Impacts of credit control and debt collection procedures upon suppliers’ turnover

Abstract

Construction materials suppliers have earned the reputation of being the Builders’ Banker. This has come about due to suppliers purveying construction contractors with a form of working capital. Inevitably, with the construction industry being volatile and prone to large numbers of insolvency, the risk associated with being a crediting organisation (e.g. supplier) is high. Suppliers’ utility gain from furnishing credit to contractors is directly related to their financial turnover. Therefore, research into supplier turnover provides valuable insight concerning issues such as their working capital ‘contribution’ to the construction industry. Using data from a UK survey of materials suppliers’ credit control and debt collection practices, stepwise multivariate discriminant analysis identified that suppliers’ turnover was related to: (1) whether they held insurance against bad debt; (2) the total number of credit accounts furnished; (3) the percentage of debting contractors who have credit limits imposed upon them; (4) whether guarantees of payment are sought; and (5) turnover trend for the last three years’ trading. The paper identifies that ‘large’ turnover suppliers tend to utilise more ‘formal’ credit control and debt collection practices (i.e. insuring against bad debt and imposing credit limits upon creditworthy contractors). This contrasts to ‘smaller’ turnover contractors, who tend only to seek guarantees of payment when a contractor places a substantial order.