Better to lose goodwill than gain bad debts
| Pages | 5-5 |
| Date | 01 October 1980 |
| DOI | https://doi.org/10.1108/eb057129 |
| Published date | 01 October 1980 |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
COMMENT
Better to
lose goodwill
than gain
bad debts
Although European companies often allow trade
debts to stand for very long periods - notably Italy with
an average credit period of 109 days - they often
charge a fiat rate of interest on outstanding debts.
Plans to introduce statutory interest in this country
are
still
under
discussion,
but companies are reluctant
to enforce their existing right to include credit interest
in their contract of sale, presumably through fear of
losing goodwill.
According to Mr Mason the average periods of trade
credit granted by British companies range from 26
days in the footwear industry to 100 days in the elec-
tronics industry. Other industries slow to collect their
debtors' cash include the engineering, plant hire and
electronic instrument industries.
These figures have to be regarded with caution
since they can easily be distorted by at least two fac-
tors.
Industries with a high dependence on export
sales are likely to show much longer collection
periods, while retail industries with a high proportion
of cash sales should have fewer outstanding debts.
So should creditors be quick to force debtors into
liquidation? Not unless you have first taken steps to
protect receivables, Dun & Bradstreet caution, and
they should certainly know as the world's biggest
commercial credit reporting and debt collection com-
pany.
That is why the Charging Orders Act, 1979, is to be
welcomed. This new legislation permits the creditor to
obtain a charge over certain of the debtor's assets -
land,
stocks and shares, funds in court, and monies
held in trust-without having to appoint a receiver.
This has considerable advantages because it does
not affect a company's ability to trade and so lessens
the threat of liquidation. Once such a charge is given
by the court, it is likely to stand up in liquidation pro-
ceedings.
The new Act seeks to give the ordinary trade cre-
ditor similar powers over a debtor as a banker enjoys.
A long overdue piece of legislation.
MY friends at Dun and Bradstreets reveal that
engineering companies have a particularly sloppy
record in debt collection. The metal goods and
mechanical engineering industries, for instance,
show median collection periods of 72 and 70 days
respectively. It adds up to a lot of credit at immense
cost in these days of sky-high interest rates.
Indeed,
according to Stan Mason, manager of the
Midland Bank's Research and Information Office, it
amounts to a staggering total of at least £10 billion
every year in British industry as a whole.
One reason at a time of recession is fear of alienat-
ing customers and losing goodwill, but it is risky in
the extreme to grant over-generous credit at the
expense of your own cash flow - as the current flood
of bankruptcies demonstrate.
"A ten day cut in the credit period could save £150m
in bank interest a year and release more than
£1
billion
in cash," says Mr Mason.
Although many companies include long customer
credit periods in their marketing strategy, they may be
unaware of the full cost of lax credit supervision. Mr
Mason cites ICI as an example of
a
company which had
the foresight to see the benefits of exercising strict
credit control. By reducing the average time of its
trade debts by 10 days during 1978, ICI saved £25m.
Alec X. Snobel, Editor
NOVEMBER 1980 5
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