Customer Credit Limits: Count Work Before Billing

A customer with $40,000 of unpaid invoices can already consume a $75,000 credit limit. The missing $35,000 may be sitting in completed work and next week's unavoidable delivery.

If your credit report stops at accounts receivable, the project team can extend credit without anybody approving it. Billing faster helps, but it doesn't replace a decision about how much exposure to accept.

For a $2M–$20M agency, consultancy, or technical service provider, the useful limit follows the work from authorization to collection.

Use one exposure definition

A practical management measure is:

Credit exposure = unpaid billed amounts + earned unbilled amounts + unavoidable future delivery cost − usable customer deposits.

The first two components represent earned amounts at risk. The third is future cash the business cannot avoid before a permitted pause. This is a management exposure measure, not a GAAP receivables balance or a prediction of accounting loss.

Don't add the entire contract's future selling price. It includes work that may never be performed. Don't count the same completed work in both invoices and unbilled revenue.

Subtract a deposit only when its terms permit applying it against the relevant obligation. A refundable or restricted balance may not protect this exposure. Confirm the contract treatment rather than assuming every customer payment is free working capital.

The account that looks below its limit

Consider this hypothetical service account:

The approved ceiling is $75,000. There is no remaining headroom.

An additional $15,000 delivery commitment would take the account to $90,000. To stay within the ceiling, management needs a $15,000 cleared payment or usable additional deposit, an equivalent reduction in avoidable exposure, or a documented higher-limit approval.

A promise to pay isn't a cleared payment. A purchase order may support the right to invoice, but it doesn't eliminate collection risk.

This distinction is why past-due aging alone is too late. The customer can be fully within payment terms while the business has already extended more credit than it intended.

Set the ceiling from capacity to absorb loss

There is no defensible universal formula saying every customer deserves one or two months of sales. Start with payment behavior, contract rights, disputes, the customer's ability to pay, and your own cash headroom.

The U.S. International Trade Administration describes open-account terms as helpful to buyers' cash flow but risky to sellers. Its guidance concerns international goods trade. The relevant principle for this service-business model is narrower: delivering before collection means accepting payment risk.

Keep the risk evidence and the approval decision together. A new legal entity should not automatically inherit the credit history of a familiar trading name. A fast-growing account shouldn't gain a higher ceiling simply because its invoices grew.

If a large account keeps absorbing cash, a free 20-minute Profit & Tax Leak Check can help identify whether billing, terms, or delivery exposure should be checked first. Rough figures are sufficient; no documents are required.

Put the checkpoint before work is committed

Sales approves a commercial opportunity. Operations books the people. Finance approves the credit exposure. Those decisions need to meet before noncancelable delivery starts.

For each large account, show current exposure, the next commitment, expected cleared receipts, and the remaining headroom. Review again when a payment fails, a dispute opens, or the customer asks for additional scope.

A simple traffic-light policy can work, but the colors need actions. “Amber” might require a payment before purchasing outside labor. “Red” might stop new commitments while existing contractual obligations are reviewed. The policy must respect the agreement and the service's legal and operational requirements; it doesn't authorize abruptly abandoning required work.

Give exceptions an expiry date. A permanent exception is an undisclosed credit policy.

Keep sales and cash consequences together

Suppose pausing new work risks a valuable relationship. The owner can choose a temporary extension. That choice should show the added exposure, maximum period, funding source, and person responsible for collection.

Credit limits aren't a device for finance to veto every difficult sale. They make the tradeoff visible while the business can still change deposits, billing frequency, milestones, or delivery pace.

The unbilled-revenue framework helps locate earned work outside the aging report. The customer-deposit guide helps keep cash received distinct from earned revenue and available protection.

For consulting businesses, this is especially useful when monthly invoicing trails a fast-moving project. One extra week of work can change the exposure more than the credit report suggests.

Review the next commitment

Fractional CFO services can connect credit limits with project approvals and weekly cash. The first useful action is to calculate full exposure for the five accounts with the largest combination of unpaid and unbilled work.

Bring the account most likely to cross its ceiling to a Profit & Tax Leak Check. Decide what must happen before the next delivery commitment makes the gap larger.