How to manage customer credit in your shop

Should a small shop sell on credit?

Selling on credit can win steady, loyal customers, but every shilling on credit is your stock in someone else’s hands. Offer it when it brings regular business you would otherwise lose, and only on terms you control.

Credit makes sense for regular customers paid monthly or weekly, fundis and contractors buying for a job, schools, offices, hotels, and small shops buying from a wholesaler. It makes less sense for one-off customers, for goods with a thin margin, or when your own cash is tight. Before you start, ask how long you can afford to wait: you still pay suppliers, rent and staff while customers owe you.

Bad debts are expensive. If your gross margin is 20%, a KSh 5,000 debt that is never paid wipes out the profit on KSh 25,000 of sales. Our guide on calculating shop profit explains margins in more detail.

How do you decide who gets credit?

Give credit to people you know, who already buy from you regularly, and whom you can find if they stop paying. A short checklist helps you decide the same way every time:

• Have they bought from you for cash for several months?
• Do you know where they live or work, and do you have a phone number that works?
• Do they have a regular income, and when do they get paid?
• Will someone you trust, such as an employer or a long-standing customer, vouch for them?
• For a business: is there a named person responsible for paying, and an office or shop you can visit?

Write down the customer’s full name, ID number, phone number and physical location, and for a business its registered name and KRA PIN. Keep these details private and use them only for the credit account.

How do you set a credit limit?

Base the limit on what the customer normally buys between paydays, plus a little room, not on what they ask for. Start low with a new customer and raise the limit only after a few months of paying on time.

Example. A hardware shop in Eldoret sells to a fundi who buys about KSh 4,000 of materials a week and is paid by his clients at the end of each month. Four weeks of buying comes to about KSh 16,000, so a limit of KSh 20,000 covers a normal month with some room. When he asks for KSh 60,000 of materials for a big job, the shop asks for a deposit or part payment instead of raising his limit for good.

Why should credit terms be in writing?

A short written agreement prevents arguments later about how much was allowed and when it was due. One page signed by both of you is enough for a shop. Include:

1. The customer’s details.
2. The credit limit.
3. When payment is due, such as by the 5th of the following month or within 30 days of each purchase.
4. Who may buy on the account. For a business or a family, list the named people only.
5. What happens when payment is late: new credit stops until the balance is cleared.
6. Both signatures and the date.

How should you record credit sales?

Record every credit sale at the moment it happens: the date, the items, the amount and the name of the person who collected the goods. Give the customer a copy of the receipt and keep one signed by the person who collected. Record every payment the same way, with the date and the method: cash, M-Pesa with its transaction code, or cheque.

Each customer needs a running balance: the previous balance, plus new credit sales, minus returns and payments. A loose exercise book with entries written up later is where credit disputes start, because neither side can show what really happened.

How often should you send statements and follow up?

Send every credit customer a statement each month, and follow up on a fixed schedule rather than whenever you remember. A statement lists every sale, return and payment in the month and the balance owed, so the customer can check it against their own records and query mistakes early.

A follow-up schedule you can keep:

1. On the due date: a polite reminder by phone or in person, with the balance.
2. 7 days late: a second reminder. Ask when they will pay, and write down the date they give.
3. 30 days late: stop new credit until the balance is cleared, and tell the customer why.
4. 60 days late: a meeting with the owner. Agree a payment plan in writing, such as weekly instalments.
5. 90 days late: decide whether the debt is likely to be paid. Get proper advice before taking any formal steps, and decide whether to write the debt off in your books.

Keep every reminder calm, factual and private. Embarrassing a customer in front of others rarely gets you paid sooner.

What is debtors ageing and how do you use it?

Debtors ageing is a list of what each customer owes, split by how long the money has been unpaid: current, 30 days, 60 days and 90 days or more. It shows at a glance which balances need attention, because the older a debt is, the less likely it is to be paid.

A worked example

A shop’s debtors ageing at the end of the month, in KSh:

Customers owe KSh 56,400 in total, but the risk sits in different places:

• The school canteen is fine: everything is current.
• The contractor owes KSh 6,500 from last month. A reminder is enough.
• The salon has balances in three columns and is falling behind. Its credit should stop until it is back to current.
• The household account has paid nothing for over two months, and KSh 7,000 is past 90 days. New credit should have stopped weeks ago; this is the one to meet and agree a plan with.

When should you stop giving credit?

Stop new credit when a customer passes their limit, misses the agreed payment date, keeps giving payment dates they do not keep, or pays with a cheque that bounces. Stop straight away and tell the customer calmly that credit resumes when the account is up to date. Selling more to a customer who is already behind usually makes the debt bigger and harder to collect.

How to manage customer credit in Wave POS

Wave POS keeps each customer’s account, credit limit and full history in one place, from the first credit sale to the last payment.

• Customer accounts with credit limits. Set a limit for each customer you sell to on account.
• Credit at the till. Customer account is a payment method like cash or M-Pesa, and split payments mean a customer can pay part now and put the rest on account in the same sale.
• Payments at the till. Customers pay their balance at the till, and the payment appears in their ledger.
• A ledger for every customer. Every sale, return and payment is listed with a running balance, which is what you need to prepare a monthly statement.
• Debtors ageing. The debtors report shows who owes what and for how long, and exports to Excel, CSV or PDF.
• Reversals for mistakes. A payment recorded by mistake is corrected with a reversal, never deleted, so the ledger keeps its full history.
• Customer prices. Customers who pay a different price can have their own percentage markup.

Read more about customer credit and the sales reports, including debtors.