The Sunday Mail
IN today’s environment, giving goods and services to customers on credit may seem like a very wise thing to do as it may increase your sales.
Credit sales entail selling goods and services and collecting the money at a later stage.
With our liquidity constraints, credit sales seem to be good but on the downside, they are terrible as you may fail to collect your cash and end up with a huge debtors’ list.
The debtor’s age analysis may show debtors well above 120 days which will likely be written off.
To mitigate the risk of credit sales, you can establish a credit policy. You should think like a bank. Not all customers are creditworthy.
If you wouldn’t give US$500 to a stranger on the streets, why would you sell US$500 worth of product to a customer you have not done business with before?
Make sure that your sales people as well as your customers know your policies. I noted so many companies are targeting civil servants in Zimbabwe.
Likely the civil servant will be having so many stop orders to the extent that when it is pay day that particular person will be having no cash in their account. Is that kind of person creditworthy?
It looks so good seeing revenue numbers growing, but are those numbers being converted into cash? So when giving credit, use a comprehensive credit application form, set credit limits and set credit terms.
For example, new customers can have a credit limit of US$500 whilst established customers can have a US$2 000 limit. This allows you to extend credit while building a relationship.
Always ensure that you bill timely when giving credit sales. Send an invoice ideally one or two days after the sale when the transaction is fresh in the customer’s mind and they are more likely to pay quickly.
Also send out monthly statements to your customers as a reminder that they owe you money. Sadly, in our nation there are some individuals who have now developed a habit of not wanting to pay and just put the blame on the economy. On the same note, some have developed a mind that “Government things are for free”.
Government has given loans and farming inputs to individuals and it may be shocking to reveal figures which have not been recovered. With this said, it is indeed necessary to revise credit policy and do more due diligence before credit sales or loans are made.
Another measure to mitigate risk is to track your accounts receivable. When you sell to customers on credit, you track those sales and payments in your accounts receivable ledger. There are many programmes like QuickBooks that you can use to not only keep track of your accounting records but also track your accounts receivable customer balances.
Always ensure that you review your accounts receivable regularly. This is where the debtor’s age analysis comes in place. Establish a review date to be weekly, every two weeks or at least once a month.
If a customer is behind on their payments, give them a phone call. If a customer is constantly late or not paying at all, stop selling to them on credit or reduce their credit limit.
Constantly reviewing your receivables ledger will prevent these customers from building up large balances that you may not be able to collect. At times a very prominent person may require goods or services from you. Because that person is well known or popular does not make that person immune from the credit policy system. Many people in Zimbabwe may have failed to recover their money from such big figures.
They will be boastful, show muscle and they speak with a confidence but I urge the businessmen to stick to their policies.
Credit can be good if used wisely. The main reason most people use credit is that they do not have the cash to pay the total cost of an item or service at once. Zimbabwe is now characterised by payment plans.
Banks are most affected as we always hear of non-performing loans. I then ask myself if it makes business sense to give credit sales in our environment. You give an individual credit today and tomorrow that person is retrenched from work. How will that person be able to pay up?
I believe credit sales period should be as short as possible until the environment stabilises. Adequate due diligence should be conducted before anyone is given credit. Is that person creditworthy?
And is whatever transaction that you are doing viable enough for you to offer credit? Make the right decision before you offer credit.
Taurai Changwa is an articled accountant and ACCA finalist. He is managing director of SAFIC Consultancy and writes in his personal capacity. Changwa can be contacted at [email protected], Facebook page SAFIC Consultancy, and WhatsApp number 0772374784
