Trade on credit often motivates customers to pace up and increase the amount of their spending that otherwise may not be possible. Some businesses choose to offer credit and gain a competitive advantage in the industry. Maintaining a balance between increased sales and the risk of reduced cash flow is a significant part of risk management in your business.
Considering the nature of your business and number of transactions, you may choose not to offer credit to new customers. Before offering a credit facility, understand the following.
What sort of risk comes along with offering credit
- Reduction in cash flow
Waiting for customers to pay reduces your ability to order new sets of inventory from suppliers. Many businesses also consider debt financing to reduce this risk.
- Reduction in profit margin
Providing credit sales often reduces your profit margin and the worst part is, the cost of this only appears in your financial statement. So, you better study the pricing of your products and services before they backfire.
- Large debts
Several outstanding debts can pose a risk to your business. This particularly happens if you are exposed to various single transactions.
Perform A Credit Check
A credit check is one of the strategies you can use to fix the risk of bad debt. Before you sell goods on credit, have them complete some sort of contract and sign a credit application form to denote consensus.
What to collect from individuals:
- a confirmation that they have read and understood the terms and conditions and have agreed to abide by them
- Identification of customers and their contact details
- Permission to conduct a credit check when necessary
What to collect from corporate clients:
- comprehensive information of all owners, directors or partners
- 3 trade credit references, at least
- Confirmation of the applicant to ensure they have read and understood the terms and conditions and have agreed to abide by them.
Another way to perform a credit check easily is to automate the process. Preferably for small businesses that sell to individual customers every minute.
A credit management application to note down every transaction as soon as it takes place and sends a message to the customer mentioning the details of the transaction and the deadline to pay their dues.
Udhaar App is a simple, easy, and reliable business application for personal and commercial use that manages your daily business khata efficiently and offers features such as free SMS reminders, daily, weekly, and monthly account statements, notes, and whatnot.
Keep a track of debtors
You can either use Udhaar App if you want to be things as simple or you can use a good filing system to keep track of customers. This will assist you to follow up outstanding payments and keep balanced cash flow.