In everyday business environments, goods and services are exchanged, for which payments are not immediately received. These sales are called credit sales. To understand this, let’s look at various small outlets hanging on their walls “no credit today comes tomorrow”, believing that tomorrow is a never-ending phenomenon. They just say you have to pay for any goods or services you receive.
As far as we know that Nigeria operates primarily on a cash economy, it has not completely gotten rid of the “buy now, pay later” system. Having said that, it is safe to say that allowing sales on credit is a culture of business relationships that cannot be done without.
The objective of this article is therefore to examine how the system will flourish or not in declining market situations, that is to say in situations where there is a continuous erosion of the purchasing power of the market. population. How to sell on credit in a market where the future of the participants in economic terms is, at best, very precarious? Or should there not be credit sales in a declining market condition as the uncertainty of the future becomes greater than usual? We take a look at some of the ingredients that follow credit sales to answer these and other questions that may arise in our speech. Then, we will also focus on how to minimize the incidents of losses (bad debts) that can become complicit in a falling market.
Why are credit sales made? If we admit that Nigeria is a cash economy, then the natural question is why the granting of credit sales is still prevalent? The business environment has become so competitive that competitors are doing everything they can to get a fair share of the market. One of those attractions that is often offered is selling on credit to potential customers to get them to buy. In this regard, sales on credit become an incentive for continuous purchase. However, it is also imperative to note that it is even more common when goods are purchased for resale to a third party. It is hardly possible for an organization to focus on total cash sales except at the retail level. Even then, only a few products will meet such stringent conditions without a drastic reduction in sales. I have the course to offer; a ‘free’ advisory service for a small business started with 5,000 N (five thousand naira) a few years ago and warned against selling on credit. From follow-up, the caveat only reduced the incidence of credit sales; he did not completely eliminate it. We can then say that selling on credit is an essential ingredient in the life of companies.
Nevertheless, it is to be expected that certain conditions will prevail before credit sales are made, regardless of the level of exploitation.
Conditions for granting credit sales
1) Customer Performance:
Credit facilities are generally granted after a careful analysis of the past performance of existing customers or of the reasonably determined future performance of a potential customer. When evaluating a client’s performance, the question of the method of payment is taken into account in terms of payment such as, for example, weekly, monthly, quarterly or periodically.
Besides performance, there is the issue of reliability. Reliability is measured according to the agreed payment terms. For existing customers, this is easy to determine, but not for potential customers. In the case of potential customers, a trial period is usually granted during which reliability is carefully assessed.
2) The status of the company:
The status of the business benefiting from the credit facilities is also essential and strategic in determining the credit limit granted to it. It is generally assumed that certain well-positioned companies are less risky to grant sales on credit based on the indices. Therefore, these businesses have access to quick credit sales. On top of that, a business coverage area can make selling on credit attractive very easily. A customer with an extensive network can advocate for a rapid turnover of goods and services in their area as a “bride” to take advantage of the credit facilities.
On top of that, some companies are strategically placed and doing business with them is seen as an easy way to enter the market.
Normally, a business should be treated with the utmost reliability and confidence. The concept of greater trust and faith must exist at all times, but it seldom is. A customer who cannot be easily located is a risk if granted sales on credit. Roaming customers without a stable address may not be considered for credit sales. In fact, in the event of a fault, the possibility of recovery becomes zero. In order for a customer to profit from sales on credit, the creditor company must be able to find him at all reasonable times. This is why an on-site assessment of a customer is usually done before the final approval of a credit sale.
4) Duration of the loan
Another thing that is considered before granting sales on credit is the term of the credit, that is, when credit will be due for payment. A relatively short period is generally preferred over one that extends into the distant future.
To be continued tomorrow
Oluwadele is a chartered accountant and public policy researcher based in Canada.
He is the author of “Thoughts of a village boy”. Email: firstname.lastname@example.org