Accounting Best Practices, Fifth Edition

7–32. Require a New Credit Application if Customers Have Not Ordered in Some Time

If a customer has not placed an order recently, perhaps for a year or more, its financial situation may have changed considerably, rendering its previously assigned credit level no longer valid. This is a particular problem when the customer may be shopping through an industry to see who will accept an order, and is forced back to the company when no other suppliers are willing to deal with it anymore. If the company’s credit department simply dusts off the old credit review and allows the same credit limit, there could be a bad debt lurking in the immediate future.

One solution is to require customers to complete a new credit application after a preset interval has passed, such as two years. This represents a significant additional workload for the credit staff, so require this additional review only if the old credit level was a sufficiently high one to represent a noticeable potential bad debt loss. Though the computer system can be designed to flag these customers for a credit review when new orders arrive, an alternative is to simply purge from the accounting database all customers with whom there has been no business in the past two years. Then, when an order arrives and the accounting system shows no customer record, the credit staff knows it needs to get involved.

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