A topic chosen by the author looks at industry best practices of a current issue related to credit management. The topic chosen was late payments and small businesses and reflects on how small business can reduce the risks of late payments from their customers and ensuring that such small business have a healthy cash flow at all times without the hassle of such large bad debts.

1. The Late Payment
Problem for Small and
Medium-Sized
Enterprises (SME’s).
Abstract | This report will look into an on-going
concern which more and more small businesses are
increasingly facing in light of the global economy;
according to a survey carried out by B2B Chartered
Accountants (2011), they state that the UK’s B2B
culture of late payment is getting steadily worse with
amounts owing to Small and Medium-Sized
Enterprises (SME’s) hitting record levels of around
£33.6B.
Wednesday, 14 March 2012
Student No: 310659
Word Count 1,331

2. St. Andrews Business School | M0841 Credit Management
Contents
Executive Summary 2
Literature Review: Analysis and Evaluation 2
Conclusions/Recommendations 5
References 8
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3. St. Andrews Business School | M0841 Credit Management
Executive Summary
This report will look into an on-going concern which more and more small businesses are
increasingly facing in light of the global economy; according to a survey carried out by B2B
Chartered Accountants (2011), they state that the UK’s B2B culture of late payment is getting
steadily worse with amounts owing to Small and Medium-Sized Enterprises (SME’s) hitting
record levels of around £33.6B.
Literature Review
Analysis and evaluation
Late payments have reached levels in the region of £33.6 billion being owed to SME’s by
their late paying customers. The average amount owed to each firm is around £39,000 and
around half of all UK SME’s on average are waiting 28 days longer than their payment terms
as addressed on their invoices, (B2B Chartered Accountants, 2011).
Trade debtors are a key element in the working capital cycle (WCC) (Paul and Boden, 2011).
Wilson (2008), states that lack of working capital management and late payment are a
common cause of small business failure. Paul and Boden, (2008) further state that whilst
businesses may have sound business reasons for granting trade credit, the time lag between a
sale being made and payment makes way for the possibility of default or delinquency risks
resulting in bad debts.
Trade Credit accounts for 80% of business transactions, which make trade credit a prominent
part of the British trading environment, however, with SME’s being owed around $26 billion
(Manager, 2009), trade receivables is seen to be the biggest yet the riskiest asset to hold,
(Paul and Wilson, 2006; Peel et al, 2000; Pike et al, 1998).
There are, however, motivations as to why businesses (not limited to SME’s) will still choose
to grant credit when, intuitively, suppliers will want to be paid up front. Offering trade credit
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4. St. Andrews Business School | M0841 Credit Management
may offer business advantages which may compensate for the risks involved in granting trade
credit. These will stem from macro-environmental factors, characteristics and norms. For
example, it may be customary to offer credit. (Paul and Boden, 2011).
Such trade credit decisions, such as how much credit to assign, will be influenced by the
industry sector in which a firm is operating within. Those operating in highly competitive
markets may need to offer extended credit terms to boost their market share. Business-2-
business (B2B) companies offering credit terms can be an essential tool for attaining new
customers (CIMA, 2010).
Seasonal businesses may demand extended credit terms because of the irregular occurring
cash flows and to achieve equibrilium with their cash conversion cycle. (Paul, 2004; Wilson
and Summers, 2002; Emery, 1987)
Summers and Wilson, (1999, 1997) state that extending trade credit may also be demanded
by firms with longer production cycles and those with substantial inventories or materials,
such as firms operating in the manufacturing industry sector. Moreover, prevailing economic
conditions as well as firms whom cannot obtain credit from institutional lenders with reasons
such as their size, (in terms of capitalization) reputation or the nature of their assets and/or
products may find taking advantage of trade credit offered by their suppliers being the answer
to seeking a cheap source of short-term finance, (Atonasonova and Wilson, 2009)
Robertson, (2007) states that when a business is determining a credit policy, which sets out
the period of credit they will give to their customers, the competitive environment needs
consideration in terms of what competitors’ credit terms are being offered.
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5. St. Andrews Business School | M0841 Credit Management
Paul and Boden, (2011, pp735) state that where the provision of trade credit becomes a
customary practice within the business environment then businesses, such as suppliers, may
find they have little choice but to offer credit as a way of responding to demand among their
competitors, (Paul and Boden, 2011). Extending trade credit may initially look good on their
profit and loss accounts but can be a disastrous move for their cash flows later on, (CIMA,
2012).
Conclusion/Recommendations
CIMA, (2010,pp.5) state that cash flow is not only a primary indicator measuring the health
of an enterprise but is also the lifeblood of any business. It is also the most single pressing
issue which faces SME’s. In an economic environment where liquidity becomes a scarce
resource, a critical success factor for such businesses is an efficient cash flow management
system.
Cash Flow Management
Cash flow management is the practice of balancing incoming cash from trade debtors with
the outgoing cash resulting from the daily and long term financial commitments and/or
financing costs, such as employee wages, interest on debentures, paying suppliers and fixed
overheads. Careful monitoring of a business’s cash flows will enable management to be able
to forecast cash flow surpluses and deficits at any given point and to take corrective actions
where necessary early on. (CIMA, 2010).
Any cash that goes out of the business (outgoing cash) to service debts and operating costs
before incoming cash is collected from receivables could mean that businesses will
experience cash flow shortages – also known as a cash flow gap (CIMA, 2010).
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6. St. Andrews Business School | M0841 Credit Management
Jones, (2011) says that one of the key lessons that businesses have taken away with them
during the economic downturn is the importance of a healthy cash flow.
