Credit Sales: Credit Management and Collection Techniques

Author: Zhang He / Country: Mainland China
Publisher:
Publish Date: 2005-08-01
Features: What are the benefits of credit sales? Credit sales, also known as trade credit, refers to a practice where a company's products are sold to distributors without requiring immediate payment. Currently, 80% of international commercial trade is conducted through credit sales. Since the 1990s, the application of credit sales has become increasingly widespread, especially in highly competitive industries such as pharmaceuticals, food, textiles, and machinery.
Case: The proportion of credit sales in the eyewear retail industry is extremely high, with a broad scope of involvement. It is estimated to have originated in the late 1980s. The main reasons for this phenomenon are as follows: The eyewear market in China is predominantly a buyer's market, with a large number of eyewear brands available and abundant supply. Additionally, due to the low transparency and relatively high profit margins in the eyewear industry, the number of large-scale, well-organized retail stores is limited. The relationship between supply and demand in this industry is abnormal, even (distorted). Manufacturers compete fiercely to secure limited shelf space in eyewear stores, inadvertently creating this distribution method. Some domestic brands, eager to introduce their products to the market, actively request retailers to conduct trial sales before payment. Consequently, retailers may demand payment after the products are sold, leading to smaller or less creditworthy stores failing to pay for their inventory. Some eyewear stores lack sufficient capital to cover all their purchases and may borrow from suppliers to support business growth. To ensure their products reach the market, suppliers are forced to accept the retailers' requests for delayed payment. Certain eyewear businesses, uncertain about the market's acceptance of new brands, models, or colors, hesitate to purchase in bulk. Meanwhile, manufacturers seek to quickly introduce their products to test market trends, resulting in trade practices resembling consignment sales, where payment is settled after the products are sold.
Impact of Credit Sales on Businesses
How significant is the impact of credit sales on business operations? According to surveys by relevant experts, when credit sales are adopted, a company's sales volume increases by an average of 16.9%, profit margins rise by 5.4%, and the number of customers grows by 14.2%. Conversely, when credit sales are not used, these three metrics decline by nearly 20 percentage points. Correspondingly, when credit sales are employed, cash flow decreases by 5.1%, while without credit sales, the reduction is as high as 10.1%. If the recovery of receivables is managed effectively, cash liquidity can even improve.
How are these differences in indicators generated? The main reasons are as follows:
① Credit sales provide customers with a grace period for payment, attracting more customers and thus increasing sales revenue and profitability.
② By adopting credit sales, companies avoid frequent interactions with banks, reducing costs and administrative expenses.
③ Credit sales facilitate financial support for customers, thereby strengthening relationships with them. In fact, many customers are not lacking the ability to pay but prefer a "buy now, pay later" model. When a commercial enterprise adopts consumer credit to expand its market share and attract consumers, other companies, to maintain their market position, often quickly follow suit.
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