Controlling Credit
Controlling Credit Checklist
9. Monitor the average length of credit
Calculate the average length of credit which your business is allowing - or which your customers or clients are taking. This can be calculated monthly, quarterly or even annually but ideally a monthly figure should be produced. The only thing worse than bad news is bad news which arrives too late for remedial action to be taken. The calculation required is: Total outstanding debtor balances at month end (i.e. the amount you are owed in total) x 365 =Average number of days credit you are allowing
Sales value for 12 months period ending at the same month end
For example, if you divide your total outstanding debtor balances of £10,000 by the sales value for the 12 month period of £100,000 and multiply that by 365, you find that you are allowing an average 36.5 days credit to each debtor. Establish this calculation as a regular routine. Remember to adjust the annual sales value each time you make the calculation by deducting the sales value for the earliest month and adding the figure for the most recent month. Producing a simple graph will show whether the average period for which you are allowing credit is increasing or decreasing.
Future Practice Owner.
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