“Business (B2B) credit is currently 1.5 times larger than commercial bank loans: and the spread between the two has grown by nearly $100 billion since the end of 2008.” from the Credit Research Foundation’s Sept. 2009 report, “Economic Impact on Business Credit & AR”.
In a pure barter system there must exist a coincidence of wants and or desires before a trade takes place. This severely restricts and limits the opportunities for commerce.
Money is a medium of exchange with an established value that is accepted in return for goods and services. The dominant form of money is currency which is issued, controlled and limited by governments. An alternative to money is B2B (commercial) credit and no government printing presses or controls are required.
Credit allows for the value of a product or service to be assessed and for profitable sales to happen based on payment at some later date. Credit is an intermediary used in trade to avoid the inconvenience and inefficiencies of a pure barter system.
Credit terms, i.e. IOUs, like money are a medium of exchange.
Safeguards so as to protect the value of credit extended must exist just as governments must safeguard the value of the money they print. For example at the time of this article one ZWD is worth .00000003 of 1 USD, that means that it takes about 37,410,000 ZWD to purchase the same as $1.00 US.
While the supply of money is limited by how much of it governments print, credit is unlimited; in fact the more of it that is created/extended the greater is the demand created for products and services . Credit, properly understood and managed allows for the expanded movement of products and services and for economic growth and prosperity . Credit is a lubricant of commerce and greases the wheels of business.
Fear of loss and focus on risk management due to a lack of knowledge on the full profit potential and on how to properly manage this unlimited medium of exchange creates bottlenecks, i.e inefficiencies that hinder the fruitful expansion of trade .
The Profit System of B2B Credit and A/R Management provides a proven, understandable and useable philosophy and methodology for integrating a seller’s specific knowledge regarding their “Product Value at Time of Sale”, their potential customers’ profile and past performance to allow for the expansion of profitable sales while remaining confident of payment.
The Profit Approach
Philosophy is the study of existence and truth and relies on a systematic approach and reasoned argument. So what is the truth or purpose for the use of B2B Credit in the selling of products or services?
To understand the purpose of B2B Credit we must first accept that behind the selling of products or services lies a profit motive, that is we need or desire to earn more than we expend in a business transaction. The actual process of extending credit must be driven, based on and support this desire to earn a profit.
Beyond the cost of the product or service being sold there are fixed business expenses and other transactional costs that must be taken into consideration to ensure that indeed a profit is earned on a sale made.
Fixed expenses are also known as fixed costs and as a rule do not vary with production. Some examples of fixed costs are rent, sometimes insurance, long term equipment costs. The ability or inability to take on more business without increasing fixed costs is a factor that must be considered in profitable credit sales.
Transactional costs are incurred in every economic exchange. These varying costs include the cost of products, of delivering a service, sales commissions , marketing costs, the effort of billing customers and of the taking of payments. It is important in B2B Credit sales to consider the transactional costs that might prove significant; so as to ensure that in fact the sale being made is a profitable sale.
In B2B Credit the costs start when a customer expresses a desire to buy based on payment at a later date. At this point of purchase efficiency dictates that the information required to help determine if and how credit will be extended to the customer must be gathered. Use of a traditional credit application that the potential customer fills out and which contains standard terms and conditions of sale contributes to delays and to a sales limiting mindset. A better tool for the gathering of customer information is a New Customer Information Form, which is completed by the selling agent and which contains an authorization to check a customer’s credit to be signed by the customer.
Additional costs that go with selling on credit terms are the costs of the investigation of the customer, the evaluation of the customer’s profile , i.e who the customer is and how the customer does business, and evaluating the seller’s Product Value at Time of Sale. Terms and conditions of sale are then determined following the investigation of the customer past payment history and the evaluation of the customer’s profile and the seller’s Product Value at Time of Sale.
There is also the cost of carrying A/R (accounts receivable), i.e. the time value of money and of bad debt write offs or losses should the customer fail to pay.
Why Incur The Costs?
We have already stated that the underlying motive or purpose for an economic transaction is the need or desire to earn a profit. Specific to B2B credit sales, credit terms are extended because:
1) Required by the customer. The customer require time after the delivery of the purchased product or service to ensure that in fact what was desired was received. They also require time to process the bill for payment.
2) Downline sales by the customer. The customer company requires time after the delivery of the purchased product or service to add value to the product or service and to make downline sales to its own customers before it can pay. If a customer company is extending credit terms to its own customers it may require even more time in which to receive payment before it can pay upline suppliers.
3) Customary in the industry. Credit terms are routinely extended in the customer’s industry by competitors and are expected.
The reason why the costs associated with the extension of credit are incurred is to capture profitable sales that would otherwise be lost.
Credit is primarily a function of sale and not of accounting.
If the management of a business believes that credit is an accounting function and all about risk management the end result will be the limiting of both short and long term sales and profitability.
DSO (days sales outstanding) and % bad debt, i.e. the % of approved credit dollars lost due to non-payment are and always have been measurement of risk. Use of risk performance measurements will result in the limiting of both short and long term sales and profitability. The old risk management approach to Credit Management limits profitability.
Two men look through prison bars, one sees the mud the other the stars.
The Profit System of B2B Credit Management
In the course of years of hands on work with companies across industry lines the copyrighted Profit System of B2B Credit Management has proven that Credit properly understood and applied can and will lead to more and larger new sales, to improved cash flow, controlled loses, greater repeat sales, elevated customer service levels and customer retention, and to the ability to identify areas of opportunity for improvement that can drive down costs of doing business for seller and customer alike.
The proven profit philosophy and set of methodologies that make up the Profit System of B2B Credit Management turns an area of business always thought of as a cost center, as a negative, a necessary evil and as the ugly step-child of accounting into a proactive profit center.
In Closing
Credit is essential in both short and long term sales and is also an investment in the lifespan of the customer relationship.
Credit allows for the value of a product or service to be assessed and for profitable sales to happen based on payment at some later date.
Properly understood and managed B2B Credit is an unlimited alternative to money and to the expanded movement of products and services and economic growth and prosperity.
Abe WalkingBear Sanchez is an International Speaker / Trainer / Consultant on the subject of cash flow / sales enhancement and business knowledge organization and use. Founder and President of www.armg-usa.com, WalkingBear has authored hundreds of business articles, has worked with numerous companies in a wide range of industries since 1982 and has spoken at many venues including the Shakespeare Globe Theater in London.