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Credit sales under diminishing market situations – Part 2

By Bolutife Oluwadele
02 November 2021   |   1:41 am
Relationship with the company: The relationship the customer has with the company is also a determinant for approving credit sales. It could be an already established relationship or a developed one ...

Relationship with the company: The relationship the customer has with the company is also a determinant for approving credit sales. It could be an already established relationship or a developed one as a result of past patronages. In this wise, the track records are looked into, and decisions are based on the fairness of the record.

Limitations Of Conditions
The conditions listed above and any other the company may wish to consider also have their limitations. As cautious as the condition may be guiding the company to make the decision, these limitations can undermine the decision’s efficacy.

1) Uncertainty as to the future of the company being granted credit:
It is difficult to predict the future with absolute exactitude. This does not rest within the confines of mortal beings, and therefore we are all prone to the error of uncertainty. A customer that has performed creditably in the past may suddenly slump into crises that it cannot overcome. It is even more pronounced in a business managed by a central figure whose death may mean an eventual business collapse.

2) Lumpiness -Inconsistency in accounts:
Usually, the credit transactions in Nigeria suffer inconsistency in accounts occasioned by both parties’ weak and even nonexistent reconciliation. It is prevalent to find arguments between both parties regarding the correct amount of credit granted and outstanding. It is even said that most customers may not have any form of proper accounting, thereby making credit sales a cumbersome affair it should not have been. However, this can be solved by training the handlers of credit-related matters in the proper accounting system.

3) Default Information Systems : In Nigeria, our Management Information System is still at its lowest ebb. Sometimes the information is not given at all, and when given, they are scanty, making rumors strive uncontrollably. The effect of this on credit is that it makes adequate monitoring of debtor’s performance very difficult. A customer may have received cash for goods sold to a third party but refused to return the same to the creditor. Those in the newspapers industry often experience this, both from the vendors and the Advertising Agents.

MITIGATING FACTORS: If we agree that we cannot eliminate the incidence of credit sales, how do we mitigate against the limitations discussed above, especially in a diminishing market situation? The issue is more critical under this situation in that a blanket ban on credit sales may spell doom and cause the eventual folding up of businesses that are merely surviving.

1) Constant Reconciliation: Periodic and up-to-date reconciliation of accounts is an instrument that is only neglected at the peril of the creditors. The creditor must make a deliberate credit policy to reconcile its accounts with all the customers constantly. This will enable the business to monitor the performance of customers, and it will assist in determining when to discontinue credit to a particular customer.

2) Shorter Credit Period: It is essential that in a diminishing market condition, a shorter credit is granted. The longer the credit period, the greater the possibility of default. A shorter credit period also helps mitigate colossal loss if the credit is allowed to pile up. A credit facility of 30 days simply means you have to pay up before further credit is extended to you. A shorter credit period is also easy to monitor than a quarterly or half-yearly facility. The degree of uncertainty in one month is less than that of a quarter or half a year. A shorter period is a mitigating factor against future uncertainty.

3) Constant on the spot evaluation to receive any danger signal:
There is the need for the creditor to constantly monitor the debtor’s condition using the on-the-spot assessment, especially in circumstances of inefficient information systems. The on the spot assessment will readily enable the creditor to read any danger signal and therefore take precautionary action both at recovery and halting of further credit. Some smart customers may hide crises and even apply for bigger credit, knowing full well the possibility of not paying back. The creditor should not wait for the house to collapse on its head but detect the structural defect even before the building collapses.

4) Attractive discounts to encourage prompt payments:
A creditor may use the instrument of generous discount to abate the incidence of substantial bad debt. This is done by offering a percentage discount if debts are settled before the due date. Even a long-overdue debt can still qualify for a percentage discount if there is any fear that it may be lost. A partial recovery is still much better than a total loss.

Granting credit sales is particularly difficult in a diminishing market situation because the incidence of non-payment is more prevalent. However, on the other side of the coin granting credit sales is one of the surest ways of remaining in business when there is gloom. To balance the equation, the creditor company must mitigate against the incidence of losses by applying the helpful tips offered above.
• Oluwadele is a Chartered Accountant and Public Policy Scholar based in Canada.

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