Setting out the agreed payment terms prior to any transaction taking place
The BIS, (2012) state that the most important step for a business to take is to formally agree
payment terms with the customer before any transactions take place – such practices should
ensure that SME’s can have a better chance of securing positive cash flows needed to invest
and expand their enterprise in the future. The B2B Chartered Accountant (2011) state that
businesses should agree payment terms in advance and to work towards a prompt payment
culture between supplier and customer.
The CIMA, (2010), pp.14) explain that being upfront regarding payment terms with a
customer is professional practice and should not be seen as ‘anti-selling’. Create an
application form for the client to sign, agreeing to comply with the payment terms and any
conditions of sale. Order confirmations and invoices should prominently show payment terms
as well as the date at which payment is expected boldly showing on such documentation. The
CIMA, (2010, pp.5) say that one in three companies did not confirm their payment terms in
writing with their customers. The FPB, (2012) say that payment terms need to be clearly
communicated on all pre-sale communications. They also point out that simply putting these
on the first invoice is usually too late in the event of a dispute.
They also say that informing customers of the Late Payment Directive, which gives
businesses the right to charge interest in covering the costs of debt collection on overdue
accounts, can be an effective way to encourage prompt payment but care must be taken not to
alienate the customer when enforcing this (FSB, 2012).
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7. St. Andrews Business School | M0841 Credit Management
The Importance of Credit References and Trading Data
In a study carried out by Dunn and Bradstreet, (2008), revealed that 90% of businesses grant
credit without a reference. Granting credit to businesses whom have not been reference check
ed run the risk of trading with ‘can’t pay, won’t pay’ customers.
The SME, (2011) say that by obtaining quality business and credit data is essential, especially
when operating in an uncertain economy. The best protection for businesses from writing
down bad debts is by continuous monitoring and robust checks for any changes in a
customer’s credit rating to enable businesses to make educated and informed decisions on
credit policy, which is expanded upon below:
Setting out a formal Credit Policy
Wells, (2004, p.4) says that firms benefit from a formal credit policy which can be used as a
guide for management for the day-to-day management of buyer accounts and to aid
consistent credit decisions, (Christie and Bracuti, 1981). Wilson et al, (2009) sees such
policies as part of the organisations long-term corporate strategy.
The role of the credit manager (in such scenarios) is to manage credit risk whilst at the same
time scrutinize how their credit policies in force will affect and will be affected by internal
finances as well as the prevailing market conditions (Business Credit/Diana, 2006).
Robertson, (2007) state that the key is to minimize bad debts. There requires a balance to be
met between the risk of granting credit to a customer and choosing not to trade with that
customer.
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8. St. Andrews Business School | M0841 Credit Management
References
Atanasova, C. and Wilson, N. (2004) Disequilibrium in the UK corporate loan market.
Journal of Banking and Finance, 20 (3), p.595-614.
B2B Chartered Accountants (2012) Small businesses 'hit by record levels of payment'.
[online] Available at: http://www.g2bgroup.biz [Accessed: 20 March 2012].
Boden, R. and Paul, S. (2011) Sizes Matters: the late payment problem. Journal of Small
Business and Enterprise Development, 18 (4), p.732 - 747.
Chartered Institute of Management Accountants (2010) Impriving cash flow using credit
management. [online] Available at: http://www.cimaglobal.com/Thought-
leadership/Tesearch-topics/Budgeting-and-planning/improving-cash-flow-using-credit-
management-/ [Accessed: 20 Markh 2012].
Department for Business, Innovations and Skills (2012) Minister leads call to change late
payment culture. [online] Available at: http://nds.cou.gov.uk [Accessed: 8 March 2012].
Diana, T. (2006) Credit Department measure up against upper management. Busiess Credit,
[online] Available at: http://www.galegroup.com [Accessed: 20 March 2012].
Dun and Bradstreet report (2008) Dun and Bradstreet Report. [online] Available at:
http://dnb.com.au/Header/News/Business_payments_blow_out_amidst_tougher_conditions/i
ndexl_4258.aspx [Accessed: 20 January 2009].
Emery, G. (1984) A pure financial explaination for trade credit. Journal of finance and
quantative analysis, 19 (3), p.271-85.
Federation of Small Businesses (2010) Late Payment Squeezing money out of SME's. [online]
Available at: http://www.fsb.org.uk [Accessed: 20 March 2012].
FPB.org (2012) Debt guidance | managing debt | business help uk | business information
resources | small business information. [online] Available at:
http://www.fpb.org/page/659/Managing.debt.htm [Accessed: 20 Mar 2012].
FSB (2012) How to Create a Credit Polcy. [online] Available at: www.fpb.opg [Accessed: 8
March 2012].
InspireMe (2011) Laye payments causing problems foe SME's. [online] Available at:
http://www.inspireme.co.uk [Accessed: 20 March 2012].
Manager (2009) Late payments to SME's leap 40% to £256Bn. [press release].
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9. St. Andrews Business School | M0841 Credit Management
Paul, P. (2004) Strategic Trade Credit: An Empirical Analysis. PhD. Leeds University
Business School.
Paul, S. and Wilson, N. (2006) The determinants of trade credit demand: survey evidence and
emperical analysis. Journal of Accounting and Business Management, 17 p.96-116.
Peel, M. et al. (2000) Late payment and credit management in the small form sector:
emperical evidence. International Small Business Journal, 18 (2), p.17-37.
Pike, R. and Cheng, N. (1998) Managing Trade Credit for Competitive Advantage: A Study
of Marge UK Companies. London: CMIA Publishing.
TheSME (2011) 65% of Credit Professionals want Government to protect SME's from late
payments. [online] Available at: http://www.thesme.co.uk [Accessed: 08 March 2012].
Wilson, N. and Summers, B. (2002) Trade credit terms offered by small forms survey
evidence and emperical analysis. Journal of Business and Accounting, 29 p.317-51.
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