Giving credit without losing the money: limits, ageing and follow-up

Manage credit sales with three habits. Set a credit limit for each party, sort outstanding into ageing buckets, and work a short follow-up list every week.

To manage credit sales and customer outstanding, do three things. Give every party a written credit limit in rupees and in days. Sort what each party owes into ageing buckets by how long it has been unpaid. Every week, work through a short follow-up list taken from those buckets. Credit is rarely lost in one bad sale. It goes missing slowly, through old bills that nobody chased.

Why do credit sales go wrong in a small business?

Most shops and distributors do not set out to lend money. It happens bit by bit. A trusted party asks for "next week", the salesman agrees to keep the order, and the old bill sits there while new bills pile up on top of it. By the time anyone looks, the party owes three months of supply and wants a discount to settle.

There are usually three causes:

No limit. Credit depends on the mood of the day rather than a number.
No ageing. The total outstanding is known, but nobody knows how old it is.
No routine. People follow up only when cash runs short, which is the worst time to start.

Fix these three and most of the problem goes away.

How do I set a credit limit for each party?

A credit limit has two parts: an amount (the most the party can owe at any time) and credit days (how long each bill can stay unpaid). You need both. A party can be well within the amount and still be dangerous if every bill is two months old.

A practical way to set them:

Look at real buying. Take the party's average monthly purchase from you.
Set the amount from that. For a regular party, a limit close to what they buy across their credit period is a reasonable starting point. New parties start lower.
Set days by type of party. Retailers who turn stock quickly can take short days. Parties with slower stock may need longer days, but then the amount limit should be tighter.
Write it down and share it. The party, the salesman and the billing counter should all know the same number.
Review every quarter. Raise the limit for parties who pay on time. Lower it for parties who are drifting.

The most important rule: check the limit when the bill is made, not afterwards. If your billing can warn or block when a new invoice would take a party over its amount or days, the limit works without anyone having to remember it. Our guide on choosing inventory software in India explains what to ask vendors about this.

What are ageing buckets and how do I read them?

Ageing sorts each party's unpaid bills by how many days have passed since the bill date (or since the due date, but pick one and use it every time). The common buckets are 0–30, 31–60, 61–90 and over 90 days.

Here is an illustrative ageing table for a small distributor. The parties and amounts are made up to show the method.

Party	Credit limit (₹)	Credit days	0–30 days (₹)	31–60 days (₹)	61–90 days (₹)	90+ days (₹)	Total (₹)	Action
Party A	2,00,000	30	1,40,000	0	0	0	1,40,000	None, healthy
Party B	1,50,000	30	60,000	55,000	0	0	1,15,000	Call this week
Party C	1,00,000	45	20,000	30,000	45,000	0	95,000	Hold new credit until 61–90 is cleared
Party D	75,000	30	0	10,000	15,000	40,000	65,000	Owner visit, agree a repayment plan
Party E	1,00,000	30	1,25,000	0	0	0	1,25,000	Over limit, needs approval before next bill

What this table shows:

The total can mislead. Party D owes the least, but it is the biggest risk because most of its balance is over 90 days old.
Being over the limit is not the same as paying late. Party E is current but over its limit. That is a conversation about the limit, not a collection problem.
Money moves right over time. Anything in the 31–60 column this week will be in 61–90 next month if nobody acts.

Read the table from the right-hand side. The oldest columns decide who gets your time first.

How do I run a weekly follow-up list?

Choose a fixed day, for example Monday morning, and draw up a list from the ageing report. Keep it short enough to finish that week.

Weekly follow-up checklist

Pull a fresh ageing report from the billing data, not from memory.
List every party with any amount over its credit days.
List every party over its amount limit.
Sort the list by the oldest bucket first, then by amount.
Give each party one owner (owner, accountant or salesman) and one action: call, visit, send statement, or hold supply.
Send each party on the list an account statement so the disputes come out now.
Write down every promise: amount, date and who made it.
Next week, check promises first. A broken promise moves the party up the list.
Before dispatch, check that held parties are not being billed by mistake.

Two habits make this work. First, record disputes separately, such as short supply, damaged goods, rate differences or missing credit notes. A disputed amount will not be paid until it is settled, so give the dispute to the person who can settle it. Second, match receipts to bills, not just to the party account. Unallocated "on account" payments hide which bills are actually old.

For distributors, credit and stock are closely linked. The same parties who stretch payments often return slow stock or ask for scheme adjustments. Our guide on wholesale distributor inventory covers the stock side.

What does good follow-up sound like?

Be polite, specific and consistent. "Your bills dated in the 31–60 bucket total ₹55,000. Can we collect that on Thursday?" works much better than "please clear the dues." Give the exact amount, name the bills, and ask for a date. When the date comes, call that day.

Escalate in steps the party can see coming: a reminder, then a statement, then a call from the owner, then a hold on new credit, then a visit. Parties usually pay the supplier who follows up regularly before the one who stays quiet.

Common mistakes

Chasing the biggest balance instead of the oldest. Large current balances are usually fine. Small old ones go bad.
Raising limits to keep an order. If a party cannot pay what it owes, giving it more credit only makes the loss bigger.
Letting salesmen set credit terms. Salesmen are judged on sales. Credit terms should be decided by someone who is answerable for collections.
Ignoring credit notes and returns. An outstanding that includes amounts the party already disputes is not a real number.
Reviewing monthly. By the time the monthly review happens, the bucket has already moved.

When this approach does not fit as-is

If you sell mostly for cash or UPI at the counter, a full ageing review is more work than it is worth. A simple list of the few credit parties is enough. If you sell to large institutions with fixed payment cycles, ageing still helps, but set credit days to match their actual cycle so that every bill does not look overdue. Questions about legal charges or interest on late payment are outside this guide. Ask your CA or legal adviser about those.

FAQ

How do I decide a credit limit for a new party? Start small. Give a limit roughly equal to one normal order and short credit days. Raise it only after the party has paid on time for a few cycles. Base the limit on how they have paid you, not on how big their shop looks or what they promise for the future.

Should I stop supply as soon as a party crosses the limit? Not always, but every exception should be a decision someone makes on purpose. Let one named person approve an over-limit bill, write down why, and agree a date for the party to come back under the limit. If over-limit billing happens quietly, the limit stops meaning anything.

How often should I review the ageing report? Once a week, on a fixed day, and before you plan the week's dispatches. A monthly review is too slow, because an amount can move into an older bucket between reviews without anyone noticing. The weekly review takes a short time if the ageing report comes straight from your billing data.

What should I do with a bill that is very old and still unpaid? Stop further credit to that party, meet them in person and agree a written repayment plan. Talk to your CA about how to treat the amount in your books. Do not keep carrying it as a normal receivable, because that makes your cash position look better than it really is.