Accounts Management

 

Should We Sell On Credit?

 

One of the dilemmas facing every small business is whether to make sales on credit.   It is widely accepted that selling on credit – in effect, giving your customer more time to pay, or put another way, lending your buyer money – generally increases sales.   But that benefit can come at a very high cost unless there is good planning and tight control over debt collection. 

 

Recent studies have shown that more than one in every five small business failures are directly attributable to sloppy use of credit – specifically slow collections, bad (i.e. unpaid) debts and increased costs.  Unless you are careful, increased sales may come with the risk of having a slower cash flow – or even a negative cash flow!

 

A sale is only complete when the customer is happy with his purchase and you have been paid.  Granting a customer credit is a privilege to be earned and respected. You must be selective – allow credit only to those customers who are worthy of the privilege.   

 

Before embarking on a generous policy of allowing credit, do some careful calculations with your accountant.  Plan the whole thing and build in workable controls such as when and how to limit (or refuse) credit to slow paying debtors.  You must eliminate (or at least reduce) bad debts, decrease the time lag between sale and payment, and not allow escalation of the various costs (e.g. extra office costs such as more records, stationery, postage, etc, and {possibly} overdraft interest) associated with granting credit.

 

Some of the risk inherent in allowing buyers credit can be reduced or even eliminated if you follow a few simple but important guidelines.

 

1. Decide whether you can afford to give credit.  Work with your accountant to prepare a cash budget to show the effects of extending credit. Then compare this with your likely cash flow from cash sales only.  It may be better to stick to cash sales only.

 

2. If you decide to go ahead, devise an acceptable credit-management process and set up specific trading terms.  Matters to be decided must include:

• What criteria should be used to determine if a buyer is worthy of credit?
• Should we ask for trade references from applicants?
• How much credit should we give each applicant?
• How long will we give our customers to pay?
• Will discounts be offered for prompt (or early) payment?
• Will interest or fees be charged on overdue accounts?
• How shall we deal with ‘slippery customers’ (who use delaying tactics)?

3. Your sales staff must know and follow your policies – no credit to any customer unless and until they conform to your trading conditions.

 

4. Determine exactly how you intend to collect each and every debt owed to you. 

 

Poor credit management is business inefficiency at its worst.  Among the more common practices that can lead to a blow-out in accounts receivable (i.e. unpaid debts) compared to the volume of credit sales are:   

• granting credit to buyers who are credit risks.
• failing to run credit checks.
• disorganised, incomplete and out-of-date files and records.
• failure to keep updated age-of-debt records (for every credit customer).
• lack of persistence in chasing debts.
• errors on documents (e.g. prices) leading to delays and arguments.
• poor interpersonal and collection skills leading to customers being antagonised.
• failure to apply sanctions (such as COD only) on overdue accounts.
• shipping wrong goods.
• not knowing who to deal with in a debtor’s business.

Do you monitor your accounts receivables and actively manage the amount and days outstanding?  If not, contact us to discuss the potential impact this is having on your business and how you can gain more control with a few simple strategies.