Letting trusted customers “pay later” is part of everyday business for builders’ merchants, auto parts stores, grocers, butchers and many other small businesses. It wins loyalty and bigger orders — but every sale on credit is money you have earned and not yet received. Without clear rules and good records, those balances grow quietly until they become a cash-flow problem or a bad debt.
This guide explains how to manage customer credit in a small business: credit policies and limits, recording sales and payments, statements, ageing reports, reconciliation, collection steps and risk controls — with worked examples and templates.
In this guide
- How customer credit works
- Writing a credit policy
- Setting credit limits
- Recording sales, payments and invoices correctly
- Customer statements
- The ageing report: seeing what is overdue
- Days sales outstanding (DSO)
- A simple collection process
- When a customer exceeds the limit
- Reconciling customer balances
- Risk controls
How customer credit works
When a customer buys on credit, the sale is recorded and the amount is added to their balance (also called an account receivable). When they pay, the payment is recorded and the balance falls. At any moment, the customer’s balance is:
Balance = opening balance + credit sales (or invoices) − payments − credit notes
| Date | Transaction | Amount | Balance |
|---|---|---|---|
| 1 May | Opening balance | $0.00 | |
| 3 May | Sale on account — receipt 1043 | + $420.00 | $420.00 |
| 12 May | Sale on account — receipt 1077 | + $260.00 | $680.00 |
| 15 May | Payment received (bank transfer) | − $420.00 | $260.00 |
| 20 May | Return — credit note | − $35.00 | $225.00 |
| 31 May | Closing balance | $225.00 |
Recording credit sales directly at the till, against the customer’s profile, keeps this history complete — see customer credit and customer records.
Writing a credit policy
A one-page credit policy prevents inconsistent decisions at the counter. It should answer:
| Question | Example policy |
|---|---|
| Who can buy on credit? | Registered business customers and approved regulars after 3 months of purchases |
| What information do we collect? | Legal name, contact person, address, phone, email, tax ID (businesses) |
| What is the credit limit? | Starting limit based on expected purchases; reviewed after 6 months |
| What are the payment terms? | Payment within 30 days of the statement date |
| Who approves new accounts and limit changes? | Owner or manager only |
| What happens when payment is late? | Reminder at 7 days late; account on hold at 30 days late |
| How are disputes handled? | Within 7 days of the statement, with the receipt or invoice number |
Ask customers to sign or acknowledge the terms when you open an account, and keep the record. Local laws on consumer credit, interest and late fees vary, so check the rules that apply to you before charging interest or fees.
Setting credit limits
A simple approach links the limit to expected purchases and payment terms:
Credit limit ≈ expected monthly purchases × (payment period in months + a margin)
Example: a garage buys about $1,200 of parts a month and pays 30 days after the statement. A limit of 1.5 months of purchases gives $1,800, which covers one month of purchases plus part of the next before payment arrives.
- Start lower for new customers and increase after a record of on-time payments.
- Reduce or freeze limits for customers who pay late repeatedly.
- Make the limit visible at the till so staff can see when a sale would exceed it.
Recording sales, payments and invoices correctly
- Every credit sale linked to the customer at the time of sale, with a receipt or invoice number.
- Every payment recorded the day it is received, with method and reference (bank transfer, cash, card).
- Allocate payments to specific invoices when the customer specifies them; otherwise to the oldest first.
- Returns and corrections via credit notes, never by deleting the original sale.
- Business customers may need a full invoice rather than a till receipt — see receipts and invoices.
Customer statements
A statement summarises the account for a period: opening balance, each sale and payment, and the closing balance due. Send statements on a fixed schedule — usually monthly — even to customers who pay on time; it prevents surprises and disputes.
| Statement section | Content |
|---|---|
| Header | Your business details, customer name and account reference, statement date |
| Opening balance | Balance carried forward from the previous statement |
| Transactions | Date, document number, description, amount for each sale, payment and credit note |
| Closing balance | Total due and due date |
| Payment details | How to pay and the reference to use |
The ageing report: seeing what is overdue
An ageing report groups outstanding amounts by how long they are past the due date. Ageing from the due date — not the invoice date — avoids treating a new invoice as late.
