Chapter 8, Problem 1Q

What are the advantages and disadvantages of extending credit to customers?

To determine

To Discuss: The advantages and disadvantages of extending credit to customers.

Explanation of Solution

Extending Credit:

Generally, most of the customers prefer to purchase the goods and services on credit. In order to attract more customers, and to increase the revenue, companies prefer to extend credit.

Advantages of Extending Credit to Customers:

The advantages of extending credit to customers are as follows:

• The company can increase its sales, and thereby earn more profits.
• The company can compete effectively in the market with the competitors, who also extend credit to the customers.

Disadvantages of Extending Credit to Customers:

The disadvantages of extending credit to customers are as follows:

• The company have to incur additional expenses in hiring and paying wage costs to the personnel, who were hired to track and follow up the customers on account.
• The company could collect only some amount of bad debts or no amount at all, from the customers to whom the credit was extended.
• As there will be delay in receipt of cash from the customers to whom the credit was extended, the company has to borrow any short-term loans and pay interest for such loans, in order to pay for the business activities.