Question

The foundations behind account receivables are company's policies and procedures for sales. Should all companies (small or large) have a credit policy? When and how do companies evaluate a customer for credit besides looking at customer's past payment histories? How do companies be able to ascertain who should get credit and who shouldn't. Also is it always beneficial to offer discounts to speed-up cash collections?

Answer 1

When goods and services are sold on credit, it creates accounts receivables in the books of the company. When trades are done at huge prices and volume, it is not always possible to pay in cash up front and hence a credit period is given to settle the trade.

Should all companies (small or large) have a credit policy?
Yes, every company irrespective of its size should have a credit policy. However, It would not be required for company's whose entire sales is in cash. Every company (selling goods or services on credit) should have a credit policy so that it is not at the risk of losing money by making sales to a debtor who might not be able to pay later.

When and how do companies evaluate a customer for credit besides looking at customer's past payment histories?
Company should generally evaluate the customer for credit before making sales to them on credit. There are various risk assessment procedures that a company should look at before granting credit to customers and it includes options like credit ratings of the customers, financial position of the customer etc.

How do companies be able to ascertain who should get credit and who shouldn't.
Basis the risk assessment procedures done above, the company should evaluate how much credit risk would it be able to bear if there are risk of defaults from the customer. If the risk appetite is more, the company can make greater credit sales than a company which is risk averse. If the customer has defaulted in the past, the company should be cautious in giving credit to such customers.

Also is it always beneficial to offer discounts to speed-up cash collections?
It is always more important for business to have positive cash flows rather than just generating credit sales which run a risk of default which can be seen from the credit financial crisis in the past. It is good to offer discounts to customer to entice them to pay their dues on or before the due date of payment.