There are various costs & benefits attached with a credit policy. These may be enumerated as follows.             

The credit sales delays the time of sales realization & therefore the time gap between incurring the cost & the sales realization is extended . This results in blocking of funds for a longer period. The firm on the other hand , has to arrange funds to meet its own obligations towards payment to the supplier, employees etc., These funds are to be procured at some explicit or implicit cost . This is known as cost of financing the receivables.

A firm will also required to incur various costs in order to maintain the record of credit customers both before the credit sales as well as after the credit sales

The firm have to incur additional costs known as delinquency costs, if there is delay in the payment by a customer. The firm may have to incur cost  on reminders , phone calls , postages, legal notices etc. There is always an opportunity cost of the funds tied up in the receivables due to delay in payment. 

If there is a default by the customer & the receivables becomes partly or wholly, unrealizable , then this amount is known as bad debt, also becomes cost to the firm. This cost does not appear in case of sales.  

Most of the firms sell goods on credit, either because of trade customs or other conditions. The sales can be further increased by liberalizing the credit terms. This will attract more customers to the firm resulting in higher sales & growth of the firm.

Increase in sales help the firm in
a)to easily recover the fixed expenses & attaining  the break-even level.
b)Increase the operating profit of the firm

Sometimes, the firm makes the credit sales higher than the usual cash selling price. This brings an opportunity to the firm to make extra profit over & above the normal profit.  

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