Question

Is there a risk of negatively impacting the revenue for the company by creating tighter credit standards? Why or why not?

Answer 1

Creating tighter credit standards can have positive and negative impact on sales

Positive Impact

1. Offering tighter credit terms to customers will directly improve your cash flow. You will have more liquidity

2. Less bad debts as you would fgive credit only to worthy clients and would ensure all money is recovered within timelines

3. Collection cycle will improve as credit would only be given to clients that have good credit worthiness in market

Negative impact

1. You will lose business if you have tight credit standards. Offering trade credit will give you a competitive edge over your business rivals. Customers would generally favour the chance of selling and obtaining payment from their customers before having to pay for the goods you have sold to them. You may also need to offer such an incentive just to stay competitive especially if your rivals are already doing the same. A way of being more competitive is to offer greater terms and a discount for early payment.

2. Decrease in sales may happen when you start selling on tight credit. Your customers are likely to buy from others as their cash flow will get disrupted.