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In Focus Risk

Covering the cost of credit

In order to judge the potential success of a deal, you first need to understand all the costs, and to price appropriately

Victoria Taala Credit & billing manager, SG Gaming victoria.taala@

Cash is king in the world of credit, as it should be to any successful business, but how effective are you at managing yours? We all know a sale is not a sale until it is

paid for, but what does that sale cost you? Your customers think that 30-day payment terms are not generous enough and want 60 days. You are considering this, but how much will it cost you? Do you know? How will it affect your pricing model or your net revenue?

A cost-effective sale? Imagine you are starting with no cash. You will need to borrow money to fund the purchase of your sale. How much will that cost you? What monies do you need to borrow in addition to the cost of goods purchase? Two months’ salaries maybe, two months’ rent, utilities costs? What then happens if you cannot collect

the cash in good time? You will need to increase your borrowings to three months! Has this then had a negative effect on your profit so that now the sale is a loss? The cycle then begins again with your

next month’s sale. Month two: do you need to borrow to fund the cost of goods purchase again as you are not collecting cash as timely? This then adds interest to the original borrowing required for funding the business for month two and possibly month three.


The right pricing Now this sounds like a downward debt spiral, but do not be afraid! Many business borrow to fund costs, but with good sound financial planning. Getting the pricing model right to reflect these additional costs is key. Who prices the sales? Is this done by the

finance department or are sales allowed to look at the market place for pricing? Get your sales teams involved in the

costs. Make them understand what the minimum pricing has to be in order to cover their salaries, business costs and to make a small profit.

It is easy to not factor in the cost of

administrative staff in the pricing of sales. How much does it cost to process the order internally, package it and order the transport? How much does it cost to raise the

invoice, send it and chase the payments? What is the cost of sickness or annual leave? Do you employ temps to cover shortages? It is easy to say you double the cost of the

purchase you made, but is that enough when it is translated into cash? After all, extending credit terms – yes,

even to 60 days – is a costly business and not one that should be taken lightly. CCR

February 2016

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