What is the major objective of a firm in granting credit?

What is the major objective of a firm in granting credit?

• A. Expanding sales
• B. Increasing profits per transaction
• C. Reducing risk
• D. Limiting credit

Answer: (A)

Offering credit is a sales strategy designed to grow demand by removing the cash-only barrier for buyers. When a firm extends credit, more customers can purchase, potentially increasing order sizes, repeat business, and overall sales volume. As sales grow, profits can rise even if the margin per unit stays the same, provided bad debts are managed and collections are effective. This is why expanding sales is the best answer. Reducing risk is important as a constraint, but it isn’t the primary objective of granting credit—credit policy aims to balance risk with the goal of higher sales. Increasing profits per transaction or limiting credit don’t capture the main purpose; the intention behind granting credit is to drive more sales.

Offering credit is a sales strategy designed to grow demand by removing the cash-only barrier for buyers. When a firm extends credit, more customers can purchase, potentially increasing order sizes, repeat business, and overall sales volume. As sales grow, profits can rise even if the margin per unit stays the same, provided bad debts are managed and collections are effective.

This is why expanding sales is the best answer. Reducing risk is important as a constraint, but it isn’t the primary objective of granting credit—credit policy aims to balance risk with the goal of higher sales. Increasing profits per transaction or limiting credit don’t capture the main purpose; the intention behind granting credit is to drive more sales.