Creditor Management

Creditor Management •Issue when business buys stock on credit •Visit/contact supplier with view to establishing good relationship: this can be very important if you have cash problems in the future. •Supplier may want credit references •Negotiate terms, more days the better! 60 days better than 30!

Are there lots of possible suppliers or does supplier hold market dominance? Will you dominate them or will they dominate you? Example: credit terms by Carlton United (beer) is 7 days or no supply! Flexibility may be necessary! Copy diagram on page 372 Ideally, a business wants to delay payment to creditors until they have received cash from its debtors.

Problem: slow STO and DTO and payments to creditors due! Solution? •Strategies to improve STO •Strategies to improve DTO •Contact suppliers: ask for extended credit (thus relationship important) •Arrange other sources of finance such as bank overdraft, increasing bank overdraft etc

Creditors Turnover (CTO) A KPI on creditor management. Measures average speed that creditor accounts are paid. Formula:

Average Creditors X 365 Credit Purchases

Example: Creditors at start of period: $4000 Creditors at end of period: $6000 Credit purchase for period: $40000 Calculate DTO. = 46 days

$5000 X 365 $40000

Is a CTO of 46 days good? Compare to benchmarks such as: •Credit terms offered •Past performance (trend) •Budgeted/goal performance •Industry average?

Consider: CTO: 30 days, 40 days, 50 days. Is this trend favourable or unfavourable? Depends on context: •Supplier/creditor says it is bad. •Business says its good since better for its cash flow.

Possible problems with increasing CTO: •Poor relationship with supplier/s •Supply may be cancelled •Poor reputation in industry may impact on sourcing alternative supply

STO DTO CTO Good management of stock, debtors and creditors is critical to a trading business