Credit Business

Business Risk Management

Any small business needs cash to continue operating. It also needs customers who make large purchases. Credit separates the pleasure of buying from the pain of paying. The customers tend to buy more when they don't have to pay on the spot. This is the main reason for offering credit.

A business owner can build revenues much more quickly by offering credit. Offering credit to customers gives business owner the competitive edge and makes his company appear more legitimate and established. 

If he does not offer credit, he may lose sales to customers who can get credit from his competitors. At the same time, business owner should not get greedy and offer every customer credit. He needs some cash customers to keep cash coming in every month. If the business owner offers too much credit to too many customers to get them to buy, he could experience cash-flow problems even negative cash flow.

The biggest risk to offering credit comes from giving credit to customers who don’t pay. If a customer stops making payments, the business owner may lose more than just the money borrowed. When he sells on credit, he does not have quick access to cash. Instead, he has more products going out than money coming in.

Balancing the potential for increased sales with the risk of reduced cash flow is an important part of managing risk in a business. The business owner needs to find the right mix between credit and cash flow for successful business.

Risks involved in offering credit are reduced cash flow, reduced profit margin, large debts. If it is not properly balanced between cash and credit it may end up in closing down the business.

Aiyan Thiruvalluvar cautions

உளவரை தூக்காத ஒப்புர வாண்மை

வளவரை வல்லைக் கெடும். (480)

लोकोपकारिता हुई, धन-सीमा नहिं जान ।
तो सीमा संपत्ति की, शीघ्र मिटेगी जान ॥ (४८०)

Explanation by Scholars

The measure of his wealth will quickly perish, whose liberality weighs not the measure of his property.

தன்னிடமுள்ள பொருளாதார நிலையை ஆராய்ந்து பார்க்காமல் அளவின்றிக்கொடுத்துக் கொண்டேயிருந்தால் அவனது வளம் விரைவில் கெடும்.