Accounting Best Practices, Fifth Edition

7–41. Shorten the Terms of Sale

There may be cases where a customer wants to place a large number of small orders with a company, cumulatively resulting in a large credit line before the company’s typical terms period has expired. For example, it may plan to place 10 orders for $3,000 each within the company’s standard 30-day terms period, resulting in a required credit line of $30,000. However, the customer’s financial condition may not warrant this level of credit risk by the company.

A solution is to shorten the terms of sale. In the above scenario, reducing payment terms to 15 days would mean that the customer should be able to purchase the same quantity of goods from the company on a credit line of just $15,000.

This approach works only if a customer is placing many small orders rather than one large one, the orders are evenly spaced out, and the customer’s own cash receipts cycle allows it to pay on such short terms. Thus, this best practice applies to only a minority of situations.

Cost:

Installation time: