Credit sales - SS2 Commerce Lesson Note

Meaning of Credit Sales:

Credit sales refer to a business practice where a company sells its goods or services to customers on credit, allowing them to make payment at a later date, typically within an agreed-upon period. Instead of receiving immediate cash, the company extends credit to customers, trusting that they will fulfill their payment obligations according to the agreed terms.

Basis for Credit Sales:

Credit sales are often based on the relationship and trust between the company and its customers. The company may assess the creditworthiness of the customers by evaluating their financial stability, past payment history, and credit references. The decision to offer credit sales is typically influenced by factors such as the company's sales strategy, industry practices, and competition.

Advantages of Credit Sales:

Increased Sales: Offering credit sales can attract more customers and boost sales since it provides them with the flexibility to pay later.

Customer Loyalty: Providing credit to customers can help build long-term relationships and foster customer loyalty.

Competitive Edge: Offering credit sales can be a competitive advantage as it may differentiate a company from its competitors and attract more customers.

Cash Flow Management: While credit sales delay immediate cash receipts, they provide the company with a steady inflow of cash over time as customers make payments.

Disadvantages of Credit Sales:

Risk of Bad Debts: Extending credit to customers comes with the risk that some customers may not pay their outstanding balances, resulting in bad debts and financial losses for the company.

Cash Flow Challenges: Depending on the credit terms and the timing of customer payments, credit sales may lead to uneven cash flow and potentially affect the company's ability to cover its own expenses and financial obligations.

Administrative Costs: Managing credit sales requires additional administrative tasks such as credit checks, invoicing, and collections, which can increase operational costs.

Opportunity Cost: The company may miss out on immediate cash flow that could have been used for other purposes such as investments, inventory replenishment, or debt repayment.