CREDIT MANAGEMENT FOR TOURISM OPERATORS AND ARTS VENUES - ON WHAT TERMS?
Do you fully understand the risks associated with providing credit to your customers?
Deciding on payment terms can be a challenging issue for tourism and arts businesses that are often more used to dealing on ‘cash’ terms – that is, payment upfront by cash, credit card, cheque or EFTPOS.
Each business or organisation needs to develop its own credit management policy that will establish:-
1) What type of customers merit payment on a credit basis?
2) What are the usual payment terms (eg. 14 days from date of invoice)?
3) In what circumstances are exceptions made to the usual payment terms?
4) Who can decide to make an exception?
Firstly there’s the risk of not winning customers if you don’t offer credit or won’t provide credit on their terms. You may want to take into account the value of the job and whether the customer is a loyal customer of yours or has prospect of being a long-standing customer. You should also consider how the customer’s business sector usually operates. For example, if your customer is an events company, is it likely that they will be extending credit to their customer, making it difficult to pay you on ‘cash’ terms?
Most importantly, there’s a risk of you not getting paid. In considering the likelihood of this occurring, consider whether this customer has a good credit history with you or your associated businesses. Is the customer already a valued customer of yours or are they unknown to you? What intelligence can you gather? If the value of the contract is significant you might want to use the services of a credit reporting agency such as Dun and Bradstreet or Veda Advantage that collects information on the credit history of individual businesses. You also need to think about the extent of harm to your business - both in respect to cash flow and profitability - should the outstanding amount becomes a doubtful or bad debt on your financial reports.
Should one of your invoices not be paid, this carries the risk of you not being able to pay your suppliers. Some contracts may not present a big risk in this regard. For example, if you are only providing a venue, the on-costs to you may be confined to utilities such as electricity and water. However if you are providing food and drinks then you should consider what credit terms are provided by your suppliers to ensure you do not experience significant cash flow issues, even in the event that your customer does pay you on time. You should have information at hand that gives you an overview of what bills fall due to be paid over forthcoming weeks. Don’t forget that your employees are also your creditors and if you provide employees with extra shifts to assist with functions and events you will need to allow for this additional expense.
Finally, there’s the risk of your staff agreeing to take on business that may present a poor credit risk. To manage this risk you need to decide who has the authority to accept customers and on what basis. For example, you may set a value ceiling that allows certain employees to accept business on credit terms of a value no more than $5000. Or you may establish other criteria – such as, you might decide that any new account must be approved by management or allow staff to only extend your usual credit terms by no more than 7 days. Importantly you must clearly communicate your policy to staff.
Enjoy Inspire Consulting Pty Ltd works with tourism businesses and arts organisations to manage risks to revenue and cost bases, including those risks associated with managing credit. Please contact Darren McClelland, Director, on 0449 167 776 to discuss your needs.