Factoring is the only method of funding that reacts instantaneously to both increasing and decreasing sales alike. It helps management react to the peaks and troughs of businesses
But what are the services that Factors offer? .
These are often divided into two types of factoring
TYPE - Brief definition
1) Non-Recourse - Includes protection against bad debts in case of the debtor=s insolvency if the debt is within a limit set by the factor or the factor=s insurer.
2) Recourse - You repurchase the debt at full face value if the debtor becomes insolvent or a debt is not paid in an agreed period of time.
Within these types of factoring there are many variations of service offered and to ensure that you as a buyer are confused different companies call the same service by different names.
Now you are totally confused there is a full description and help can be found on my web site.
I trust I have given you Food for thought?
Before talking to either an outsourcing company or an invoice finance company talk to an independent consultant like myself to help you through the vagaries of the market place.
© Copyright M E Gilbey May 2001
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