How to design a credit policy for wholesale customers
Criteria to set limits and terms, what to do when an order exceeds credit, receivables aging, DSO with an example and applying payments across several invoices.
A customer who buys every month asks for another truckload on credit. The sales rep knows they “always pay”, the warehouse ships, and at month end it turns out the customer had invoices two months overdue. Nobody did anything wrong on purpose: there was simply no written rule saying how much credit, for how long and what to do when it is exceeded.
A credit policy is exactly that: a short set of rules that sales, the warehouse and collections apply the same way, without relying on anyone’s memory. This guide helps you build one.
1. Set the limit with a criterion, not by eye
A practical starting point is to tie the limit to what the customer actually buys and to the terms you give them:
Limit = average monthly credit purchases × (terms in days ÷ 30) × headroom factor
- Average monthly purchases come from the last 6 to 12 months, not the best month.
- Terms are the ones you grant (30, 45, 60 days).
- The headroom factor (for example, between 1.0 and 1.3) covers seasonal peaks.
Suppose a customer buys Bs 60,000 a month on average, with 30-day terms and 1.2 headroom: limit = 60,000 × 1 × 1.2 = Bs 72,000.
Then adjust with qualitative criteria:
| Criterion | Raises the limit | Lowers the limit |
|---|---|---|
| Payment history | Pays within terms | Recurring delays |
| Customer tenure | Several years | New customer |
| Guarantees | Has a guarantee or guarantor | No guarantee |
| Concentration | Small share of your receivables | Large share of your receivables |
For new customers, start with a low limit or cash only and raise it after a few on-time payment cycles.
2. Define terms by segment
Not every customer needs the same terms. A simple structure:
| Segment | Terms | Condition |
|---|---|---|
| New | Cash or 15 days | First months of the relationship |
| Regular | 30 days | Clean history |
| Key or institutional | 45–60 days | High volume and a written contract or agreement |
Every day of terms is working capital you finance. If you extend terms, get something in return (volume, exclusivity, price).
3. Decide what happens when an order exceeds the limit
The classic mistake is comparing the order with the limit. The right comparison is exposure:
Exposure = receivable balance + approved orders not yet invoiced + new order
Following the example: the customer owes Bs 58,000 and orders Bs 20,000. Exposure = 78,000, which exceeds the 72,000 limit by Bs 6,000.
There are two paths, and it is worth writing down which one applies:
- Hold the order: it is not shipped or invoiced until resolved. This is the default.
- Approve as an exception: someone with authority (credit manager, sales director) releases it, and who, when and why is recorded.
The usual ways to release a held order are: a customer payment that lowers the balance, an advance, shipping only the part that fits within the limit, or an exceptional approval. If there are overdue invoices, the rule should be stricter: hold even if the order fits within the limit.
What matters is that the sales rep is not the one who releases it: they have a legitimate incentive to sell, not to protect receivables.
4. Track receivables aging by bucket
Aging groups what you are owed by how many days it is overdue. Suppose receivables of Bs 450,000:
| Bucket | Amount (Bs) | % of receivables | Suggested action |
|---|---|---|---|
| Current | 270,000 | 60% | Normal follow-up |
| 1–30 days overdue | 90,000 | 20% | Reminder |
| 31–60 days | 45,000 | 10% | Call and payment commitment |
| 61–90 days | 22,500 | 5% | Hold new orders |
| Over 90 days | 22,500 | 5% | Intensive collection and limit review |
Look at the table every week, not at month end. What matters is movement: if the 31–60 bucket grows, the over-90 bucket will grow a month later.
5. Calculate DSO and read it correctly
DSO (days sales outstanding) sums up in one number how long it takes you to collect:
DSO = (receivables at close ÷ credit sales for the period) × days in the period
Suppose that at quarter end you are owed Bs 450,000 and credit sales for the quarter were Bs 1,350,000:
DSO = 450,000 ÷ 1,350,000 × 90 = 30 days.
Interpretation: compare it with your average terms. If you give 30 days and DSO is 30, you collect on time. If next quarter, with the same sales, receivables rise to Bs 600,000, DSO would be 40 days: on average you collect 10 days late, and you finance those 10 days.
Watch out: DSO is distorted by seasonal sales. Always compare it with the same period of the previous year and read it alongside the aging table.
6. Apply payments across several invoices with a rule
Wholesale customers often pay round amounts that cover several invoices. Without a rule, each collector applies them differently and aging stops being reliable.
Suppose the customer deposits Bs 24,000 and has three invoices:
| Invoice | Balance (Bs) | Status | Oldest first |
|---|---|---|---|
| F-1 | 10,000 | 50 days overdue | Goes to 0 |
| F-2 | 8,000 | 20 days overdue | Goes to 0 |
| F-3 | 12,000 | Due in 10 days | Left at 6,000 |
The usual rules are: oldest first (the most common, it clears the high buckets), nearest due date first, or explicit allocation when the customer states what they are paying. Pick one as the default and use explicit allocation only with the customer’s backing. Overpayments and credit notes should remain as a visible customer credit, not forgotten.
Indicators to track
- Monthly DSO and its trend.
- % of receivables over 90 days = balance over 90 days ÷ total receivables × 100. In the example, 5%.
- Collection effectiveness index (CEI) = (opening receivables + credit sales − closing receivables) ÷ (opening receivables + credit sales − closing current receivables) × 100. The closer to 100%, the better.
- Held orders per month and average time to release.
- Concentration: share of receivables held by the top 10 customers.
Common mistakes
- Setting limits once and never reviewing them.
- Comparing the order with the limit instead of total exposure.
- Letting the sales rep release their own orders.
- Looking at receivables only at month end.
- Applying payments without a rule and losing the real aging.
- Measuring DSO without comparing it with the terms granted.
Moving it into a system
All of this can be run on a spreadsheet with discipline. When there are many sales reps and orders every day, an ERP like MKA can hold only the credit orders that exceed the customer’s exposure until someone with permission releases them, apply one payment across several invoices and show receivables by aging bucket (see the wholesalers and distributors solution).