Credit Policy as Instrument for Success in Doing Business
Under the conditions of resource concentration caused by the crisis in the domestic and the world mining markets, it is becoming especially important for businesses to improve the quality of current asset management. Here, the credit policy represents the major instrument.
World manufacturers of mining equipment are characterised by their large-scale production cycle and the long period of inventory turnover in general. Crediting, or, simply said, post-payments for buying material assets within a 230 days’ period, is a standard practice, which is proved by benchmarking research.
The above period is individual doe each separate manufacturer and, first of all, depends on the duration of the production cycle: from procurement of resources to output of finished products. Simply speaking, manufacturers need current assets; therefore, they negotiate with suppliers to delay payments. The advantage of such arrangements is obvious for both partners: a consumer of goods and services receives resources required to secure its production process, and a supplier receives a guarantee that the settlement with him will be made within the agreed terms. However, the fact that by satisfying the partner’s needs, the supplier secures its market is even more important. No doubt, maintenance of the partnership and continuation of cooperation in the future represent a mutual benefit for the parties.
Based on the practice of the world leaders in the sector, as per this July, Corum is introducing a new credit policy. In such a way, the Group plans to increase its accounts payable turnover in terms of days. “According to its new credit policy, Corum suggests that the suppliers cover the stock rotation indicator by 66% by providing a 120 days’ delay in payments. The choice of the accounts receivable turnover indicator, optimal for the Group, is closely connected with the inventory turnover period, i.e. expenses for raw materials, their delivery and storage, as well as other expenses. In 2015, the period of delivery of components increased, which was accompanied with changes in the production cycle; therefore, the period of inventory rotation increased by over 25% and amounts to 180 days now. This is an average period, equal to the average term of delivery of the major material assets and the inventory turnover, including the Group’s production cycle”, Mikhail Potapov, Corum’s Chief Financial Officer, commets.
The Group has reviews its approach to procurements in general by applying the following categories: major, strategic, critical and non-critical. The classification is based on the impact of procurements on the total financial result and accounts for all risks associated with certain procurements.
It should be noted that the notion of accounts receivable is not only applicable to Corum as a consumer of goods and services, but also as a supplier: “The Group is also a supplier of solutions for the mining industry, and, just like other market players, is greatly affected by the current economic crisis. That is why, we make significant concessions to miners by developing mutually acceptable schemes of order financing, including rent and leasing of our equipment. We also invest in developing new markets to secure future orders for us and our suppliers; we also contributed to the future of our country as a technologically developed state”, Mikhail Potapov summarises.