Creditor control is managing your relationship with organisations or people you owe money to, such as suppliers. It forms part of working capital management.
It is, unfortunately the area over which not-for profit organisations have least control. If you are dealing with an industrial giant or a big local authority, they generally dictate the terms of trade.
However, there are steps you can take to improve your position:
- Try to negotiate as long a period of payment as possible at the beginning of the relationship.
- Pay by the due date, but not before - remember, this is free credit.
- When you have established yourself as a reliable payer, try to renegotiate for better terms.
- Bring problems to your supplier's attention promptly and courteously. Give them enough time to remedy the situation before you refuse to pay.
- Don't try to delay a £2,000 payment on the grounds of a £20 complaint.
Monitoring creditor control
The ratio to watch here is the average number of days credit you take from your suppliers. Take too little and you may be paying extra costs like bank overdraft interest and charges unnecessarily. Take too much and you risk your suppliers demanding cash on delivery - or worse, cash with order. Try to keep the figure the same each year, or cautiously increase it.
Calculating average creditor payment period
- Find the number of creditors
Be careful to match like with like. For example, you should exclude from the creditors figure any items such as amounts owing to the Inland Revenue for PAYE as this has a specific payment date completely separate from your ordinary operations.
- Multiply (1) by 365
- Divide (2) by the total cost of goods and services purchased
The result (3) is the average days credit taken.
Find out more about working capital management.
Find out more about financial difficulties, how to recognise and avoid them.
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