| Customer | Current | 1–30 | 31–60 | 61–90 | 90+ | Total |
|---|---|---|---|---|---|---|
| Hartley Builders | $1,200 | $850 | — | — | — | $2,050 |
| Green Leaf Café | $640 | $300 | — | — | — | $940 |
| Marsh Garage | — | $410 | $520 | — | — | $930 |
| Customer D (individual) | — | — | — | $180 | — | $180 |
| Park Office Supplies | — | — | — | — | $600 | $600 |
| Total | $1,840 | $1,560 | $520 | $180 | $600 | $4,700 |
| Share | 39.1% | 33.2% | 11.1% | 3.8% | 12.8% | 100% |
All customer names are fictional. Reading the example: most of the money is current or less than 30 days late, which is normal. But $600 — 12.8% of the total — is more than 90 days overdue from a single customer, and Marsh Garage has started to slip into the 31–60 column. Those two accounts need attention this week.
Days sales outstanding (DSO)
DSO = accounts receivable at period end ÷ credit sales in the period × number of days in the period
Example: at the end of a quarter, customers owe $18,400; credit sales during the quarter were $46,000. DSO = 18,400 ÷ 46,000 × 90 = 36 days. On average, it takes about 36 days to collect a credit sale. Compare this with your payment terms: with 30-day terms, 36 days means customers pay slightly late on average.
DSO is an average and can hide problems; always read it together with the ageing report.
A simple collection process
| When | Action |
|---|---|
| Statement date | Send the monthly statement |
| 7 days past due | Friendly reminder by email or message, with a copy of the statement |
| 21 days past due | Phone call; agree a payment date and record it |
| 30 days past due | Put the account on hold — cash or card only until it is paid |
| 60 days past due | Formal written notice; consider a payment plan |
| 90+ days past due | Decide with your accountant whether to pursue formally or write off as bad debt |
Be consistent: customers learn quickly which deadlines are real. Record every contact and promise in the customer notes.
When a customer exceeds the limit
Sooner or later a good customer will want to buy more than their limit allows. Decide in advance who can approve an exception and how, rather than leaving the cashier to negotiate at the counter. A common approach: the sale above the limit is paid immediately by cash or card, or a manager approves a one-time increase and records the reason. Repeated requests are a signal to review the limit formally — upwards for customers who always pay on time, or not at all for those already overdue. Whatever you decide, record it in the customer’s notes so the next person at the till knows the history.
Reconciling customer balances
- Monthly: total of all customer balances in the POS should equal your accounts receivable in the accounting records.
- Payments: match bank transfers and card payments received to the payments recorded against customers.
- Unallocated payments: investigate any payment not linked to a customer the same week.
- Disputes: resolve with the original receipt or invoice, then issue a credit note if needed.
- Year-end: review the 90+ column with your accountant before closing the books.
Risk controls
- Only approved customers can buy on credit; approvals by owner or manager.
- Credit limits set for every account and checked at the till.
- Individual staff logins so every credit sale is attributed — see staff permissions.
- Permissions restrict who can change limits, edit balances or issue credit notes.
- Statements sent monthly; ageing report reviewed weekly.
- Accounts on hold automatically communicated to all staff.
- Customer balances backed up with the rest of your POS data.
Credit management is part of daily routines — see the retail store operations guide — and it affects your financial picture: overdue balances are revenue you have recorded but not yet collected, which matters when you review retail KPIs and cash. Businesses that commonly sell on account include hardware stores, auto parts stores and butcher shops.
Keep customer records and purchase history in one place: the free edition includes customer profiles and sales history, with demo data to explore.
Frequently asked questions
What is customer credit management?
It is the set of policies and routines for selling on account: approving customers, setting limits, recording sales and payments, sending statements, monitoring overdue balances and collecting what is owed.
How do I calculate a customer’s balance?
Opening balance plus credit sales or invoices, minus payments and credit notes. In the example above, $680 of sales minus $420 of payments and a $35 credit note leaves $225.
What is an ageing report?
A report that groups outstanding customer balances by how many days they are past due — typically current, 1–30, 31–60, 61–90 and over 90 days.
How is DSO calculated?
DSO = accounts receivable ÷ credit sales in the period × days in the period. For example, $18,400 ÷ $46,000 × 90 = 36 days.
When should I stop selling on credit to a customer?
Follow your written policy — commonly when the account is a set number of days overdue or above its limit — and apply it consistently to every customer.
