Credit Management. Why Credit ????? Credit is a marketing tool to strengthen the company’s...
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Transcript of Credit Management. Why Credit ????? Credit is a marketing tool to strengthen the company’s...
Credit is a marketing tool to strengthen the company’s competitive position in the market, facilitating growth of it’s business.
Credit is given much against our will due to competitive forces and as a value addition.
Creditors don’t give the dues in time and show annoyance, if reminded.
Creditors have much less than they owe and choose to live & thrive on the tolerance of the suppliers.
Some customers take a very long time to pay and some may finally not pay at all.
We don’t ask creditors for payments in time fearing that we may lose the business.
Additional cost to the company in terms of man-hours, interest cost.
The task is to get our money in our coffers in agreed time.
A sale can be considered complete only when the last rupee due is in our hands.
Payment terms Credit evaluation Credit organisation Collection / Monitoring
activities Recovery of outstandings
Payment Terms Letter of credit Post dated cheque in advance Credit against bank guarantee /
collateral security Zero credit terms Bill discounting / marketing system Factoring Product exchange system
(Bartering) Trade finance
Credit Evaluation Financial statements
– Liquid ratio– Current ratio– ROCE
Trade reference Bank reference Sales Officer report Press reports Self developed ratings Ratings by professional agencies.
Credit Organisation Credit Manager
– Goals : • Maximum profitable sales • Steady turnover of accounts receivables.
– Knowledge :• Thorough with company policies.• Principles & practices of marketing• Principles of accounting & economics• Business problems & needs• Credit & collection management• Statutory Acts & rules / Legal formalities
Credit Organisation (cont’d….) Credit Manager (cont’d….)
– Special Qualities• Knack of getting money from unwilling
customers.• Art of writing good reminder letters.• Motivation of field staff for timely
collection.• Dealing firmly with weak customers.
– The person • In our existing setup, the Manager –
Marketing is ideal person for this job.
Collection / Monitoring Activities
Action by field officers– Ascertaining
customer track record
– Follow – up with customer for payments.
– Immediate settlement of disputes
– Coordination with finance for reconcilliation.
Collection / Monitoring Activities
Action by RO– Credit rating.– Regular reconciliation– Follow – up with banks
in case of LC– Take up with bank for
avoiding late credit– Maintaining
transaction records at RO and comparing with supply locations.
Recovery of outstandings Arbitration. Civil suit. Winding up petition. Factoring Joint action with industry members. Product exchange Channel for collection of bad debts. Additional payments with ongoing
supplies.
SBI Banking Arrangement Dishonoured Instruments:
– OMC account will be debited with the amount of instrument and the interest beyond 13 days at PLR
– Original instrument to be handed over to OMC local representative.
– Dishonoured instrument will not be presented again even if requested by drawee bank or local representative of OMC.
Scale of charges:– Transfer of funds:
• upto Rs 1 Lakh- Rs 3 per thousand•Over Rs 1 Lakh – Rs 2 per
thousand•Subject to a minimum of Rs 250
with a cap of Rs 500 per TT– For DD Purchase of all outstation
cheques:•A composite rate of 70 paise
percent (Interest Rs 0.45, collection charges including P&T charges Rs 0.25) with a minimum of Rs 15
Overdue interest on purchase of outstation cheques:– PLR will be recovered for the
period in excess of 13 days– No interest to be charged if it is
drawn on SBI or drawn on Bank at the center where clearing arrangement with SBI exists.
– In case of dishonoured instruments, in all cases, overdue interest at PLR will be recovered for the period in excess of 13 days
Negotiable Instruments Act, 1881
Section 138: Dishonour of cheque for insufficiency of funds.
If any cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or it exceeds the amount arranged to be paid from the bank
Such person shall be deemed to have committed an offence
He will be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or both.
Provided– the cheque is presented within a
period of six months – a demand is made within fifteen
days of the receipt of information from the bank
– the drawer of such cheque fails to make the payment within fifteen days of the receipt of the said notice.
Section 142: Cognizance of offences– No court shall take cognizance
of any offence punishable under section 138 except upon a complaint made by the payee.
– Such complaint is made within one month of the date on which the cause of action arises.
– No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.
Recommendations Each RO must have credit ratings
of its customers. MOU or customer acceptance for
the credit terms must be ensured. Instead of open credit, PDC to be
insisted. Periodic credit evaluation thru
professional agency for all CCR customers.
Comprehensive credit policy to be developed.
Issues
Credit To Be Perceived As A Necessary Evil
Competitive Pressures Driving Credit Credit Vs Discount Not Always
Accepted Approved Credit Going Beyond Limits Delays/Defaults/Unilateral
Deductions/Matching Competition
Securitisation of Credit Efforts are on to securitise the Credit
– Bank Guarantees, L/C Third Party Non-recourse Bank Finance
– Gulf Oil, Lanko Kondapalli (Total Business 50 Crs)
– Low rate of interest (12.5%) (charged to Party) Channel Finance to Lube Distributors
– Citi Bank, Stanchart – Successful implementation of 20 Accounts– More Distributors Interested– Totally Non-recourse to OMC
Securitisation of Credit
Channel Finance– Increase in Distributor Working
Capital– Immediate Realisation to OMC– Longer Credit to Distributors– Low Interest Rate (15%)
Extension of Channel Credit– Bitumen Buyers, Hexane Consumers
etc.
