CREDIT CORNER

 

Credit Control Categories

 

 

Since credit losses are always a factor in the operation of any business, management as well as the credit executive must take a careful look at the profitability and control of selling to “marginal” accounts.

 

1.                   Prime Accounts

Rating and past sales history indicates good credit experience and shows no bad debt loss possibility.  Such accounts require only periodic review.

 

2.                 Good to Slow-Pay Accounts

These may include some customers who delay payment to those where a 1 to 5 percent is possible.

 

3.                 Marginal Risks

This group as a whole usually involves increased collection expense and a possible bad debt loss of 5 to 10 percent.

 

4.                Sub-Marginal Risks

Such accounts do not warrant credit consideration – at any price.  It is from this category that the greatest potential for profit loss may be expected as well as the largest number of charge-offs.

 

 

In considering the above credit control procedures, profit margins on the sale of your products should be the determining factor as to accepting or rejecting orders.  Working at a profit margin of 20 percent would indicate that sales to the first three categories would product a net profit – even with a possible bad debt to loss of 5 to 10 percent.  If, however, your profit margin is only 10 percent, it becomes obvious that sales must be restricted to “Prime” and “Good to Slow-Pay Accounts”.  Otherwise, a more serious loss can be expected by extending credit to the last two categories.