Predicting materials suppliers' bad debt

Present methods for evaluating contractor's creditworthiness have been found to be ad-hoc and bespoke. As such, materials suppliers place themselves in a position of considerable risk when they furnish contractors with credit. Very often, the result of this is bad debt for the supplier. By considering a UK nation-wide survey of suppliers' credit control and debt collection practices, this paper presents two multivariate discriminant analysis models. The first, models suppliers' percentage bad debt incurred in financial year 1997-8. The second model complements the first, by investigating the relationship between suppliers' targeted profit margins (minus bad debt incurred), for the same time period. The first model identifies that percentage of bad debt incurred is related to: whether suppliers implement a standard procedure for collecting overdue accounts; and their philosophy for checking contractor's creditworthiness. The second model identifies that suppliers' targeted profit percentage (minus bad debt incurred) is related to: their standard terms of payment imposed onto debtors; whether they insure against bad debt; whether guarantees are sought for substantial orders; their financial growth trend; and method(s) used to establish contractor credit limits. The paper shows that failure by suppliers to realize the risk they expose themselves to when granting credit, is directly linked to the level of bad debt they incur.