Part 2 · Running the business · Chapter 2.5
Credit and collections
Draft: the wording may change.
The idea
When you give a retailer goods on credit, you are lending him money without interest. A bank would ask for papers and security before lending; most stockists ask for nothing. So set each retailer's limit by one question: if this shop shut tomorrow, how much could I lose and still stay in business? That is the limit you can afford to lose.
What a bad debt really costs
A stockist's margin is thin. Say you keep ₹5 on every ₹100 of sales after costs.
Ravi Stores closes down owing you ₹20,000. To earn back ₹20,000 at ₹5 per ₹100, you must sell ₹4,00,000 of goods somewhere else. One small shop's unpaid bills can wipe out a month's margin on a whole beat.
Even good debts cost money. If your retailers owe you ₹6,00,000 on average and you run on a bank overdraft at, say, 12% a year, that outstanding costs you about ₹6,000 every month in interest — paid by you, for their benefit.
Two limits, not one
Every credit customer needs two limits, written in their account (chapter 1.3):
| Limit | Question it answers | Example for Ravi Stores |
|---|---|---|
| Credit limit (amount) | How much can he owe at one time? | ₹25,000 |
| Credit days (time) | How long can any one bill stay unpaid? | 14 days |
A shop can be under its amount limit and still be a problem. If he owes ₹8,000, but ₹6,000 of it is a bill from 50 days ago, he is paying the new bills and leaving the old one. That old bill is the one most likely never to come.
At the counter
Before every new bill, the office checks Ravi Stores:
| Check | Today | Result |
|---|---|---|
| Outstanding now | ₹19,500 | — |
| New order | ₹7,200 | — |
| Outstanding after this bill | ₹26,700 | Over ₹25,000 limit |
| Oldest unpaid bill | 21 days | Over 14 days |
Two rules are broken. The office does not simply refuse. It tells the salesman: collect the 21-day bill first, then bill the new order. Usually the money comes the same day, because the shop wants the goods.
If the owner decides to bill anyway, he approves it himself, by name (chapter 2.11). An exception should be visible, not quiet.
The collection routine
Collection is planned work, not a reminder when cash runs short.
- Ageing list every morning. Every retailer's outstanding split by age: 0–7 days, 8–14, 15–30, over 30 (chapter 1.12).
- Collection list by beat. Each salesman gets the bills due on today's beat, with amounts.
- Statement to the shop. Once a month, send each retailer his ledger, so disputes come up early.
- Over 30 days, the owner calls. Not the salesman. It shows the shop it matters.
- Stop supply past the hard limit, and say so plainly.
Common mistake
Raising a limit because a shop is "good" and wants a big festival order. A bigger order on the same thin margin is a bigger loan, not a better customer. Shops usually fail just after their biggest buying season, holding your goods. Raise a limit only on a record of paying on time, never on the size of the next order.
Where you'll use this
In Part 3, credit runs on the beat: credit days by kind of retailer, van sales, and collection targets for salesmen. The two limits from this chapter are the rules a beat plan and a salesman's collection list are built on.
Check yourself
- Your margin is ₹4 per ₹100 of sales. A shop owes ₹10,000 and closes. How much must you sell to earn it back?
- A retailer is under his amount limit but has a 45-day-old bill. Should you bill him again?
- Why should the owner, not the salesman, call about bills over 30 days?
Answers
- ₹2,50,000.
- Not until the old bill is collected (or the owner approves an exception by name). The days limit is broken.
- It shows the shop the debt is serious, and it keeps the salesman's working relationship with the shop intact.