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Why Credit Could Be Killing Your Business

Last updated July 22, 2020

Let's start with the story.

A butcher had a very healthy restaurant round. But all the restaurant owners demanded 30 days credit; it was given freely. Worse still, not all the restaurant owners paid the butcher on time.

The butcher had become a bank, he was financing the restaurant business with his free cash.

Then Covid 19 lock down hit.

The restaurant round disappeared overnight. Credit control and money chasing became a top priority for the butcher. It took ages to get the outstanding invoices paid, and they didn’t get it all…..

But that's not the end of the story….

Their shop had queues, long ones, customers bought meat and paid cash there and then, no argument no one asked for credit. Now cash flow was hugely positive, no credit control required, and profit margins had doubled. Stress levels are non-existent. So many positives for the butcher.

Now the butcher is asking….

  • Why should I give credit to the business customers?
  • How can I maintain my new profit margins?
  • How can I keep customers buying meat at the shop?
  • How do I keep stress at bay?

What would you do next?

Most businesses, especially new ones, assume they must give business customers credit to secure their custom. But why give credit to a business that doesn’t pay on time, or not at all?

Related Articles: How to Get Paid Quickly and Raise Prices the Easy Way

Nobody has an automatic right to credit; it must be earned. Credit is very precious and mustn’t be given away lightly. Once you’ve given credit, it's very hard to remove it. Why would you risk a double loss: the goods and the payment?

What can our butcher do?

  1. He could charge his restaurant customers retail price. Unlikely but he should increase prices to somewhere between wholesale and retail and remind clients they get free delivery as he absorbs that cost.
  2. Provided he has increased his prices then he could offer a small discount for immediate payment BEFORE the goods are delivered.  He’ll decide on the discount level but remember once given its hard to change it.  5 or 10 or 15 or 20% might be right for you, think about it. At least he knows that he’ll have the money in the bank before he delivers the product. Saving time and money on credit control and money chasing.
  3. Add a delivery charge. A fixed fee per delivery regardless of the size of the order. This encourages his customers to buy larger amounts of product at the same time.
  4. As soon as a customer delays payment stop delivering until they have paid – don’t compound the problem. Move them back to cash at point of order if you can because they will probably default again.
  5. Credit check clients BEFORE giving credit. – no one has the right to credit.

Here are the benefits…

  1. No credit control function required within your business
  2. You get paid straight away; the money goes straight into your bank account so you can use it to grow your business
  3. You're no longer a bank for other businesses
  4. Profit margins have increased.
  5. Less driving to do – more collections
  6. A happier butcher!

I can hear you saying yes but…..  ‘that doesn't happen in the real world’.

Well maybe it doesn't, but here is one thing you can do for every client (pre lockdown) who was slow to pay, you had to chase, or they didn't pay at all. They are the ones that absolutely do not deserve credit.

Use the suggestions above for all these clients. After all you won't lose anything if they go elsewhere because they probably wouldn't pay you anyway!

This is another great read.  Does Every Client Deserve Credit Terms? This blog was written by Mark from Friend & Grant. It’s an accountants’ view as to why you should not give anybody credit. It’s well worth 10 minutes of your time….

shirley-mansfield-CoachSME
Shirley Mansfield
Master Business Problem Solver

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