Question

The scenario:

You are the senior manager of an accounts receivable department in a medium-sized company selling specialty metals such as titanium, tungsten, and magnesium to manufactures. Credit sales last calendar year totaled $46 million. In your opinion, credit policies and procedures seem to be functioning quite well – last year the company wrote-off less than $50 thousand of bad debt (uncollectable accounts receivable).

For the past six months, you have been closely watching the account balances of one of your best customers. This customer accounts for 20% of your company’s total sales. For many years, the customer has had an impeccable payment history. However, beginning about a year ago, payments began stretching out from 30 days to 40 days to 50 days and now nearly 60 days from the date of the invoice.

Yesterday, the company called in to place an order that, because of its slow payment history, would put the company in excess of its credit limit of $1 million. The staff member that took the order came to you for guidance, noting the credit limit issue but also explaining that the customer was unwilling to place a COD order. Moreover, the customer explained that this was a rush order and was willing to pay extra for expedited shipping.

The exercise:

What advice would you give this staff member?

What are the advantages and disadvantages to fulfilling this order?

Answer 1

By analysing the situation, we would recommend the staff member to strictly comply with the credit policy and maximum time allowed to the customer should be under norms ( i.e. period of credit +1/3 of period of credit). In the current scenario, his situation and mindset should be analysed and judged and order should be delivered as if we deny, it can be a indication to heavy amount of bad debt and customer loss.

Advantages to fulfill this order-

• More revenue
• Protection as to approval of previous amount
• Customer retention

Disadvantages as to fulfill this order-

• Can promote the customer to make delayed payments in future.
• Can be a case where the customer will not come again (there can be intention not to come again)
• Can lead to other customers, not to follow credit policies