There is no precise method of allocating credit. However, a simple policy that works well is to allocate customers to one of the four categories of credit risk (prime, good, average, other) based on past paying behavior, then set a dollar limit for credit less than that for prime or good customers. Hold to that dollar level unless you have a particularly pressing reason to change it.
By selling to average and other credit risks selectively, you can increase profits -- but you should limit your exposure. This is where your banker can help you. Important considerations include size of order, potential for future orders, kind of product (seasonal, competitive, and so on), and status of present account.
How can you check the credit rating of your customers?
- Ask your banker to help.
- Ask your customers to fill out a standard application form.
- Use the telephone. Vendors are often reluctant to write down negative credit information and may be more forthcoming on the phone once you identify yourself and explain why you need the information.
This material was excerpted from Chapter 13 of Financial Troubleshooting by David H. Bangs Jr. and Michael Pellecchia.
Copyright 1999 Goldhirsh Group Inc.