Olin Company currently makes only cash sales. Given the number of potential customers who have...

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Olin Company currently makes only cash sales. Given the number of potential customers who have requested to buy on credit, Olin is considering allowing credit sales. What factors should Olin consider in making the decision whether to allow credit sales?

David · Accepted Answer

Developing a credit policy is something a business eventually has to face. One of the 
basic decisions you have to make when starting a business is whether or not you are 
going to extend credit to other businesses and consumers. This is a decision to be 
taken very seriously as it will impact your cash flow and even your profit. 
Here are six factors that you should consider when developing a credit policy and that 
should influence your decision whether or not to extend credit to customers. 
You should grant credit only if the positives of doing so outweigh the negatives. Often, 
this is difficult to determine. 
1. The Effect on Sales Revenue 
The reason you would grant credit in the first place is so your customers can delay 
paying you. This is convenient for your customers and will probably win customers for 
you, but it is not so convenient for you and yourbottom line, at least on an immediate 
basis.Sales revenue from the sale you made to your customer will be delayed for either 
thediscount period or the credit period, or perhaps longer if the customer is late in 
making the payment. The upside is that you may be able to raise your prices if you offer 
credit. 
You have a trade-off. The possibility of more customers and higher sales prices if you 
offer credit in exchange for possible delayed and late payments. Unfortunately, it's hard 
to quantify this. 
2. The Effect on Cost of Goods Sold 
Whether you sell products or services you have to have them available and, in the case 
of products, in stock, when a sale is made. When you extend credit, that means paying 
for that product or service in order to have it in stock but not getting paid for it 
immediately when it is purchased.

Olin Company currently makes only cash sales. Given the number of potential customers who have requested to buy on credit, Olin is considering allowing credit sales. What factors should Olin consider...

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