We quite often get enquiries from Chic Paints Ltd, who require cover for up to £100 million sales. Sounds fantastic, right? Sadly for us, this isn’t a big piece of business, it’s for an accountancy qualification question and therefore students are looking for a rough idea of price. The question focuses on the company that forced a management buyout to enter into a niche market of more specialist paints, which have a greater gross margin.
The question is very in depth and looks at many aspects of the business, from pleasing all the stakeholders to improving processes. This invoked some conversation in the office and it is clear that credit insurance could be an option to address some of the issues faced.
How could credit insurance help Chic Paints Ltd?
There are many reasons why credit insurance could help with Chic Paints’ position. The main reason would be that the credit control processes would be improved. In some of the papers we have read, it seems that the processes are quite relaxed when it comes to credit checks and deciding what to do with larger clients. With a managed credit insurance policy, Chic Paints would apply for a credit limit of the amount outstanding at any given time for their customers. Once approved they could offer credit terms straight away, without the need for a cash trial period, which could put off some customers.
Being able to offer credit terms instantly to new customers is a big plus as it can quite often win business in its own right as it would help the customers’ cash flow. By winning more business, without risking the stability of the business, the revenue and therefore profit would increase. The business could also target new markets with confidence that the cover provides, thus increasing revenue and profits further.
Credit insurance would also direct their sales team to more creditworthy customers, meaning Chic Paints’ cash flow is not damaged. With the risks of non-payment mitigated, their sales team can really focus on increasing business and furthermore the finance team wouldn’t have any concerns with whether the invoices will be paid.
Credit insurance also works with a company’s credit control to improve the processes in place so that invoices are paid promptly. For example, if a customer hasn’t paid an invoice by the due date, after a period of time the credit control team would need to notify the credit insurer and put the customer on stop meaning no further goods should be shipped. This alone can prompt for payment but if this is not the case, there are further steps going forward:
- The company would attempt to recover the overdue.
- They would pass it to a third party debt recovery provider (usually the credit insurance provider).
- If payment is still not forthcoming a claim would be made to cover the loss.
Assuming a customer became insolvent, a claim would be processed as soon as the company was notified, thus resulting in a much faster claim payment. Claims are paid due to protracted default (non-payment from a company even if they are still trading), insolvency or political risk on export sales.
We find these enquiries very interesting and obviously want to help people that are trying to get a qualification as much as possible. Especially if the students obtaining qualifications will be the next finance directors and credit managers responsible for the debtor book, which is more often than not a company’s largest asset.