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The five C’s of credit management

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It’s no secret businesses are doing it tough, with many challenged by bad debt and cash flow management. So what’s the solution? Veda, provider of commercial and consumer data intelligence, says stringent credit management is the key to keeping a business healthy.

“Before signing up new creditors, most businesses should perform a thorough check on the company and its director(s) to evaluate their risk exposure,” advises Moses Samaha, head of commercial risk at Veda. “Businesses should also continue to monitor their credit portfolio to limit exposure to risk from late payment and external administration.”

According to Veda research, a company is four times more likely to find itself in trouble in the next 12 months if one of its directors has had adverse information of their credit file.

Veda has developmed an easy way for businesses to assess the credit risk of potential creditors: the five C’s which stand for character, capacity, capital, cash flow and conditions.

1. Character

Research your potential creditor’s financial track record to determine their past willingness to pay. Items such as past defaults or court actions should act as a red flag.

2. Capacity

Before investing in a company or extending a large amount of credit, assess the prospective organisation’s capacity to generate sufficient cash flow to be able to cover any outstanding debts.

3. Capital

Understand your customer’s capital base, including their cash and other assets, as well as shareholder commitments.

4. Cash flow

Understanding a potential creditor’s cash flow will give you an indication of how swiftly they may pay you for your products or services.

5. Conditions

Look at the marketplace and determine whether certain factors could affect the ability of a business to repay debt on time. Factors such as the impact of international economic conditions on the domestic market or offshore financial volatility and fluctuating exchange rates, could have an impact.

If you’re looking to work on your business rather than being stuck in it, book in for a complimentary business assessment today with Switzer Business Coaching.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, April 16, 2012

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