Oiling the wheels of business
Much has been written about the oil crisis. But how is this crisis affecting the commercial environment? Businesses are spending more money on their utility bills, on fuel for manufacturing and transportation, on raw materials and imported products...
Much has been written about the oil crisis. But how is this crisis affecting the commercial environment?
Businesses are spending more money on their utility bills, on fuel for manufacturing and transportation, on raw materials and imported products purchased, and on wages demanded by the workforce to make good for inflation. These higher production costs have to be financed somehow!
There are three broad ways to address this difficulty: The business can absorb the increases in the cost of production to the detriment of its profit or capital reserves; it can set higher prices for the consumer; or the business can request loan or credit facilities from its bankers or trade suppliers.
However, each of these options has consequences. There is a limit as to how much of the increase in the cost of production a business can shoulder; the basic objective of a business is to make a decent profit to survive and grow in the market. On the other hand, increasing consumer prices would have an effect on the competitiveness of the business, while loans and credit facilities do not come free.
Finding the best strategic way to finance production is becoming increasingly difficult for many businesses.
From discussions with the local business community, it is clear that today's businesses require more working capital to maintain their competitive advantage in the market. This implies that businesses need to protect their cash flow and balance cash inflows with cash outflows in a more diligent manner. Liquidity is becoming more critical if one is to survive in today's business environment.
To add insult to injury, the world credit crunch is not helping much either, as banks are being more cautious when granting and extending credit facilities. Central banks have attempted to help by adjusting interest rates. But if the interest rates are set to control inflation, businesses will be discouraged even further from investing with the consequence that credit would be even more rationed.
Due to this macroeconomic situation, there is increasing demand for trade credit to finance the escalating cost of production and it is expected to continue increasing due to forecast increases in the oil price.
Increase in trade credit intensifies the risk to the businesses offering credit. Therefore, businesses should invest adequately in their respective credit management function. Debtors' accounts should be managed in a proactive manner in order to avoid late payments and bad debts, which would worsen the cash flow of businesses.
Effective and efficient credit management systems should be employed. Invoices should be issued promptly, followed by regular statements of accounts sent to customers. Credit application forms, clearly stating the terms and conditions of sale, are the key to analysing the creditworthiness of the customer requesting credit and also to make sure that the responsibilities and obligations of the parties are understood. Bank references should also be requested by the seller before granting or extending credit.
Continuous monitoring of existing debtors is becoming more critical than ever before. A creditworthy customer today may well become a problematic debtor in the future due to the hostile external economic and commercial forces. Therefore, businesses should always be proactive when dealing with credit. Early warning signs should be identified, evaluated and credit decisions based on reliable information should be taken promptly. Nevertheless, the cost of the credit management system and that of the credit information should be justified.
The current credit environment is forcing businesses to compete not only to promote and sell their products but also to collect dues from their customers.
This entails building good customer relationships to maintain loyalty. Employees managing credit should be trained not only to satisfy and exceed customers' expectations but also to build bridges with the sales team within the same organisation. Sales people can be helpful and valuable to the credit staff as they gather customer information from the horse's mouth, which is critical in credit decisions.
Although the business environment is not at all rosy, it is opportune for local businesses to start thinking about innovative credit management processes and systems in order to maintain or even gain competitive advantage in the market and to sustain profitability and sound cash flow through long-term business relationships.
• Mr Busuttil is the director general of the Malta Association of Credit Management.
Businesses are spending more money on their utility bills, on fuel for manufacturing and transportation, on raw materials and imported products purchased, and on wages demanded by the workforce to make good for inflation. These higher production costs have to be financed somehow!
There are three broad ways to address this difficulty: The business can absorb the increases in the cost of production to the detriment of its profit or capital reserves; it can set higher prices for the consumer; or the business can request loan or credit facilities from its bankers or trade suppliers.
However, each of these options has consequences. There is a limit as to how much of the increase in the cost of production a business can shoulder; the basic objective of a business is to make a decent profit to survive and grow in the market. On the other hand, increasing consumer prices would have an effect on the competitiveness of the business, while loans and credit facilities do not come free.
Finding the best strategic way to finance production is becoming increasingly difficult for many businesses.
From discussions with the local business community, it is clear that today's businesses require more working capital to maintain their competitive advantage in the market. This implies that businesses need to protect their cash flow and balance cash inflows with cash outflows in a more diligent manner. Liquidity is becoming more critical if one is to survive in today's business environment.
To add insult to injury, the world credit crunch is not helping much either, as banks are being more cautious when granting and extending credit facilities. Central banks have attempted to help by adjusting interest rates. But if the interest rates are set to control inflation, businesses will be discouraged even further from investing with the consequence that credit would be even more rationed.
Due to this macroeconomic situation, there is increasing demand for trade credit to finance the escalating cost of production and it is expected to continue increasing due to forecast increases in the oil price.
Increase in trade credit intensifies the risk to the businesses offering credit. Therefore, businesses should invest adequately in their respective credit management function. Debtors' accounts should be managed in a proactive manner in order to avoid late payments and bad debts, which would worsen the cash flow of businesses.
Effective and efficient credit management systems should be employed. Invoices should be issued promptly, followed by regular statements of accounts sent to customers. Credit application forms, clearly stating the terms and conditions of sale, are the key to analysing the creditworthiness of the customer requesting credit and also to make sure that the responsibilities and obligations of the parties are understood. Bank references should also be requested by the seller before granting or extending credit.
Continuous monitoring of existing debtors is becoming more critical than ever before. A creditworthy customer today may well become a problematic debtor in the future due to the hostile external economic and commercial forces. Therefore, businesses should always be proactive when dealing with credit. Early warning signs should be identified, evaluated and credit decisions based on reliable information should be taken promptly. Nevertheless, the cost of the credit management system and that of the credit information should be justified.
The current credit environment is forcing businesses to compete not only to promote and sell their products but also to collect dues from their customers.
This entails building good customer relationships to maintain loyalty. Employees managing credit should be trained not only to satisfy and exceed customers' expectations but also to build bridges with the sales team within the same organisation. Sales people can be helpful and valuable to the credit staff as they gather customer information from the horse's mouth, which is critical in credit decisions.
Although the business environment is not at all rosy, it is opportune for local businesses to start thinking about innovative credit management processes and systems in order to maintain or even gain competitive advantage in the market and to sustain profitability and sound cash flow through long-term business relationships.
• Mr Busuttil is the director general of the Malta Association of Credit Management.