Sales credit is the extension of payment terms to the customer. In other words, sales, credit is when the sales transaction takes place at the current date, but the payment can be made at a pre-decided later date.
It is a very common business transaction which is seen at almost every place special in case of bulk buyers and resellers. Sales credit is very common for bulk selling but may also be found in certain individual purchases.
In today’s digital era, portals like LazyPay offer payment of a transaction amount at a later date, thereby extending Sales credit even to end-user of the service or product.
There are common notations used in most of the sales transactions to pass on the sales credit. This is credited clothes the number of days within which the payment has to be made along with a common discount which will be applied if the customer can pay within a smaller number of days then the credit days.
Following example will help you understand the common notations used in credit sales:
The credit terms of sales credit maybe 5/30, net 90.
This means that the entire amount is due in 90 days, but if the customer is willing to pay in 30 days or less, a discount of 5% will be applied to the transaction value.
Why do you need to give sales credit?
It is essential to understand why she is credit is passed on to the reseller or the customer. Usually, a sale is defined as a transaction in which the buyer and seller exchange his goods with money.
Theoretically, a sales occur when there is an exchange of goods in between buyer and seller but until and unless the cash or the amount of the sale is realized the transaction cannot be completed.
This is how a sales transaction occurs. Following are few the reasons why a sales credit is to be extended from the seller to the reseller or the buyer:
- Many companies come up with multiple products all the time which the market may or may not buy. Sometimes the companies have to create a demand to liquefy the stocks. Creating demand takes time during which the stock lies idol with the reseller. During this time, the anticipated demand may increase or decrease, which is why this is credit helps. If the sale of all the stock takes place in the seller can return the money to the producer of the supplier and keep the profits with him but if all of the stock is not liquidated then and the seller can return the stock to the supplier along with the value of the goods that are sold.
- Sales credit gives time to the buyer to understand his market and place the orders accordingly. During this time, the seller can have different schemes to liquidate the stock, or you can extend the credit days by discussing with the supplier.
- Whenever a new business opens up the owner of that business may or may not have enough funds to purchase the stock at one go. In this case, change credit comes into the picture wherein the new owner can purchase the stock with a buffer time during which we can try to sell the products and payoff to the supplier.
- Sales credit also helps in case of a stock recall. There are instances when companies have recorded the entire stock of a particular product. In such incidences, if the buyer has already paid for the entire amount of the goods, then the supplier after recording the batch of unused and unsold goods will have to to give the amount back to the buyer who is a very long and combustion process. Sales credit is helpful in this case because the researcher can easily return the unused stock and get the wave off instead of going through the hassle of getting the refund.
- There are cases when that packaged product made turned out to be damaged. This happens in case of any and every product, and in such cases, it is easier to return the product then to return the product and to get the refund. There are also instances when the final customer buys the product and turns out to be the defective or problematic in which case the product is returned to the seller who in turn returns it to the supplier. In these cases, it is better to have sales credit instead of going through the refund because the process of refund involves a lot of paperwork which is a hassle for both the supplier as well as the seller.
Advantages of sales credit
There are few advantages of having sales credit for everyone which are as follows:
#1 For suppliers:
- It is easy to manage the accounts and settle them in case of sales credit because the amount is taken only after the sales transaction has taken place, which avoids many complications had the amount been taken earlier.
- One time account settlement can be done in which the unused or expired or defective products can be taken back, and after reducing the cost the net amount can be taken by the supplier which is easy for accounting purposes.
- Some vendors may give immediate payment in which case it is beneficial for or the supplier to pass on a good discount to the vendor.
- The finished products are supplied to the suppliers by the company, which gives there finished products to multiple suppliers. This is a credit that is extended by the raw material provided to the production facility is extended towards the suppliers who are an advantage for the suppliers.
#2 For resellers:
- The resellers get sales credit from the suppliers who are utilized in case of bulk buying. Bulk buying assurance business and sales credit give the liberty of payment terms to the reseller. This advantage for a reseller who purchase large production quantities.
- The resellers sometimes stock up with an excess product which is water table discount, but it does not go well with the customers all the time. Sometimes our product sketches of the customers but sometimes it doesn’t, and in such cases, it is essential that the reseller has sales credit terms which we can utilize and return the product within those terms.
- The credit may be extended to the end customers at times in which sales credit comes in handy. This is true, especially in the case of bulk purchase customers, regular and repeats purchasing customers and capital equipment. Sales credit is very useful in such cases.
Disadvantages of sales credit
- The primary disadvantage of having sales credit is that the value of the product is not realized and is a certain amount of time is passed. All of the employees need their salary on a particular day in which case the organization should have enough funds with them, and in this case, sales credit does not help.
- The transaction is half complete for a long period in case of settled accounts. Unless the payment is made this is transaction cannot be termed as closed. There may be crores of business theoretically may be of gross weight does the payment is clear the business cannot be said as completed.
- The business that is done in credit is not a true business, and the money should be realized before the payment is made. The company has to pay off salaries to the individual employees, the supplier has to pay off the manufacturing company, and the reseller has to pay to the supplier, and all of them use some sales credit and payment terms for payment completion which is why longer sales credit don’t work in the business.
Examples of sales credit provided at different levels
Consider a company manufacturing from raw materials extends a sales credit of 7/45, net 90 to the supplier. Meaning the supplier will get a discount of 7% if the payment is made within 45 days or else you can make the entire payment in 90 days.
The supplier extends the same credit to the reseller as 3/30, net 60. This means that the reseller will get a discount of 3% if the payment is made within 30 days and the entire payment without discount can be made within 60 days.
The reseller who may be the final entity between the end-user and supplier, usually do not work on sales credit. Sometimes, in case of regular customers and bulk buyers, the sales credit of a few days may be extended by the reseller.
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List and explain five advantages of credit sales