For this month’s getting finance column, we approached one of the top finance experts in the region – Andy Yiacoumi, Partner, Credit Management Institute Middle East FZ LLC. Here, we ask him to address a tough, yet crucial, question – as the market starts to turn around, how should an SME approach credit?
As we reflect on the last five years of ups and downs you sense that the market is slowly gathering pace. We read daily lots of positive news in the media to brighten our perspective on the future.
With many companies small and large having experienced significant losses, defaults , absconders, legal and many more issues can we positively say that all is well and a very different environment?
With my day to day experiences in the industry I can say that whilst the mood is certainly more positive about the economy the reality is that cash reserves are still very low. Everyone wants to do business but do they have the ability to pay within the agreed terms?
My general advice in the business community remains as it has always been, pick and choose your clients cautiously and you will have little to worry about. The trick though is how to find the right customers. Every potential new deal is purely potential. Until the money is “In the Bank” we face the usual risks. There is an age old phrase that I love to quote, “Prevention is better than the Cure”.
Last week there was a press release about three Trading Companies that had shut and absconded. They had left many companies with “Bounced Cheques”, all persons have disappeared and they will never be found. They had absconded with millions left unpaid. I had predicted back in October that these three companies would do this and of course I was right. My own clients had requested Credit Assessment reports on these 3 companies. With our assessment I clearly stated “High Risk of Default, potential fraudulent activity; do NOT offer any Credit Terms at all”.
So, how do you, as an SME, avoid such potential problems with defaulters? You need to have a simple process so that when you are out marketing your company and service you have a system of gathering information from the potential clients and reviewing them individually. You should also seek an external assessment and once you have collated all the necessary information you will then decide on any if at all credit terms. There is no magic formula to avoiding bad debt but if you have a basic process in place then at least you will be in a position to make a qualified judgement on who you should be offering credit to.
The true meaning of “Credit” is “To Trust that you will be paid”. You need to be as sure as you can that if you do offer any credit terms, you have the highest possible chance that you will actually be paid for your work. Do not be afraid to say no if you don’t feel right. In a competitive world the problem is that most will say yes to any deal and just hope and pray that they will be paid. When I state this to companies I always receive the same response, “I can’t afford to lose the business”. That’s fine but can you afford to sell your product on Credit which you have already paid for in advance, and then never be paid?
As an example the cost to you as a business is 10 times what you have lost in one unpaid invoice. So if that invoice value was 50,000 AED then then you will have to make sales to the tune of 500,000 AED to break even on the loss of 50,000 AED. A few losses such as this example can lead to business failure. One of the main reasons why SME’s fail is because they run out of funds. To avoid being one of those statistics there has to be a cultural change from within on whom you do and don’t do business with.
Over the next three months, Credit Management Institute Middle East FZ LLC (CMI) will be running a series of workshops which will address all of the above in greater detail and provide the tools required to ensure you have the processes in place for the fundamental aspects of Credit.
For further details on how CMI can assist with the above please contact us directly for a consultation.