Securitisation of Credit
New Finance Instruments– Class I Companies Invoice Discount w/o L/C– Use of Consumers’ limits with the same
bankers– Usance Bill Discounting– Trust and Retention Accounts/Escrow
Accounts– Convince Consumers to avail Alternate
Finance Credit by OMC with Interest
Credit Rating Monitoring Health of 8 Major Industries
– Crisil Studies Monitoring Financial Strength (thru
Crisil)– 100 Major Consumers– Current &Potential Consumers
Basic Credit Evaluation Package to R Os– How to read Financial Statements– Basic Financial Ratios and Norms
Credit Rating
Tied up with Dunn & Bradstreet– Evaluating Small and Medium Units– Including Potential
Dealers/Distributors Regular Communication from HQO Involve Consumer to Get Himself
Rated
Control Mechanisms Credit As Item of Evaluation in MOU Each RO is Given Targets & Rating
– Credit to Be Brought Down to 60% of Opening Balance
– Total Credit Exposure to RO– Incentive for Collection of Old Dues– Incentive for Reversal of Earlier Provisions– Credit As No. Of Days Sale– CCR/SOA Reconciliation
Credit Must be Brought Down With Approved Limits– Propose for Realistic Credit, Regularise Thru Approval
Controls thru Software Conversion of SOA CDs into Data-base files SOA Reconciliation thru small matching
programs Collection of CCR data from Dispatch
terminal in soft form using DDP Consolidation of CCR data at R O thru
simple software Generation of various MIS reports of CCR
thru the same software Roll Out of Software Across the Country by
Dec
Accounts & Credit ControlInterface Special Emphasis on SOA Reconciliation Constant Monitoring/periodic Review
– HQO Commercial– Zonal Finance
Co-ordination Between Dispatch Location/R O– On Invoice and Collection Confirmation
Efforts to Bring Credibility to SOA Exceptional Cases Hire Out Side Help Instructions to Complete All Major Accounts in Each
RO Expedite Refunds to Enhance Corp. Image Some Hard Decision on Very Old/unreconciled
Accounts
Risk Vs Profitability
Low Risk– Cash and Carry, L/C, Bank Guarantee,
Charge on Assets, Third Party Finance,Escrow, Trust and Retention etc.
High Risk – Free Credit, Matching Competitors, Volatile
Industries Managerial Skills
– Low Risk and High Volume
Risk Vs Profitability Ground Reality
– Surplus Products Chasing Few Consumers– Recession in Economy– Market Completion
• Marketers, Refiners, Crude Producers, Traders, Direct Imports
• Free Credit/Low Interest Credit
– Alternatives• Credit/Discounts• Uneconomic Exports
Risk Vs Profitability Develop Corporate Risk Index Assess Credit Risk Calculate Incremental Volumes to Be
Generated Thru Very Judicious Credit Calculate Incremental Volume Additional
Margin As Compared to Export Loss Arrive at the Total Credit Exposure (No.
of Days)– Business Line-wise, Product-wise– Regional Office-wise, Corporate
Risk Vs Profitability Let Risk Free Sale be = x Let Additional Credit Sales be = y Say Product Margin is 1000 and Export
Loss is 3000 on Sale Price Contribution to Risk= x X 1000 +y X1000 Contribution in Export= x X1000-y x
3000 Depending on Selling Price of Product An
Incremental Volume can be worked out for Judicious Credit
Risk Vs ProfitabilityCase Study
FO Demand Lost By MRO III for a want of Credit– 10,000 tons/month (Standard, Mukund, Reliance,
Float Glass) Diff. Between Domestic Price and Export (Say)
Rs. 3000/Ton One Month Exposure and Credit Risk 10 Crores Loss Due to Export 3000 * 10000 = 3 Crores Loss of Losing the Entire Recoverable = 10
Crores Break-even for no risk Business = 3,300 mt. Applying Safety Factor The Full Business Can
be Retained at 33% Bank Guarantee/LC
Some More Thoughts
Control Credit thru Exception– Beyond Approval Terms
A B C Analysis of Outstanding– Accounts More than 1 Crore
Upfront Provide for Doubtful Debts– Say 1% of the Total Outstanding
Expect and Budget for Unforeseen Failures
Cover the Out standings thru Insurance (if possible)
Way Forward Bring Discipline in Field Force Accountability for SOA Reconciliation
– SOA Availability to be made Current Develop Skills in Credit Evaluation Rope in Professional Help Monitor
– Select Industries, Select Business Groups,External Environment, Competition
Expect Failure and Act Rather Than React Not to Compromise
– Accepted Contractual Obligations, Due dates, Financial Instruments, PDCs, Bounced Cheques
FINALLY Yesterday is a cancelled
cheque.
Tomorrow is a promissory note.
Today is a cash….
Collect it wisely.