Should you give credit, if so for how long?
Most companies have set credit periods; the detail of such should be stated on the invoice, if there are not you are looking for trouble off the bat. If you don’t have a policy regarding the credit period, it is an important place to start building your policies from.
Credit periods are influenced by several factors:
- Strength of your position in your market
- Attitude of your competitors
- Accepted practice in your industry
- Your attitude to risk
- The desire to increase sales
There are three main reasons to make the credit period as short as possible.
1. Very few customers will pay to terms – whatever those terms are debtors will push them like little children to find your limits.
2. Many companies will always as their own company policy add a fixed term to your terms and their accounts receivable will be automatically set up this way. Simply they will add 30 days – therefore an invoice due 30 days will then become 60 days; an invoice due 7 will be 37.
3. Collection procedures are geared around the due date, and credit control sanctions will only start after this date.
Net Monthly or Not
Invoices due net monthly add an extended period of credit to the invoice. For example an invoice issued on the 1st January would not be payable until the end of February. However if the invoice is 30 days it would be payable by the end of January – this is a huge difference for the cost of credit. Monthly accounts add an average of 15 more days than 30 day credit periods.
It is worthwhile considering if you should give credit. Without credit there is no need for credit control, saving on employment costs, administration, audit, debtor’s ledger, and no statements. It is worthwhile considering what the effects on your business would be if the concept of credit did not exist.