Keeping credit in check

OUR RECENT STUDY of AIM listed companies reveals that the UK corporate sector is relying more than ever on credit to manage its cashflow. Although not entirely unexpected given the challenging economic environment we find ourselves in, these findings should nonetheless act as a wake up call to businesses: tighten up your credit control now - or you may face serious consequences later.

The survey unearths a tension at the heart of UK business. We are seeing a rise in the number and proportion of customers seeking credit at a time when suppliers can least afford to provide that credit - potentially giving rise to the all-too-familiar problem of a corporate environment propped up by an unsustainable credit culture. To avoid building castles in the air, companies must be sure they have strong, efficient credit management systems and processes in place.

Companies of all sizes are spending more time chasing debts, and experiencing increasing demands for credit and longer extensions beyond the standard terms. There are also higher levels of bad debt across the board. Yet only a small minority of those surveyed were looking at their systems and processes for improved efficiencies. Smaller companies are less likely to have a formal policy for credit management - and most of those that do have such plans have not revised them in the light of the present economic climate.

This inaction is especially puzzling, given that businesses seem well aware of the benefits of good credit control. A significant proportion of respondents considered that even small changes in the number of days' credit taken could have a major impact - early payment being highly welcome, and late payment potentially damaging.

Credit management policy must reflect the current economic situation, not one from ten years ago. Systems and processes must give early warning of problems, so that action can be taken in time. It is clear that smaller companies in particular could reap measurable benefits by looking hard at this area, to get their working capital under control.

Dennis Horner is head of financial management and planning at PKF