Where distributors lose money.
WHY IT IS THE CENTRAL RISK
Thin margins mean one bad debt wipes out the profit on many sales.
WHAT TO CALCULATE
How much revenue is needed to replace a bad debt.
WHY CALCULATE IT
At typical distribution margins the figure is startling, and it changes behaviour.
WHAT TO ESTABLISH BEFORE EXTENDING CREDIT
Who the customer is, verified How long they have traded Their premises, seen References from other suppliers Their payment record
WHY REFERENCES FROM OTHER SUPPLIERS
They are the most reliable indicator available.
WHAT TO SET
A credit limit, per customer.
HOW
Conservatively at first, increased on performance.
WHAT TO ESTABLISH
Payment terms, stated clearly.
WHAT TO ENFORCE
The limit, and the terms.
WHY ENFORCEMENT MATTERS
Limits that are exceeded routinely are not limits.
WHAT TO ESTABLISH
That further supply stops when the limit or terms are breached.
WHO SHOULD DECIDE EXCEPTIONS
Someone other than the person selling.
WHY
Sales pressure and credit discipline conflict.
WHAT TO MONITOR
Balances by customer and by age.
WHAT AGEING REVEALS
Deterioration, before it becomes a loss.
WHAT TO DO ABOUT SLIPPING ACCOUNTS
Act immediately, at the first missed payment.
WHY IMMEDIATELY
The first missed payment is the warning; by the third it is a loss.
WHAT TO AVOID
Supplying more to a customer who owes and is not paying.
WHY
It is the commonest way small debts become unrecoverable ones.
