In order to determine whether the company has a good record of servicing sales and paying the suppliers, it is necessary to assess its income statement and balance sheet. The former report shows the amount of the sold goods and the revenues – if any – received. The latter document reveals the amount of the company’s total assets, revenues, expenses, and liabilities (Warren et al., 2019). In this regard, to evaluate the company’s credibility concerning the payments to suppliers, I would assess its accounts payable during several reporting seasons. In particular, I would use the accounts payable turnover ratio, which shows how fast the company pays its debts (Kozlovskyi et al., 2019). If the potential client’s ratio is higher than the industry average, then it can be concluded that its credibility is high.
Bad debts refer to the risk of customer inability or unwillingness to pay one’s debts. Therefore, in order to minimize the possibility that those expenses would appear, I would evaluate the client’s cash flow and retained earnings statements. Both documents show the amount of available cash that the company possesses. The latter, in turn, is the sign of whether the client is able to pay its suppliers and creditors.
Allowing the customers to purchase the products on credit can be both advantageous and disadvantageous for the company. On the one hand, such an option is associated with increased competitiveness as clients often prefer to avoid instant payments for various reasons. This, in turn, leads to a surge in sales and greater customer loyalty. Yet, on the other hand, selling the products on credits increases the risks of bad debt expenses growth. Additionally, credits negatively affect the company’s cash flow by reducing the overall asset liquidity. Moreover, credits deprive the company of available cash that could be invested in capital or stocks instead. Last but not least, there may be potential problems with the clients regarding payments which can negatively impact the future partnership.
References
Kozlovskyi, S., Poliakov, B., Lavrov, R., & Ivanyuta, N. (2019). Management and comprehensive assessment of the probability of bankruptcy of Ukrainian enterprises based on the methods of fuzzy sets theory. Problems and Perspectives in Management, 17(3), 370-381. Web.
Warren, C., Jones, J., & Tayler, W.B. (2019). Financial and managerial accounting (15th ed.). Cengage.