FIN.3:4.2 - Make customer credit a commercial choice

A customer-credit policy includes who can buy on credit, how much exposure can accumulate, the payment term, any early-payment discount, collection action and the response to overdue balances. Establish the actual offer and likely customer response. A longer term can increase sales while requiring earlier production cash and increasing expected nonpayment. A tighter term can reduce exposure while losing a profitable customer. Compare the entire change against the business that would occur without it.

Construct additional receipts from the changed sales volumes, prices, discounts, collection dates and expected losses. Construct the additional cash costs of delivering those sales, credit administration, collection and any capacity step. Use MA.5 for the operating response and FIN.6 for an incremental present-value comparison when dates or recurring effects matter. Revenue growth alone cannot answer whether the credit policy creates value. Do not subtract expected bad debt again if the forecast receipts already allow for noncollection.

Keep the credit limit distinct from the term. The term controls when a particular invoice falls due; the limit constrains the exposure allowed to accumulate. A customer may stay within a limit while paying late, or exceed it through several otherwise current invoices. Consider concentrations and related customers when a common failure can affect several accounts. FDM supplies the relevant parties and claims rather than a name-matching shortcut.

Monitor an aging of actual unpaid invoices, with a stated reference date and whether age is measured from invoice or due date. Reconcile its total to the receivables account and inspect disputes, credit notes and receipts not yet applied. Compare cohorts or stable customer groups when sales mix changes. An aggregate fall in days receivable can be caused by a surge of recent sales; it does not show that old overdue invoices were collected. Return the changed collection forecast to FIN.2.

Factoring or discounting receivables can bring forward cash without changing the customer’s payment. Distinguish the advance, retained reserve, fees, servicing and any recourse if the customer fails. A transfer of the receivable and a loan secured by it have different claim consequences. Use actual FDM terms and FIN.10 to obtain net proceeds and remaining exposure. Do not count both the financier’s advance and the same full customer receipt as unencumbered cash.