Effective credit policy of the enterprise
Why is there a need for an effective credit policy?
Due to the high level of competition in the food market, the situation is such that in order to increase the attractiveness of its products, enterprises are forced to lend to wholesale-level operators, and those, in turn, retail stores. As a result, a significant part of the company’s current assets is always concentrated in accounts receivable for works, goods and services.
Enterprises have to increase accounts receivable in order to achieve their economic goals, which can be expressed using an absolute financial indicator – “Net profit” and a relative indicator – ROCE (return on capital employed – profitability of working capital). Both indicators characterize the efficiency of the enterprise, which is expressed in the fact that the organization “does what is needed in a proper way”.
Consequently, lending to buyers of goods, on the one hand, leads to an increase in sales revenue and gross profit, and on the other, to an increase in the company’s expenses related to attracting short-term financial resources and the emergence of doubtful and uncollectible receivables. In this situation, it is necessary to act in accordance with the economic goals of the business, in connection with which the issue of receivables management and the implementation of an effective credit policy arises.
Credit policy is understood as a tool to achieve the strategic goals of an enterprise related to net profit and ROCE, through the achievement of current goals for sales, gross profit and expenses associated with lending.
Definition: A credit policy that ensures the achievement of sales revenue goals and maximizes profits associated with customer lending is called effective credit policy.
If the achievement of the objectives of the sales revenue is related to the effectiveness of the credit policy, then the achievement of the goals for net profit and ROCE should be linked to the effectiveness of the credit policy, since net profit is the difference between total income and total expenses that the credit policy affects at the same time. In this regard, the criterion for the effectiveness of credit policy is to maximize the effect of investing in receivables.
Intuitive Credit Policy
As a rule, managers – CEOs, business owners – lack a clear approach, clearly describing the priorities between various factors that they can manage to achieve their goals. Obviously, much depends on the ability of a product to meet certain customer needs, on the price level, on the qualifications of business personnel, on the distribution system, on advertising support, on the literacy of building business processes. But, unfortunately, the idea of what to pay attention in the first place, why, and what can be expected at the same time, is still lacking among the majority of Ukrainian leaders.
Managers have a need for new competent system approaches to company management. One of them is the introduction of an effective credit policy, which will help minimize doubtful and bad debts, ensure the required rate of turnover of accounts receivable, and achieve the goal of sales revenue and net profit.
“The fact that today the need to improve efficiency, to streamline the credit policy exists in almost all enterprises, is beyond doubt,” says Igor Chugunov, director of consulting at Business Master. – There are doubts that managers are able to identify their need for the introduction of relevant technologies. Often, insufficient economic literacy prevents them from believing in the effectiveness of the method. ”
Today, many leaders of large companies often act intuitively. However, in the current market situation, when competitors literally “breathe in the back of the head,” it turns out that only one intuition is not enough. To make informed effective decisions, you must have special knowledge.
“At one of my clients, the owner of a large company, with the development of the sales department, the receivables grew from UAH 1 to 15 million. – says Igor Chugunov. – And then he had a logical question: what should be its size? In search of an answer, the term “effective receivables” was introduced and the formula for calculating the effective debit amount was invented ”.
Definition: Effective receivables – this is the amount of receivables at which the maximum effect is achieved from investing in receivables, i.e. the maximum, ceteris paribus, value of profit associated with investing in receivables.
In practice, however, clear formulas and definitions are absent altogether, the solution of “credit issues” occurs mainly through the “scientific tyke” method or using established traditions.
