Credit Control — A Survey
| Published date | 01 March 1985 |
| DOI | https://doi.org/10.1108/eb057394 |
| Date | 01 March 1985 |
| Pages | 9-11 |
| Author | Christopher J. Cowton,Peter C. Ho |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
Credit Control
—
A Survey
by Christopher J. Cowton and Peter C. Ho
University of Wales Institute of Science
and Technology, Cardiff
Introduction
The provision of credit and the terms on which it is granted
are,
in many industries, important decisions affecting the
marketability of a company's products and services.
However, against this stimulus to sales should be set the
extra costs associated with granting trade credit, the various
expenses incurred in its administration, the interest on the
funds tied up in debtors and the possibility of default, or
bad debts[1].
One sector in which trade debtors can be highly significant
is builders' merchants; their customers themselves receive
very "lumpy" payments and are notoriously susceptible to
failure.
In this article we consider some of the major
elements in the effective management of credit, illustrating
the points with data from a survey of builders' merchants.
Following a brief description of the research methodology,
the article considers in turn the major areas of concern in
granting and controlling credit.
Methodology and Sample
In order to investigate the practices of builders' merchants,
a questionnaire was sent to merchants in Wales in 1984.
Following a reminder, a response rate of 26 per cent was
achieved (21 usable replies). This compares favourably with
the earlier credit control surveys of Kirkman[2] and Goddard
and Jay[3], from whose work the questionnaire was
adapted
The turnovers of the respondent companies ranged from
£23,000 to £8 million, with 16 of the firms falling below
Table I. Turnover Represented by
Credit Sales
Percentage
0 - 20
21 - 40
41 - 60
61 - 80
81 - 100
N = 21
Number of
companies
4
2
5
6
4
£1 million. In spite of the size differences, credit policy show-
ed a considerable similarity, so size-associated differences
will be pointed out only where necessary. All the respon-
dent companies provided credit sales, with trade debtors
generally being an important current asset. The percentage
of turnover represented by credit sales is shown in Table I.
Credit Policy and Operation
The success, in terms of both effectiveness and cost, of a
credit system is largely determined by the policy establish-
ed within the company. This will cover considerations such
as the quality of acceptable trade accounts, credit period,
discount allowed, interest charged on overdue accounts and
special terms. If the parameters are too liberal, great pro-
blems may ensue, yet if the policy is too conservative, many
good potential orders may be lost. In each of the respon-
dent builders' merchants, the overall credit policy was set
by at least one senior member of the company. All the com-
panies based their credit period on one "month", though
this was subject to a considerable variety of interpretations,
as shown in Table II. Taking a simple average across the
companies, this resulted in a mean period of 49 3 days
credit being taken.
Table II. Full Normal Credit Period
Credit period
28 days
30 days or one month
30 days after invoice date
30 days after statement
date
End of delivery month
End of month following
delivery month
N = 20
Number of
companies
1
7
1
1
4
6
The longer the period of credit, the greater the opportunity
cost in terms of finance tied up in debtors. One method of
encouraging customers not to take credit beyond the per-
mitted period is to offer a discount for early or prompt pay-
ment. However, Kirkman[2] found that the number of com-
panies offering discount had fallen during the decade prior
to his survey. Only 12 of the builders' merchants surveyed
admitted to offering discounts, eight of them on a selective
basis.
Ten offered a discount of two per cent for payment
IMDS • MARCH/APRIL • 1985 9
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