Running the business Credit control
Setting credit limits for customers
A credit limit is the most a customer can owe you at any time. A simple way to set it is the party's expected monthly purchases multiplied by your credit period in months, then adjusted for how well they pay.
- Distributors and wholesalers
- Manufacturers selling to dealers
- Owners giving credit
- Accountants and credit staff
- Sales managers
On this page 11
Why limits matter more than credit days
Credit days tell a customer when to pay a bill. A credit limit stops the total from growing beyond what you can afford to lose. Without a limit, a party can keep ordering while old bills stay unpaid, and you find out only when the amount is already large.
A limit also protects your own working capital. If you have 200 credit customers, the sum of their limits is roughly the money you are lending to the market.
A starting formula
Credit limit = expected monthly purchases × (credit days ÷ 30) × buffer
Use a buffer of about 1.2 to allow for a slightly larger order without the party hitting the limit every month.
Example: a dealer buys about ₹2,50,000 a month and you give 30 days. Limit = 2,50,000 × 1 × 1.2 = ₹3,00,000.
For a new party with no history, start smaller, for example two weeks of expected purchases (₹1,25,000 here), or ask for advance on the first few orders.
Adjust for payment behaviour
| Payment record (last 6 months) | Suggested change |
|---|---|
| Pays on or before due date | Can raise limit by 20–25% at review |
| Usually within 7 days of due | Keep limit |
| Often 15–30 days late | Reduce limit or credit days |
| Bills 60+ days overdue or a bounced cheque | Move to advance until cleared |
A useful measure is the party's own average days to pay: total outstanding ÷ average daily purchases. If a dealer owes ₹3,60,000 and buys ₹8,000 a day on average, they are taking about 45 days on 30-day terms.
Other factors to consider
- Years in business and with you. Long, steady relationships earn more room.
- Concentration. No single party should hold so much of your receivables that their default would hurt you badly.
- Security. Some trades take post-dated cheques or a security deposit for higher limits.
- Season. Allow a temporary increase before festivals or the season, with a date when it ends.
- Market information. Other suppliers and salespeople often know when a dealer is struggling.
Rules for using limits
- Record the limit against each customer in your accounting software and in your credit control policy.
- Check outstanding plus the new order against the limit before dispatch, not after.
- Any order that crosses the limit needs approval from one named person.
- Review all limits every six months, and immediately after a bounce or a long delay.
- Tell customers their limit. It sets expectations and avoids awkward calls at the loading bay.
Credit limit example for three dealers
| Dealer | Monthly purchases | Terms | Formula limit | Record | Final limit |
|---|---|---|---|---|---|
| Mehta Traders | ₹4,00,000 | 30 days | ₹4,80,000 | Always on time, 8 years | ₹5,50,000 |
| Singh Electricals | ₹1,50,000 | 30 days | ₹1,80,000 | Usually 10 days late | ₹1,80,000 |
| New Era Hardware | ₹1,00,000 (expected) | 15 days | ₹60,000 | New; first three orders on advance | ₹50,000 after 3 months |
The formula gives a starting point; the record and your judgement give the final number. Write down why you went above or below the formula, so the next review has context.
Add up all the final limits. If the total is more than your business can comfortably fund, given your own capital and bank limits, you are promising more credit than you can afford, and some limits need to come down.
Checking limits in the field with Cashflow OS
Credit limits can be set on party ledgers in TallyPrime. Cashflow OS syncs each party's balance and bill-wise outstanding with ageing, so a salesperson can see a dealer's dues on the phone before taking an order. Orders from frontline staff can be set to need approval, which gives the owner a check before an order goes to Tally. See outstanding receivables and team roles.
Avoid these
Common mistakes
- MistakeGiving credit days but no credit limitDo this instead
Set a limit as well as a period, so a party cannot keep ordering while old bills stay unpaid.
- MistakeChecking the limit after goods are dispatchedDo this instead
Check outstanding plus the new order before dispatch, and have one named person approve any order over the limit.
- MistakeThe same limit for every customerDo this instead
Use one method for everyone, but base each limit on that party's purchases and payment record.
- MistakeTemporary increases that never endDo this instead
Record an end date for every festival or one-time increase and bring the limit back on that date.
Keep handy
Checklist
Setting credit limits for customers — 8 checks. Tick them as you go.
In Cashflow OS
How Cashflow OS helps
Cashflow OS puts your TallyPrime books on every phone in the team. Where it fits this topic:
Dues on the phone before taking an order
Each party's balance and bill-wise outstanding with ageing sync from Tally, so a salesperson sees a dealer's dues before booking.
See Outstanding receivables
Approval before orders reach Tally
Orders from frontline staff can be set to need approval, giving the owner a check before an order goes to Tally.
See Team roles and access
Questions people ask
Should all customers get the same credit limit?
What if a good customer needs a one-time higher limit?
How do I reduce a limit without offending the customer?
Is a credit limit the same as a credit period?
What should I do when a party crosses the limit?
Can I set credit limits in Tally?
Should I take post-dated cheques for higher limits?
How should festival or season limits work?
This page is general information for Indian businesses, not tax, legal or financial advice. Rules and rates change — check the official portals or your CA before acting.
