Forecasting construction materials suppliers' financial turnover

Abstract

Through the credit they furnish, materials suppliers provide a form of working capital for most construction contractors. This paper considers the implications of this for crediting organizations (i.e. suppliers). It is shown that a supplier's financial turnover movement (or lack of it) can be modelled and predicted with some accuracy by considering a number of characteristics of their credit control department. The models are developed from analysis of data obtained from a survey of 55 UK materials suppliers' credit control and debt collection procedures. The statistical technique of multivariate-discriminant analysis (MDA) is used. Predictive accuracy of the models is tested on an independent, hold-out sample of 10 suppliers' characteristics. It is found that ‘risk-taking’ suppliers who protect themselves from bad debt by using insurance; suppliers who employ a third-party organization to evaluate potential debtors' creditworthiness; and suppliers who service only one construction trade with materials, achieve significantly greater financial growth than those suppliers who do not exhibit these characteristics.