Of course, credit in retail has costs both real, which includes the expense of capital, the administration costs of handling it and the opportunity cost where the money advanced to your customers could be put to other items. Plus there is the risk that many of these debts will go South.
The major method of handling debt in retail is by established credit limits which I talked about here.
It is a discussion about the advanced functions and control in our pos system that can be used to control these debtors.
The common method used is to first demand all goods be paid up front or by lay by. Then after monitoring this for a while steadily allow them more credit if they purchase regularly, and if you see that they make timely payments slowly increase the credit. Sometimes this does not work as some clients often need credit before they can start to trade with you so like everything you need to use your intelligence.
Above all monitor the KPI, which is how long, on average, it takes them to pay their bills.
Another common KPI used is (Total debitors)/(Average daily debitor sales)
So if say you did $500,000 in sales in debitors last year, divide that by 365 days = $1,365 a day.
Say you are now owed $150,000 so your figure is 109 days, which would be a worry if your credit term was 30 days. What bit should be in 30 days is 30 x $1,365 = $41,000.
This figure in practice tends to be a good rule of thumb.
One point I was told by my accountant just before I started my business was monitor cashflow because the number one cause of SMB collapse is bad cashflow so what I put into our system was an extremely powerful system for monitoring it. Check it out here.
