Credit sales are perhaps the most commonly used method of selling which is done by the companies to increase their sales number as the majority of customers prefer to buy goods on credit rather than paying cash. Credit sales refer to those sales where the consumer buys the products from the company but pays for the product purchased in installments or after some period of time until then they are debtors of the company. In order to get a better understanding of this term, one should look at some of the advantages and disadvantages of credit sales –
Advantages of Credit Sales
Credit Sales leads to Increased Sales
The first and foremost advantage of credit sales is that it helps the company in increasing the sales of the company because the majority of the people do not have cash and they prefer to purchase goods on credit and that is the reason why companies who do not give credit to its customers suffer from lower sales. In simple words, cash sales are good if you are a small trader or company but if the company wants to achieve growth and become big then it has to sell goods on credit to its customers.
Suitable for All Products
Another benefit of credit sales is that it is suitable for all products or services which is not the case with cash sales as cash sales are not suitable for all products. Hence for example whether it’s lower-priced grocery items or higher priced electronic items all such products can be sold on credit by the company to the consumers which in turn gives credit sales a much wider scope as compared to cash sales which have lesser scope.
Good Relationship with Consumers
Selling goods on credit not only increases the business of the company but also helps in creating and maintaining good relationships with the consumers. Hence consider the case where you go to a grocery store and the owner of the grocery store refuses to give your goods on credit even though you live nearby naturally you will prefer to buy goods from some other store that do business on both cash as well as credit basis the same thing applies to bigger companies also where selling goods on credit results in having a good relationship with consumers.
Disadvantages of Credit Sales
Risk of Default in Credit Sales
The biggest drawback of credit sales that there is always this risk that consumers may not pay the dues on time resulting in the risk of default and if out of 100 customers 5 to 10 customer defaults then it will result in the company losing a profit margin of 100 customers which is the reason why small traders, as well as companies, prefer to use cash sales as the mode of the transaction rather than selling goods on credit even though it increases the sales of the company.
Credit Sales requires Extensive Follow Up
Credit sales bring big numbers but at the same time it requires extensive follow up on the part of the company because while many customers may their dues on time but some consumers require constant remainder and follow up on the part of the company which requires a lot of manpower, time and effort on the part of the company which in turn makes the whole process of selling goods on credit a headache for the company.
Working Capital Requirement
Companies need cash or working capital if it wants to remain in the business and grab profitable opportunities but due to credit sales, companies working capital remains tied up which has an opportunity cost associated with it and that is the reason why companies doing credit sales require a higher amount of working capital as compared to those companies who do cash sales only.
As one can see from the above that credit sales have pros as well as cons and that is the reason why any company thinking of doing credit sales should carefully read the above points and then only should take a call whether it wants to do cash sales or sell products on credit.