Posted in Finance, Accounting and Economics Terms, Total Reads: 502
Definition: Open Account
Open Account is used in transactions when one party delivers the goods to the other party without instant or advance payment. The payment is done after 30 to 90 days. This practice is common with traders who don’t want to lose business because of payment hassles.
It is about developing a long term relationship with the customers. But it is most popular in which there is security of business. If the business does not do well then there are problems with the payment as the customer also has to maintain the cash flow. Hence the creditor always runs a risk of non-payment or default.
But there are benefits also. Providing credit to the customers ensures that the creditors always have business. It takes them ahead of the competition while ensuring regular business relationship with the customers.
But it takes good financing skills to calculate the amount of credit and the duration of payment to successfully make Open Account work. Risk analysis and mitigation measures have to be in place before granting the credit.
This is common practice in FMCG companies which provide credit to the retailers and wholesalers by Open Account who pay these companies after they have made the sales.