Customer Balance vs Customer Balance plus Open Transactions

Extending customers credit, especially in today’s economy, has always and will continue to extend a companies financial risk. Unfortunately, we cannot do business (well most of us) on a cash and credit card only basis.

I had an issue arrise this week where a customer had a credit limit of around $2,500.00. This is a very low credit limit for most of our customers, so that tells me that we are keeping this customer on a tight leash. This particular customer’s balance was around $1,000 to us. Now, the customer’s balance is made up of the unpaid invoices that have been posted against his account. We typically have a 1-2 day lead time for orders to be processed by account receivable, invoiced, and posted to a customer’s account. What happened in this case was the customer placed 3 more $1,000 dollar orders with us in that 1-2 day period. While his balance remained the same, $1,000, he had open charges, yet to be posted, of around $3,000. Since none of these individual transactions of $1,000 pushed him over his credit limit (current balance $1,000 + individual transaction $1,000 does not equal credit limit $2,500), no credit limit hold fired. You can obviously see the problem here.

To get around this, we have written a SQL query that will combine the customer’s balance, plus all open transactions against the customers account. If the total of the balance and open transactions exceeds the customer’s credit limit, we fire off an email to our receivables department to stop the order and manually place it on hold. We then contact the customer and alert them that their account is over it’s limit and that the order has been placed on hold. This is usually, but not always, enough to get the customer to send us a check.

If you are extending credit to your customers, this is definately something you should be aware of. It is always better to be proactive and hold the order, which also gives you the leverage to get paid, as opposed to reactive and battling to get paid. Do you ever think about how much it costs for you to collect your receivables?