Setting a credit limit is important for any business as it allows you to stipulate a maximum amount of loan you can provide to your customers. Before going out to set up a credit limit for your customers, it is important that you keep your business accounts updated. You can seek professional help from an acclaimed accounting services provider or use cloud-based accounting tools like the xero accounting software to smoothen the entire process. Read on to know why and how your business should set credit limit for customers.
Steadies the sales process
Setting up a proper credit limit will ensure that sales process of your business will be much smoother and organized as the time required for credit approvals would be heavily reduced. Furthermore, it will also minimize risk exposure while making sure that your revenue and cash flow are maximized.
Builds a lasting relationship with customers
Setting credit limits for customers can be a way to build a lasting relationship with them. Initially, you can set a lower credit limit for individual customers. Gradually, when some level of comfort is attained between you and the customer; the credit limit can be increased accordingly. This will ultimately help you achieve a long-term and trusting relationship with your customers.
Now let’s take a look at how to set up a credit limit:
Determine customer requirements
Determining the customer’s requirements before setting up a credit limit for them is essential. You will have to recognize the customer’s expected orders or plans – which will then allow you to foresee an estimated sales figure, your potential profit margins and frequency of orders.
Carry out a financial analysis
The most time-consuming part of setting up a credit limit is analyzing the customer’s financial strength. It needs to be done depending on the credit limit request of a customer. A comprehensive and detailed financial analysis would include available working capital, credit score, payment history, financial ratios, short/long-term liquidity, and the total net worth. This is where your accounting services provider or xero accounting software can help you. Cloud accounting software like xero can generate financial analysis reports instantly even if it involves multiple currency.
Evaluate past performances
Evaluate the customer’s past history based on the information you have in your accounting books. Ask your accountant to look for past payment performance and purchase patterns of your customer. The payment terms, period of payments and the amount of sales expected with the customers will also have to be factored in while deciding the credit limit. Using Xero accounting software can be helpful here as it imports and categorizes your latest bank transactions with ease and will hence help you better understand the customer’s payment history.
Set up credit policies
Listing out your company’s formal credit policies will be beneficial because it will compel the management staff to plan well and take the required actions before approving credit. Proper policies should be established and followed while setting up a new account, making sales, or showing green light to loan applications. Your employees should know exactly when to increase credit limits for your new or existing customers.