Keeping the cash flowing. The principles and practice of modern trade credit management in Poland's market economy / Robert Patterson, Małgorzata Wejer-Kudełko

This book explores an important but often neglected aspect of a firm's finances: trade credit management (TCM). When firms offering credit to each other so purchases can be made on open account it is a vital source of business-to-business credit flows. Trade credit is the life-blood of competitive economies. Trade credit involves taking calculated credit risks. In return, selling firms boost sales and profitability. Buying firms get access to credit. But trade credit has to be carefully managed. To generate cash, accounts receivable need to be collected. In the meantime, working capital must be managed so that cash flow is sufficient to pay the firm's bills. The price of error is financial distress and even bankruptcy. The book explores the topic from many angles and is anchored in the hard realities of Poland's marketplace. Particular attention is paid to the dynamics of trade credit in small to medium enterprises, firms which often have special needs. The focus of this book is threefold:
• the analysis of the role of TCM from inside and outside of the firm;
• a detailed investigation of best practice in TCM collection processes;
• the presentation of issues concerning working capital management.

AUTHORS' FOREWARD 9


PART I: Big Picture Overview

LOOKING INSIDE THE FIRM 27
I. The Accounts Receivable Investment 27
Why Carry Accounts receivable? 27
Measuring the Receivables Investment 28
Trade Credit and Elasticity of Demand 31
What Does Offering Trade Credit Cost? 34
II. The Perennial Finance-Sales Tension 40
III. The Psychological Dimension of TCM 42
Easily Overlooked 42
Leaning on the Trade 42
Collection Games 43
The Role of Confidence in Patience 44

LOOKING OUTSIDE THE FIRM 47
IV. Macro-economic Conditions 47
Business Failure: Bad Debts 47
How Much Risk Is Out There? Bankruptcy Patterns in Poland 48
Bad Debts as a Cost of Business 50
The Credit Cycle 51
Industry Patterns in TCM 53
V. Institutional Infrastructure 54
Legal Status of Unsecured Trade Debt 56
Access to Bank Credit 61
Trust and Business Confidence 67
Credit Information Infrastructure 69
Credit Bureau-Generated Credit Scores 100
Polish Market 107


PART II: The TCM Collections Cycle

OVERVIEW OF THE TCM COLLECTIONS CYCLE 119
I. Formulating A Credit Policy 121
Strategic context 121
Terms of sales: Liberal or Tight? 132
II. Information Gathering 136
Information Appetite 136
Customer Files 138
Establishing Identity 139
Guarding Against the Possibility of Fraud 140
Information Sources 157
Trade References 159
The Economics of Search Costs 163
III. Credit Risk Assessment 165
The Five Cs in Action 173
Setting Credit Limits 195
Credit Scoring 199
IV. Monitoring & Collection 212
Collection Steps 212
V. Dealing With Default 226
Dunning 228


PART III: Financial Management Issues

I. Liquidity Management 271
TCM & Liquidity Management 271
Arranging bank credit 276
Accounts Payable Management 303
Cash Management 314
II. Overtrading 318
III. Risk Transference 324
Bank Letter of Credit (L/C) 324
Domestic Credit Insurance 327
Factoring 345


APPENDIX A
Some Suggested TCM Reforms 375
APPENDIX B
Useful Websites 377
APPENDIX C
Glossary of Trade Credit Management Terms 379

REFERENCES 419