Making credit history
An answer to distributors' long struggle with credit dilemmas
By Richard R. Wiley -- Industrial Distribution, 4/1/1999
MY FATHER USED TO TELL A STORY about how the practice of extending credit to customers originated. As the story goes, a farmer sent his oldest son to the general store to buy supplies without any cash. Either he didn't trust his son orhe didn't have the cash. The store proprietor, Mr. Smith, recognized the farmer's predicament and extended to him a new idea of credit, providing him with supplies on the condition that the farmer settle his account once he sold his crops.
Although Mr. Smith's idea of credit was revolutionary in his day, today's distributors live with the dilemmas that surround accounts receivable, accounts payable, payment terms and customers who are credit risks. Credit problems directly affect our profit margins, ability to obtain capital and ability to grow, and can ruin an otherwise healthy business.
Despite our standard terms of "net 30 days," our average for receivable collection time with OEM customers is 20 days past that date. Mr. Smith never anticipated the 20-day difference between when our payables are due and when we can expect to get paid by our customers. Those of us who figure out how to stay in business and make money with these terms spend our time with accountants, hovering over mounds of financial data instead of making sales calls.
Every day our inside sales staff seeks to validate customers whose accounts are overdue. Most of the time we accept the new order and use it as leverage to collect the overdue receivable. If we refuse the order, the customer will buy it from our competitor. Mr. Smith never had to compete with six other general stores.
Though credit has always been an issue, the strong sales, profit margins and cash flows of the 1990s have made it easy to forget how tight credit was in the 1980s. We forget what it was like to check the mail every day to see how much money came in and what vendors we could pay.
How will our current system of credit affect us in the future? Can we afford to extend liberal credit terms just to compete? Can we risk tying up most of our company's net worth in receivables? Where will our return on investments come from? Will the national chains take over the independents?
Distributors need to get paid on time for their goods and services in order to limit their risk. Over the years we've discussed ideas like discontinuing credit terms, which would send our customers scurrying through the doors of our competition, or creating a central bank for industrial sales that would handle all transactions.
But a less complicated solution is already available: secured electronic commerce over the Internet. Envision virtual electronic storefronts for every line you carry, with every item priced and availability accounted for, with complete catalogs and product descriptions. The Internet offers the customer the ability to place an order whenever he wants from anywhere in the world.
Let the customer's credit be drawn on any bank, and let the bank set credit limits and take the risks.
I think this is just want Mr. Smith had in mind when he offered that first farmer a line of credit.
-- Richard R. Wiley is president of Tri-Power MPT, Inc., a power transmission/motion controls distributor located in Akron, Ohio.
There are no other articles related to this article.Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
