Creditor Assessment Template

Toolkits
Toolkits January 16, 2022

Creditor Assessment Template

This Creditor Assessment template will help you to assess your creditors and to see which ones offer you the best terms and who is the most beneficial for you to develop your relationship with.

As a manager, you will usually be expected to understand basic accounting concepts and communicate effectively with financial people in your own organization. You may also be asked to contribute financial data about your own business unit. The basic principles of accounting are best understood by considering some simple businesses and how they might document their financial activities.

Accrual accounting is considered to be the standard accounting practice for most organizations, and is mandated for organizations of any real size. It provides a more accurate financial picture, but is more difficult to administer. Terms like ‘revenue,’ ‘expenses,’ ‘gross profit,’ ‘depreciation,’ ‘bad debt,’ and ‘fixed assets’ have precise definitions when used in business accounting. You will also need to understand exactly what is meant by accounting terms like these.

Almost every business has creditors that they work with on a regular basis. Whether it is a group of raw materials suppliers that extend credit to your business, or a series of banks lending cash for operations, creditors are the lifeblood of many a business. When used properly, creditors can make possible success in a business that would not be financially viable otherwise. However, not all creditors offer the same terms and using the wrong ones can be a costly mistake.

The most basic analysis of creditors is a simple comparison of the terms that each one offers you. For example, say that you are a manager within a large bakery operation and you need to purchase mass-quantities of flour for your daily production runs. Clearly, it is important to get the best price possible on flour in order to keep costs down and maximize the profit margin. However, the true cost of the flour can’t be seen just by looking at the per-pound rate.

In order to know just how much that flour is costing you, the terms of your credit must be examined. Does the creditor offer you a discount on your invoice if you pay within the first 10 days? How much of a penalty is there for a late payment? Do you ever run up against cash shortages and have to pay late? These considerations will reveal the real cost of the flour to your business.

If you are purchasing a raw material such as flour, you likely have at least a couple choices for suppliers that you can deal with. Inquire with suppliers that you don’t already work with as to the terms that they would be able to offer based on your business’ credit history, volume, etc. You might be able to negotiate based off the current terms you are getting to get a better deal with a new supplier. Remember, they want to sell flour – so don’t be afraid to drive a hard bargain and see where they will meet you in regard to the terms of the credit agreement.

It is important to remember when shopping for terms that not all suppliers are created equal, and there are many other factors that need consideration as well. If a new supplier will give you better credit terms, can they meet the demand that you have? How reliable is their delivery process and how long have they been in this business? For the purposes of our example, a bakery without flour would quickly be out of business. The flour supplier in this case has to be highly reliable and trustworthy to deliver on time, every time. The best terms in the world will do you no good if the creditor can’t hold up their end of the bargain.

One last component that needs close examination is the cash flow of your business and when you are able to pay your bills. Let’s say you are offered terms that provide you with a 5% discount on your invoice when you pay in the first ten days. That is great – only if you are able to pay within the first ten days that the bill is due. Otherwise, it may as well be 25% off, because you aren’t going to be able to take advantage of it. Taking an honest look at your cash flows and determining how realistic it is that you can pay your bills early is an important part of this process. If you simply can’t pay early, then you can stop worrying about those terms and just look for the best supplier.

As a manager, you will want to explore all possible options for your creditors as a way of getting input costs as low as possible. Having options is always a good thing, and you will be able to show those above you the logic behind using the creditors that you have chosen. Fine tune all of the creditors that you use to find the best terms available to your business and another piece of the management puzzle will be locked into place.