Key Concepts
Granting credit carries a risk: some customers may pay late, or not at all. Before agreeing to sell on credit to a customer, a business assesses whether that customer is likely to pay. It weighs both accounting and non-accounting information.
| Type of information | Examples |
|---|---|
| Accounting |
|
| Accounting (G3 only) |
|
| Non-accounting |
|
Accounting information can be expressed as a money amount and comes from the records (e.g. the trade receivables balance). Non-accounting information is not a money amount (e.g. the customer's reputation, the economic outlook).
G3 The two G3 items, rate of trade receivables turnover and trade receivables collection period, are ratios you will learn to calculate in the financial statements analysis chapter. For now, just know they measure how quickly a customer pays the money it owes.
How to answer a credit-worthiness question. This is a scenario-based question (SBQ). Use this two-step structure every time:
Step 1 — State your decision clearly.
Begin with a direct statement of whether the business should grant credit.
"[Business] should (not) agree to sell on credit to [Customer]."
Note: There is no single "right" or "wrong" decision in an SBQ. Marks are earned in Step 2 — as long as the decision is supported with evidence and financial impact, either option can score full marks.
Step 2 — Support your decision with evidence from the question.
For each supporting point, give E + E:
- Evidence — the specific figure or fact that matters — in your own words, not copied wholesale.
- Effect — explain why that evidence supports your decision in terms of financial impact (effect on cash flow, the risk of an uncollectible debt, or profit).
Number of supporting points required:
- G2: 2 pieces of evidence, each with explanation.
- G3: 3 pieces of evidence, each with explanation.
How marks are awarded: the decision statement earns 1 mark, and each supporting point is worth 2 marks — 1 mark for the evidence (the figure or fact) and 1 mark for the financial impact (its effect on cash flow, the risk of an uncollectible debt, or profit). So evidence given on its own still earns 1 mark — but the second mark is lost without the financial impact.
Note: This is the same SBQ format used in the "which inventory to buy" question earlier in the course — and it returns in later chapters (e.g. Non-current assets, Trade payables) with different subject matter.
Step 1: State your decision. Say clearly whether to grant credit.
Step 2: Support with evidence — pick out the relevant fact, then explain the financial impact (cash flow, the risk of an uncollectible debt, or profit).
G2 = 2 points. G3 = 3 points. Decision = 1 mark; each point = 1 mark evidence + 1 mark impact.
Ravi is a potential new customer. The following information is available about Ravi's business:
- Ravi has run his business for the past 8 years. However, sales have fallen over the past year.
- Ravi pays his own suppliers within 27 days.
- Ravi's suppliers are willing to give a reference on his reliability and payment history.
Required: Recommend whether Tropical Trading should agree to sell on credit to Ravi. Justify your decision with two reasons.
Acceptable Answer 1 — agreeing to grant credit:
Decision: Tropical Trading should agree to sell on credit to Ravi.
Ravi has run his business for 8 years. An established business is more likely to keep generating sales and so have enough funds to pay Tropical Trading on time, reducing the risk of an uncollectible debt.
Ravi's suppliers are willing to give a reference on his payment history. A good reference suggests Ravi is a reliable payer who is unlikely to default (fail to pay back what he owes), which lowers the risk of an uncollectible debt and protects Tropical Trading's cash flow.
Ravi pays his own suppliers within 27 days — only 7 days beyond Tropical Trading's 20-day credit period — which shows he does pay what he owes, just a little later. Tropical Trading could agree to grant credit but set a shorter credit period or stricter terms to manage the risk. (G3: include this third point.)
Acceptable Answer 2 — declining credit:
Decision: Tropical Trading should not agree to sell on credit to Ravi.
Ravi's sales have fallen over the past year. If this decline continues, Ravi may struggle to pay the amount owed on time, increasing the risk of a delayed or uncollectible debt for Tropical Trading.
Ravi pays his own suppliers within 27 days — 7 days longer than Tropical Trading's 20-day credit period. As Ravi is used to paying later than the period allowed, he may settle late, hurting Tropical Trading's cash flow and its ability to pay its own urgent expenses.
Although Ravi can provide references, he may have named only suppliers he pays promptly, so the references may not show how he pays his other suppliers. This gives Tropical Trading less assurance that he will pay on time. (G3: include this third point.)
Giving evidence without linking it to financial impact. "Ravi's sales fell" earns only the evidence mark. Tie it to an effect: "…so Ravi may struggle to pay on time, raising the risk of an uncollectible debt."
Forgetting to state the decision first. Always open with a clear choice before presenting evidence — do not leave the decision implied.
Giving fewer points than required. G2: 2 points. G3: 3 points. Each point must be a separate piece of evidence, not the same idea reworded.