Question

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I believe Olin should consider to allow credit sales. An advantage would be is an increase in sales by offering to purchase on credit. It also show that you respect your customers by trusting them to pay for their purchases at a later time. Olin will gain the respect of his current customers while gaining new customers from other competitors and creating competition.

There are some disadvantages to allowing credit sales. Cash flow will be affected due to the delay in cash coming in according to the credit terms. The cash that used to be available before will not be there to pay bills. It's also just an overall huge risk to take. Customers credit history needs to be checked before taking the risk. Even if the customer does have a good credit history it can still lead to bad debts. If the collection agency isn't able to obtain the money then it is an expense to the business for their purchase. Accounts receivable will become a new account to fund. Accounts receivable will need to be calculated and updated frequently. If customers don't pay on time an invoice should be sent out which will create more work.

Olin should make an estimate on how much revenue he will actually gain with the huge risk he is taking by allowing credit sales.

Answer 1

Selling goods on credit is a well known marketing technique. I have used the word " Marketing technique ", because Marketing means not only selling our goods but also customer satisfaction. A customer will satisfy when we allow credit for sale up to some affordable period. Then automatically he will continue to purchase our goods. In present global world, business became competative. And to be in competation,with holding present customers is also a very important task as well as tageting new customers. Selling goods on credit is a nice technique which enables the seller or trader to with hold our old customers. There is also one more benfit that is, mouth publicity by our customers to whome we have provided Credit sales, which will attract new customers.

At the same time, selling goods at credit is also involves risk factor. There may be a risk of bad debts, allowing credit may raise liquidity problems to the business, which may effect working capital requirements of the business. And as said if the accounts receivables were sold to collecting agencies, if they are not collected then it will be expenses for the purchase.

So, a business person before providing goods on credit basis, he must check " Risk and return " factors in Credit sales.

i.e... a) To which customers sales can be made at credit :- To loyal customers whose credit rating is good and financial status is in a position to pay back the credit.

b) How to know, whether they are able to repay the credit amount if sales were made on credit :- In order to provide goods on credit, first receive a appication from the customer for his acceptance to credit sales, that should be attached by CIBIL or CRISL credit rating certificate copy ( latest)

c) How to know their financial staus is good enough :-  With application, take a copy of Residential proof and if he is an employee, request a copy of pay slip (latest) or if he is a business person request a copy of IT returns which shows his revenue (latest)

By analysing all these factors calculate the risk and return factors and finalise to whome goods can be sold at credit, if you want to be in safe zone.

But, some times it may hurt feelings of customers if we request or ask their income and financial status. Which may creats a wrong opinion on us.

Here in the above case the risk is less and return is also less ( 1st Option )

If you provide goods on credit on small compliance just by taking his mobile number on bill ( trader copy) then the customer will feel happy and good. But it may have the risk of bad debt

So, here in the above case the risk is high and return is also high ( 2nd Option )

So, based on the requirement and mind set of the business person, he can choose one option in the options mentioned above.

If he is ready to face and challenge and to take high risk 2nd option is advaisable

If not he may follow 1st option.