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The Bao Lyon Group, LLC Accounting tips
Volume of credit sales are significant
The majority of commercial sales (95–98%) are made on credit, with only a small portion (2–5%) transacted in cash. This means that the credit department is a critical function, overseeing a large percentage of the company's liquid financial resources held in accounts receivable. While businesses can tolerate a certain level of credit loss, typically ranging from 0.5% to 5% of sales, these losses must be carefully controlled. Profitability is highly sensitive to credit management; uncontrolled losses can increase rapidly and severely impact a company's financial health.
Accounting and finance expertise is needed
A professional commercial credit manager needs more than just accounting and finance knowledge. They need to be good with people, too. A good credit manager:
- Reviews customer financial statements to assess risk.
- Uses financial training to predict profits and recovery rates.
- Understands how money tied up in credit affects your business.
- Balances collecting payments with keeping customers happy.
Good customer relations are essential
The commercial credit manager and their department play a crucial part in the company's success by balancing asset recovery with sales growth. This is more than a collections role; it requires tact and foresight to navigate customer relations effectively. A rigid approach to approving credit or demanding payment can harm sales. Instead, the professional credit manager works collaboratively to maximize both revenue and cash flow. Their strategic position ensures they are integral to the company's most critical business decisions.
Credit policies
Changing global and regional economic conditions dictate evolving management goals. Therefore, management must consult the credit department when reviewing policies or creating new sales and receivables programs. It is the credit department's duty to monitor economic shifts, providing crucial advice to management on potential challenges. The credit department is integral to the company's success, and your active contribution to decisions involving proposed changes is critical, given the inseparable link between company growth and credit policies.
Credit control might be relaxed
To support a geographic expansion program, credit controls may be relaxed, such as by approving smaller purchase amounts without a full credit check. While this is necessary for growth, it also requires tighter, proactive management of new accounts to stay on top of collections. Commercial experience suggests that roughly two out of every ten new customers will become a collection problem, while two others will consistently pay late. Your department must recognize and tolerate this inherent credit loss rate. Collaborate closely with the sales team to encourage expansion while proactively managing risk. Pay special attention to new customers, particularly as economic conditions tighten. Experience shows that financially distressed companies often seek credit from new vendors, so scrutinize these requests carefully. By using historical data—which suggests that 60–80% of new accounts will become reliable customers—we can forecast expansion and anticipate recovery rates.
Faster recovery may be required
When facing supply chain pressures or a profit squeeze from rising labor and material costs, a business must adapt its strategy. The focus shifts from rapid expansion to prioritizing existing customer relationships. In such a climate, a faster recovery of receivables becomes paramount for safeguarding cash flow and profitability.
To achieve this, the credit department must intensify its collection efforts. This includes dedicated follow-up with accounts that have consistently paid 70 to 90 days late, using personalized communication to reinforce payment terms.
Furthermore, management may choose to concentrate sales on a smaller, more secure customer base. This shift—which reduces inventory, streamlines operations, and lowers employee overhead—places a greater responsibility on the credit department to closely manage a smaller number of high-value accounts. Schedule a free consultation to explore how we can support your department.
(*) Contractual services
To achieve this, the credit department must intensify its collection efforts. This includes dedicated follow-up with accounts that have consistently paid 70 to 90 days late, using personalized communication to reinforce payment terms.
Furthermore, management may choose to concentrate sales on a smaller, more secure customer base. This shift—which reduces inventory, streamlines operations, and lowers employee overhead—places a greater responsibility on the credit department to closely manage a smaller number of high-value accounts. Schedule a free consultation to explore how we can support your department.
(*) Contractual services
"Small companies often offer credit to customers without considering the process as more than a necessity of doing business. But when the health of a small business relies on customer payment of the amounts owed, collecting accounts receivable can become a serious issue. A strong, formal credit policy can help set billing guidelines at the initial stage of a sale and may prevent more work and risk after the sale is completed."
"Establishing an effective credit policy prevents small businesses from over-extending credit to customers and may help them avoid having to devote future time and money managing accounts receivable and collections. Aside from setting a basic credit limit, credit policies should define payment terms, including any required deposits prior to the start of work. Procedures for evaluating a customer's ability to pay should also be a part of credit guidelines."
"Establishing an effective credit policy prevents small businesses from over-extending credit to customers and may help them avoid having to devote future time and money managing accounts receivable and collections. Aside from setting a basic credit limit, credit policies should define payment terms, including any required deposits prior to the start of work. Procedures for evaluating a customer's ability to pay should also be a part of credit guidelines."
- Paychex.com
