The economic UpdaTe SEPTEMBER 2012
SEPTEMBER 2012 The economic UpdaTe • Type III Debtors:
The chal enges posed by overdue customers are different from
a. Debtors who try to avoid payment. Managing Credit Effectively
those of prompt payers. Customers fal ing under this category
b. Debtors who may be operating fraudulently, with no
may differ in their payment behaviour. Therefore, this category
of customers should once again be segmented to help the credit
practitioner understand the reason why the customer is paying
One has to note the difference between ‘Customers’ and
late and also to take the appropriate actions according to the
‘Debtors’. The Type IIIs are referred to as debtors and not
customers. Customers, unlike debtors, have genuine intentions
to trade honestly, thus pay their suppliers as appropriate.
Therefore, credit practitioners should do their utmost to
minimise risk by avoiding Type III customers at the onset.
• Type I Customers:
Good credit management practices suggest to evaluate the
a. Customers who may not be well-organised or whose
credit worthiness of the prospective customers before granting
account payable function is slow moving
credit and to monitor changes in the payment pattern of the
b. Customers who may be extending credit from their
existing customers. The Maltese business community, members
suppliers as a form of short-term financing
of MACM, have the necessary systems available to take the most
profitable credit decisions in an effective and efficient manner.
Type I customers are profitable customers. It is advisable
Good credit management practices also acclaim that
to build and keep good rapport with the persons responsible
after taking any possible action to recoup money from these
for payments. Big firms fal ing under this category may pay
customers in-house, it would be wise to take legal action at an
their suppliers late to secure sound cash flow of their business.
early stage (only if such actions are justified) and, or refer them
Although this may sound unwarranted by suppliers, the latter
should acknowledge that these customers can stil be profitable
and hence, it is recommended to keep them buying and paying
as their contribution may be significant to the bottom line of the
• Type II Customers:
Monthly contributor Josef Busuttil tackles yet
Nevertheless, there exists no perfect world!
a. Customers who don’t pay due to disputes with their
another aspect of Credit Management, which
Late payments occur when sel ing on credit, and the best way
given the current economic climate, has truly
to being both effective and efficient in managing credit is by
b. Customers who may not be able to pay by due date but
categorising the credit customers and take the appropriate action
can and will pay in the near future
proactively in respect of each and every category. c. Customers who cannot meet their liabilities and will
A compendium of studies argues that repeat sel ing is much
It is commendable to categorise the credit customers according
less expensive than sel ing to new customers. Hence, gaining
to their payment behaviour. Categorising customers helps the
and sustaining long-term customer relationships is important
credit practitioner to get to know the customers better and to
The credit practitioner should resolve promptly any disputes
to minimise the cost of running a business. This may entail
understand the customers’ different attitudes and behaviour,
and misunderstanding with customers. Customers wil not pay
sel ing on credit to satisfy the needs and expectations of
while deploy the limited resources where they are effective most.
until disputes are resolved, and rightly so!
customers, which sequential y requires the necessary resources
Credit customers can be divided mainly into two groups:
Other customers fal ing under this category may be
to manage this credit effectively in order to secure sound cash
• Prompt payers – those customers who pay within the
suffering short-term cash flow difficulties. These customers
flow for the business. But resources are often limited and
should be identified and supported continuously. This should
maximising the available limited resources is inevitably vital.
• Overdue Customers – those who do not honour the
be considered as long-term investment by suppliers to their
Type III customers should also be referred to MACM as
In business terms, this is usual y referred to as the effectiveness
customers. Nevertheless, suppliers are to ensure that customers
overdue accounts, so that other members would know about
Both groups offer chal enges to the credit practitioner!
are not overtrading, which is the recipe of business failure.
them and take the necessary decisions and actions. Exchanging
To this effect, people employed in the credit function should
It is unfortunate to note that few credit practitioners are
Some customers may also have cash flow difficulties due to
information of these Type III customers would help the local
be skil ed and trained to strike a balance between the credit
aware of their contribution towards prompt paying customers.
various reasons that would ultimately lead to business failure
business community to stay away from sel ing on credit to
demands of the customers and the profit imperative of the firm
Prompt payers are those that require the credit practitioner to
and bankruptcy. Some of these reasons may wel include
these customers in order to prevent further fraud. Exchange of
that s/he works for. Best credit results are achieved by credit
sustain long-term customer relationship by means of striving to
undercapitalisation, overtrading, lack of adequate resources,
overdue debtors’ information would not only help the particular
staff that possesses good interpersonal skil s, complementing
continue meeting the customers’ needs and expectations. It may
lack of proper management, and inability to change and meet
supplier but also help the economy at large.
their numeracy and literacy. These ingredients make a credit
not be easy to retain this long-term customer relationship due to
market demands. In such scenarios, it is recommended to stop
practitioner able to sustain long-term customer relationships
various internal and external factors. Therefore, it is critical for
sel ing on credit and proceed to ‘Cash on Delivery’ credit terms.
Josef Busuttil is the Director General at the Malta
while keeping the customer current and paying according to the
the credit practitioner to deploy efficient and effective working
Whenever possible, suppliers may also obtain guarantees to
Association of Credit Management (MACM)
practices by which competitive advantage in their respective
www.macm.org.mt
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The economic UpdaTe SEPTEMBER 2012