January 26, 2022

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How to Deal with Credits Sales for a Small Business

How to Deal with Credits Sales for a Small Business
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Every business must sell goods on credit. This is the way to reduce the number of inventory in-store. Also, it can be used to increase revenue. However, selling on credits comes with numerous problems. This might as well affect small businesses. Therefore, sales that have been recorded as revenue may not be collected as cash. And may result in high non-recoverable debts. What are credit sales? How do you set up a credit sales policy? What will you do if customers are not paying off their debts?

What are credit sales?

Credit sales are when you sell goods or rendered services without collecting cash immediately. This means that you allow a customer or client to take a portion of your business with the belief that he or she will pay in the nearest future.

When goods are sold on credit, it is brought into the company books. This is referred to as Account Receivables. Also called debtors. It is also important to track every credit sale by creating an Account Receivable schedule. Many accounting software, like QuickBooks and Sage, may provide this on a platter. However, you can use Microsoft Excel software or Google Sheet to set up this schedule.

Generally, credit sales are good for business. Why? It increases the business revenue and reduces the high stock of inventory in the entity’s warehouse or store. However, it has its problems! It might not be easy to get your money back from the customers that are buying on credit terms. Credit sales increases a company’s credit risk. The more goods are sold on credit the higher the credit risk. As a result, there is a need to set up a credit policy.

How to Set up a Credit Policy

There are three credit policies to set up:

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1. Stringent or tightening or restrictive credit policy.

2. Flexible and

3. Lenient credit policy.

The stringent policy restricts clients from accessing credit from the entity. And a flexible policy allows the firm to choose whom to give credit and at what amount can credit be given to an individual. Furthermore, a lenient policy gives credit to just any person.

The best type of credit policy from my point of view is the flexible type. This allows a form of restriction and a lenient policy. Here, you will need to have more information about each client and customer to apply this credit policy effectively. In this type of credit policy, there will be a restriction to give credit to first-time customers.

Also, a credit range may be given to customers based on their worth. A customer that can afford to buy goods or pay for services that worth 500,000 Naira can earn more credit than customers that can buy goods less than 50,000 Naira.

A first-time customer that is well known in the community and probably wealthy can access credit sales even at first-time sales to him or her. For example, if Dangote or Bill Gates comes to your firm to buy goods and he requests it on credit. You may want to sell such goods believing that he can pay for them within a specified time.

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Furthermore, some customers or clients might buy goods on credit previously and pay on time. These customers may be permitted to buy more items on credit terms. However, when goods are sold or services rendered on credit, there is the need to recover the money on time. Failing to do so is bad for business. Many clients may not take you and your business seriously if steps are not taken to recover the debts from them.

Procedures to recover Debts from Customers or Clients

To recover debts from clients it is paramount to follow one or more of the steps below

Give Discounts. One way to get customers to pay for the goods or services that are bought on credit terms is to issue discounts. Offer them the opportunity to pay a lesser amount if they pay within a time range. You may say pay between 1 to 2 months and earn a 20 percent cash discount. Pay from 2 months and 4 months and earn a 10 percent discount. Cash discount reduces the cash collected from customers but, it doesn’t reduce the revenue and of course profit. It also helps avoid bad debts.

Communicate account statement. You can regularly send the account statement of the customer. The statement will show the debt owed by the clients and the amount paid so far. This will serve as a reminder on one hand and can be used to motivate customers to pay.

Send a message periodically. It is necessary to send messages regularly to clients of customers. Emails, text messages, WhatsApp chat, or a phone call should be done periodically to remind customers to pay for the goods or services that are on credit terms.

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Visiting the customer. This should be done sparingly. Visiting customers to request your money may be embarrassing. However, if it is a customer with a good moral sense, it may push him or her to pay for the goods or services. However, a limited number of customers may still not pay their debts despite these efforts by the entity.

Seek litigation. This should be done only when other procedures have been taken. Also, this method is applied when the customer is yet to pay for the goods or services that are on credit terms. The entity may use the customers to a magistrate court or high court. The court will persuade the clients to pay the debts within a specific time. However, using this method may lead to a loss of sales. How? Some customers may not want to buy from you. They may fear that you may sue them to court for not paying for the goods.

Conclusion

Selling on credit terms will increase the firm’s revenue and yes, profit. A sale of goods on credit requires effort to recover the cash. Various methods had been enlisted in the article to help small business owners recover their money from debtors. Following these methods will reduce credit risk.

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