Staying healthy in an economic slump

A simple credit check might save your business.

New Zealand is currently experiencing one of the most challenging credit cycles in 20 years. Payment is slow, credit is tight and bad debts are increasing. Good client companies you've being trading with for years could turn bad for you overnight if you're not careful. With Veda Commercial Reports you may be able to access the information you might need to keep your business practices on the right track.

A credit check of every new customer, as well as regular checks of existing customers, should be part of your best business practice policy. The cost of being a regular subscriber to Veda's Commercial Reports is extremely small compared with the cost of a single bad debt that could ruin your bottom line.

The 5 'C's of commercial credit represent an effective framework for assessing the credit risk associated with a potential client:

Character (Willingness to pay)

It is important to understand the character of the people behind the organisation and the organisation's past performance so you know who you're dealing with and can potentially  assess their ability to satisfy financial obligations. How long has the business been under the same control? Do they have any defaults? What is their track record to date?

Understand - The identity of the company, company directors and shareholders, and the structure of the company.

Capacity (Ability to pay)

Assessing the prospective organisation's capacity to operate as a going concern and generate sufficient cash flow from operations to repay any debt should be one of the highest priorities of any credit manager.

Understand - The company's operational structure, and the company's potential to face seasonal fluctuations.

Capital (Ability to pay)

Capital is the wealth of an entity in the form of money or assets owned, coupled with the commitment from the shareholders. It is not easy to establish the capital behind any organisation but Veda provides information to assist in determining an organisation's capital.

Understand:

• The structure of the business.
• The capital used as security for credit.
• Directors' guarantees.
• The worth of the business.

Cash Flow (Liquidity)

Cash flow is the lifeblood of every business and poor credit control will greatly affect cash flow and the ability to pay debts on time. It is essential to carefully evaluate a customer's capacity to meet your credit payment terms by understanding their cash flow position. This information is not readily provided by customers; however there are a number of measures credit managers can take to determine a customer's cash flow position.

Understand - The customer's capacity to pay debts on time, and the customer's cash flow situation.

Conditions

What are the current economic conditions in the marketplace? Is the prospective customer sensitive to economic downturns? What are the trends in the industry? Is there an election looming that may change the political landscape? Will international economic factors have an effect?

Understand - The current economic conditions and how they affect your company, and Industry trends.