Accounting Best Practices, Fifth Edition

7–29. Modify the Credit Policy Based on Potential Product Obsolescence

If a company manufactures or resells products with a short shelf life, or which are subject to rapid technological obsolescence or fashion trends, completed products sitting in the warehouse may be subject to obsolescence in the very short term. If so, a tight credit policy can result in limited product sales that leave excess quantities on hand. In such cases, the company is faced with the choice of scrapping the remaining inventory or selling it off at fire sale prices.

The alternative is to loosen the credit policy on those selected inventory items most likely to become obsolete in the near term. The logic is that, even if inventory is sold to customers with a questionable ability to pay for the goods, this at least presents higher odds of obtaining payment than if the company trucks the goods to the nearest dumpster.

To make this best practice work, the credit department must be kept regularly informed of the obsolescence status of inventory items, preferably on a daily or weekly basis. The easiest way to do this is to have the sales, marketing, and logistics staffs regularly flag potentially obsolete items in the inventory database and give the credit department on-line access to this information. When customers send in orders, the credit staff can call up this information in the computer system, verify the obsolescence status of the items ordered, and modify the credit policy as needed. If the company ...