Is your installment sales profitable? Do the math before extending credit. Profitability of credit sales.
The sales report brings good news: more customers, more orders, and more purchases on credit. However, upon checking the bank account, the enthusiasm fades. There are outstanding payments, expenses to cover, and customers who are already behind on their payments.
The question arises late: how much are we really earning by selling on credit?
Offering payment options can help you close deals. To determine if those sales contribute to the business, you need to consider the costs of financing, managing, and dealing with non-payments.
The profitability of credit sales is best understood when you track every dollar from the sale to its recovery. This analysis also allows you to evaluate solutions like ZRS by asking a specific question: what value can they bring to my operation after considering their costs and terms?
The sale is recorded today; the money may arrive months later.
When you deliver a product on credit, your company commits resources before recovering the full price.
During that period, you may need to pay for inventory, payroll, commissions, and other expenses. If you use financing, you must also consider its cost. If you use your own resources, it's important to recognize that this money will no longer be available for other needs.
The way installments are offered changes the analysis. If a financial institution settles the sale and assumes the consumer's credit, you must review the fees and responsibilities of that arrangement. If your company retains the receivable, the cost of financing it and the risk of default are directly part of the transaction.
Therefore, before extending your deadlines, identify who finances the client, who collects the payment, and who absorbs the loss if they don't pay .
Costs that can reduce the profit margin of a sale on credit. Profitability of credit sales.
1. The cost of the product or service
This is the starting point: how much it costs you to deliver what you sell. Depending on your business, this may include acquisition, production, installation, or service provision.
The difference between the selling price and that cost should still be enough to cover the rest of the operation.
2. Financing and fees
Consider the interest you pay to sustain accounts receivable and the fees associated with the payment scheme.
A longer timeframe can facilitate closing the deal, but it can also keep your resources tied up for a longer period.
3. Administration and collection
Reminders, reconciliations, follow-up, staff, and external services all have a cost.
A portfolio that requires a lot of management can consume a significant part of the margin, even when payments are eventually recovered.
4. Losses due to non-payment
A late payment doesn't automatically equate to a definitive loss. You need to distinguish between what can still be recovered and what you can reasonably expect to lose.
To make decisions about new sales, use estimates based on your experience. To evaluate past transactions, review their results and actual returns.
An example: selling one million and keeping less than expected.
Imagine a company that makes 100 credit sales of $10,000 each.
The following table compares two scenarios for the same group of transactions throughout their collection period. The figures are hypothetical, expressed in Mexican pesos, and exclude VAT. They do not represent ZRS results or rates.
Concept | Scenario A | Scenario B |
Sales | $1,000,000 | $1,000,000 |
Cost of products | -$700,000 | -$700,000 |
Financing and fees | -$50,000 | -$50,000 |
Administration and collection | -$20,000 | -$20,000 |
Losses due to non-payment, after recoveries | -$30,000 | -$90,000 |
Contribution before fixed expenses and taxes | $200,000 | $140,000 |
Both scenarios show the same sales. However, the second scenario retains $60,000 less: a 30% reduction in the contribution from those operations.
That result is not the company's net profit . Fixed costs and corresponding taxes still need to be taken into account.
This example illustrates why billing the same amount can produce different results. It also explains why a business strategy needs to consider the quality of payments received, in addition to sales volume.
The calculation you should make before increasing your credit.
As a management tool, you can start with this formula:
Estimated contribution = sales − cost of product or service − financing and commissions − administration and collection − expected losses due to non-payment.
Apply the calculation to comparable transactions: same term, product, channel, or customer profile. An average across the entire company can mask profitable segments and others that consume resources.
Then he poses three questions:
What happens if the customer takes longer to pay?
What happens if losses due to non-payment increase?
How much margin is left if I add an assessment and protection solution?
Ensure that each cost is accounted for only once. If a commission already includes a certain service, avoid deducting it separately again.
Where can ZRS fit in?
ZRS stands for Zero Risk Score. It combines a technological assessment of default risk with a guarantee subject to agreed-upon conditions.
The description of ZRS in We Link includes a real-time evaluation and compensation of the agreed non-payment percentage when the prediction is incorrect, according to the contracted scheme.
For a company that sells to individuals, its evaluation should consider two aspects: the information it provides to decide on the operations and the scope of the support available.
Before signing up, it's important to clarify which clients and transactions are eligible, how much the solution costs, what limits and exclusions apply, and how to request compensation.
Automatic payments should not be budgeted for any arrears. The origin and timing depend on the applicable conditions.
How to assess whether a risk solution adds value
Requesting a quote is part of the analysis. To make a decision, you also need to compare it with your current situation.
If you incorporate a solution like ZRS, include its total cost and estimate what losses would still be borne by your company after any applicable compensation.
The comparison should take into account potential changes in collections, financing, and operations. Any eventual compensation should also not be treated as cash available from the date of the delay.
Start with a comparable group of transactions
Define a segment and an evaluation period. Document the approval rules and monitor payment behavior until sufficient time has passed to assess the results.
Comparing newly originated sales with an older portfolio can produce misleading conclusions: the former have not yet had time to show their full behavior.
It measures more than just approval.
Useful indicators include:
Percentage of applications approved.
Contribution per operation.
Late payments and losses after recoveries.
Administration and collection costs.
Time required to recover the cash.
Greater approval is valuable when it is accompanied by sustainable results for the business.
Frequently asked questions about selling on installment plans and ZRS
Does selling on credit always reduce profit?
Not necessarily. It can generate profitable additional sales. The outcome depends on the margin, the scheme's costs, and customers' payment behavior.
Does ZRS replace my company's credit policy?
Their assessment should be integrated with your business's origination, documentation, and tracking rules. Each participant's responsibilities should be clearly defined from the outset of the hiring process.
Can I assume that all defaults will be covered?
You must review the specific scope of the contract: eligibility, agreed percentage, limits, exclusions, and requirements for claiming compensation.
Before selling more on credit, find out how much you're keeping back.
A well-evaluated credit strategy connects the sales team with finance and collections. It allows for clearer decisions on what terms to offer, what transactions to accept, and what collateral makes sense to obtain.
At We Link we help you analyze whether ZRS fits your customer profile and your credit sales model.
To begin, it is helpful to have on hand the average sales amount, the terms offered, the volume of transactions, and the historical payment behavior.
Do you want to evaluate ZRS for your business?
Contact We Link and let's review your transaction, the requirements, and the applicable conditions.
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