{"id":30902,"date":"2025-06-03T08:58:27","date_gmt":"2025-06-03T12:58:27","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=30902"},"modified":"2025-06-03T08:58:29","modified_gmt":"2025-06-03T12:58:29","slug":"credit-policies-and-standards","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/credit-policies-and-standards\/","title":{"rendered":"How credit standards affect DSO and accounts receivable risk"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-us\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tHow credit standards affect DSO and accounts receivable risk\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2025-06-03T08:58:27-04:00\">June 3, 2025<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"How credit standards affect DSO and accounts receivable risk\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-us\/blog\/credit-policies-and-standards\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author has-dark-background-color alignfull\">\n\t<div class=\"container\">\n\t\t<div class=\"col\">\n\t\t\t\t\t\t\t<div class=\"co-authors\">\n\t\t\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-us\/blog\/author\/yassirmalik\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2024\/03\/Yassir-Malik.jpg\" class=\"entry-author__image\" alt=\"yassir-malik-profile-picture\" \/>\t\t\t\t<span class=\"entry-author__name\">Yassir Malik<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n<p>Your credit policy determines your day&#8217;s sales outstanding (DSO). One of the most impactful elements of that policy is the credit standards you set. These standards influence the level of financial risk your business takes on and how much working capital you need to finance <a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/accounts-receivable\/\">accounts receivable<\/a>.<\/p>\n\n\n\n<p>In this article, we\u2019ll break down what credit standards are, what to consider when setting them, and how they impact your DSO.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-are-credit-standards\"><strong>What are credit standards?<\/strong><\/h2>\n\n\n\n<p>Credit standards are your business&#8217;s financial guidelines to evaluate a customer\u2019s ability to pay. They help control risk by identifying which customers are likely to meet their payment obligations\u2014and which might not.<\/p>\n\n\n\n<p>By applying consistent credit standards, you can better manage who receives credit, how much is extended, and under what terms.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-key-factors-to-consider-when-setting-credit-standards\"><strong>Key factors to consider when setting credit standards<\/strong><\/h2>\n\n\n\n<p>To manage risk and control DSO, consider the following financial indicators:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-credit-history\"><strong>Credit history<\/strong><\/h3>\n\n\n\n<p>A customer\u2019s track record is a strong indicator of future behavior. Look at:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Longevity:<\/strong> How long have they been offered credit?<br><\/li>\n\n\n\n<li><strong>Credit limits:<\/strong> What\u2019s the highest credit extended to them?<br><\/li>\n\n\n\n<li><strong>Terms of sale:<\/strong> What terms were offered in the past?<br><\/li>\n\n\n\n<li><strong>Payment history:<\/strong> Do they consistently pay on time?<br><\/li>\n<\/ul>\n\n\n\n<p>Reviewing credit history helps determine both the amount of credit and the appropriate payment terms to offer.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-financial-resources\"><strong>Financial resources<\/strong><\/h3>\n\n\n\n<p>Customers with solid financials are typically more reliable. Look for:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Strong financial statements<br><\/li>\n\n\n\n<li>Positive bank references<br><\/li>\n\n\n\n<li>Adequate working capital<br><\/li>\n\n\n\n<li>Balanced debt levels<br><\/li>\n<\/ul>\n\n\n\n<p>Financial stability means they\u2019re more likely to pay on time\u2014even during economic shifts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-borrowing-capacity\"><strong>Borrowing capacity<\/strong><\/h3>\n\n\n\n<p>Can the customer borrow when needed? Those with available credit and a history of repaying loans are less likely to delay supplier payments.<\/p>\n\n\n\n<p>Borrowing capacity offers a buffer against unexpected expenses or slow periods, reducing the chance they\u2019ll rely on you to manage their cash flow.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-credit-terms\"><strong>Credit terms<\/strong><\/h3>\n\n\n\n<p>Only offer as much credit as necessary. Avoid overly generous terms that could stretch your customer\u2019s cash flow or encourage late payments. Structure terms that reflect the customer\u2019s capacity and your business\u2019s risk tolerance.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-collateral\"><strong>Collateral<\/strong><\/h3>\n\n\n\n<p>In higher-risk situations or industries where it\u2019s common, consider securing credit with a deposit or letter of credit. While collateral can reduce your risk, be cautious: extending excessive credit just because it\u2019s backed by collateral can still lead to high DSO and cash flow issues.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-balance-risk-and-sales-growth\"><strong>Balance risk and sales growth<\/strong><\/h3>\n\n\n\n<p>Stricter credit standards can lower DSO and reduce the chance of bad debt. However, they may also limit potential sales or strain customer relationships. Finding the right balance between risk control and sales enablement is key.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-automate-to-stay-ahead-of-dso\"><strong>Automate to stay ahead of DSO<\/strong><\/h2>\n\n\n\n<p>Technology plays a critical role in keeping DSO under control. An <a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/accounts-receivable\/\"><strong>automated accounts receivable platform<\/strong><\/a> like<a href=\"https:\/\/www.sage.com\/en-us\/products\/sage-ar-automation\/\"> <strong>Sage AR Automation<\/strong><\/a> empowers your team to:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Track credit terms and customer performance<br><\/li>\n\n\n\n<li>Send automated reminders<br><\/li>\n\n\n\n<li>Prioritize follow-ups based on risk<br><\/li>\n\n\n\n<li>Maintain consistent credit and collection policies<br><\/li>\n<\/ul>\n\n\n\n<p>With the right tools, you can enforce your credit standards and reduce manual workload\u2014helping your team stay proactive instead of reactive.<\/p>\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to our Sage Advice Newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get our latest business advice delivered directly to your inbox.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-ab515c6e-7e90-4c2f-a67e-113872516e8b\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Subscribe<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg\" class=\"single-cta__image\" alt=\"Working from home with tea in hand\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Credit standards directly impact your DSO. Learn how to evaluate risk, set the right terms, and use automation to control accounts receivable effectively.<\/p>\n","protected":false},"author":1774,"featured_media":25068,"menu_order":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[43],"tags":[],"business_type":[312],"lilypad":[],"context":[],"industry":[57],"persona":[],"imagine_tag":[],"coauthors":[509],"class_list":["post-30902","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","business_type-accountants","industry-financial-services"],"sage_meta":{"region":"en-us","author_name":"Yassir Malik","featured_image":"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2023\/08\/BrandShootSF_Oct2021_FinancialServices_10773.jpeg","imagine_tags":[]},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice US","distributor_original_site_url":"https:\/\/www.sage.com\/en-us\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/30902","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/users\/1774"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/comments?post=30902"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/30902\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media\/25068"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media?parent=30902"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/categories?post=30902"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/tags?post=30902"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/business_type?post=30902"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/lilypad?post=30902"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/context?post=30902"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/industry?post=30902"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/persona?post=30902"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/imagine_tag?post=30902"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/coauthors?post=30902"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}