Growing credit sales can increase income while consuming cash. A credit policy gives the team consistent rules for who receives terms, at what limit, who approves them and what happens on delay or exception.
A credit limit needs context
A customer has a SAR 50,000 credit limit, SAR 35,000 of open invoices and an approved but uninvoiced order of SAR 10,000. A new SAR 12,000 order arrives. Checking invoices alone produces SAR 47,000, apparently within the limit. Including existing commitments gives exposure of SAR 57,000: SAR 7,000 above the limit.
Define what exposure includes: invoices, confirmed orders, uninvoiced deliveries and the treatment of guarantees or advance payments. Do not deduct a promised transfer as though cash has already arrived. Nor should a disputed invoice automatically fall outside the limit; the dispute may itself justify caution over further sales.
A legitimate exception needs a reason, an authorised approver and an expiry. Management might permit a limited shipment to a reliable customer against partial payment. That does not permanently increase the limit. Once the exception expires, normal rules resume and its approval history remains available.
Sales staff should understand both why an order is held and what would release it: payment of a specific invoice, a missing document or an approved increase. A generic “credit exceeded” message encourages repeated calls and workarounds. A useful policy protects collection while giving sales a precise route to a decision.
Credit sales with understandable terms
Policy balances sales opportunity, non-collection risk and working-capital cost. It uses customer information, payment history and reviewable limits, without assuming every customer in one segment carries identical risk.
When payment performance deteriorates
Establish the cause: a delivery dispute, missing paperwork or financial difficulty. Correcting an invoice differs from repeatedly extending terms, which warrants an exposure review. Record each payment promise with its date and amount, then compare it with actual settlement.
A sales hold should not exist only as an informal conversation. Identify affected orders, any contractual commitments requiring separate consideration and who can authorise release. Clear exceptions protect the customer relationship and prevent inconsistent treatment between salespeople, particularly when responsibility changes or the usual contact is absent.
Approve against actual exposure
A customer may remain below the credit limit while its oldest invoice is seriously overdue. Exposure limits therefore work alongside overdue-age rules; unused headroom is not an unrestricted permission to sell. New customers need identity information and agreed terms, while existing customers need a review of actual payment and dispute behaviour rather than merely repeating the original application form.
A credit decision at the sales desk
- Define assessment evidence and approval levels.
- Record a limit, terms and review date for each customer.
- Create reminders and follow-up stages by lateness.
- Document each exception, reason, expiry and approver.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
