Credit sales under diminishing market situations
In everyday business environments, goods and services are exchanged, of which payments are not immediately received. Such sales are what are referred to as credit sales. To understand this, let us cast our minds to various small outlets that hung on their walls “no credit today come tomorrow,” believing that tomorrow is an endless phenomenon. They are simply saying you are to pay for whatever goods or services you are receiving.
As much as we know that Nigeria operates mainly on a cash economy, it has not entirely rid of the “consume now and pay later” system. Having said this, we can reasonably assert that allowing credit sales is a culture in business relations that cannot be wished away.
The thrust of this paper, therefore, is to examine how the system will flourish or otherwise in diminishing market situations, i.e., in situations where there is a continuous erosion in the purchasing power of the people. How do you sell on credit in a market where the participants’ future in economic terms is, at best, very shaky? Or should there be no credit sales in a diminishing market condition since the uncertainty of the future becomes more significant than usual? We look at certain ingredients that follow credit sales to answer these questions and others that may crop up in our discourse. After this, we shall also endeavor to see how we can minimize the incidents of losses (bad debts) that may become an accomplice of a diminishing market.
Why are credit sales made at all? If we concede that Nigeria is a cash economy, then the natural question is why granting credit sales is still prevalent? The business environment has become so competitive that competitors make all efforts to have a fair share of the market. One of such attractions that are often offered is credit sales to potential customers to make them buy. In this regard, credit sales become an incentive to continuous buying. However, it is also imperative to note that it is even more common when goods are bought for resale to a third party. It is hardly possible for an organization to insist on total cash sales except at the retail level. Even then, only a few products will meet such stringent conditions without a drastic reduction in turnover. I have the course to offer; a “free” consultancy service to a small business started with N5,000 (Five Thousand Naira) a few years back and cautioned against credit sales. From a follow-up, the caution only reduced the incidence of credit sales; it did not completely eliminate it. We can then say that credit sales are an essential ingredient in business life.
Nevertheless, expectedly some conditions must be prevalent before credit sales are made at whatever level of operation.
Conditions for granting credit sales
1) The Performance of Customers:
Credit facilities are granted usually after a thorough analysis of the past performance of existing customers or a reasonably determined future performance of a potential customer. In assessing the performance of a customer, the issue of mode of payment is taken into consideration in terms of payment like, say, weekly, monthly, quarterly, or periodically.
Apart from performance is the issue of reliability. Reliability is measured in conformity with agreed terms of payment. For existing customers, it is easy to determine, but not so for potential customers. In the case of potential customers, a trial period is usually given by which reliability is thoroughly assessed.
2) The status of the company:
The status of the company being granted credit facilities is also vital and strategic to determining the limit of credit granted to it. There is usually an assumption that some well-positioned companies are less risky to grant credit sales depending on the indices. Therefore, such companies have access to credit sales quickly. Besides this, a company area of coverage may make it attractive to receive credit sales very easily. A customer with a widespread network can make a case for rapid turnover of goods and services in his area as a “bride” for enjoying credit facilities.
In addition to this, some companies are strategically placed that doing business with them is seen as an easy way of penetrating the market.
3) Traceability :
Ordinarily, a business should be transacted with utmost reliability and trust. The concept of utmost trust and faith must exist at all times, but this is scarcely the case. A customer who cannot be easily traced is a risk if such is granted credit sales. Customers that are itinerant without a stable address may not be considered for credit sales. The reason for this is that in the event of default, the possibility of recovery becomes nil. For a customer to enjoy credit sales, the creditor company must be able to trace him at all reasonable times. That is why an on-the-spot assessment of a customer is usually carried out before final approval is given for credit sales.
4) Length of credit
Another thing that is considered before granting credit sales is the length of credit, i.e., the timing the credit will be due for payment. A relatively short time is typically preferred to that which extends into the distant future.
To be continued tomorrow
Oluwadele is a Chartered Accountant and Public Policy Scholar based in Canada.
He is the author of “Thoughts of A Village Boy.” Email: email@example.com