What is credit limit management?

Credit limit management is the practice of establishing maximum credit limits for clients before requiring payment, monitoring exposure against those limits, and taking action when limits are approached or exceeded. For professional service firms, credit limits control AR risk by preventing excessive unpaid work accumulation with any single client before payment demonstrates willingness and ability to pay.

Key characteristics

• Sets the maximum credit extended per client

• Based on the client's creditworthiness and history

• Monitored against current outstanding balances

• Triggers action when limits are approached

• Protects against excessive AR concentration

• Should be reviewed and updated periodically

Why it matters for professional service firms

Without credit limits, firms can accumulate significant receivables from clients who may not pay. A $200K receivable from a struggling client represents major risk. Credit limits control this exposure: work pauses when limits are reached until payment is received. Professional service firms should establish credit limits for new clients (conservative until history develops) and for existing clients (based on payment history and relationship value), and monitor and enforce limits to manage AR risk.

Real-world example

Amanda's firm had no credit limits. One client accumulated $185K in receivables before cash flow problems emerged, eventually collecting only $110K after 8 months. Implementing credit limits: new clients are limited to $25K until payment history is established; existing clients are assigned limits based on payment history and relationship (ranging from $50K to $200K). The monthly report flagged clients within 80% of the limit. When one client approached the $80K limit (set at $100K), work paused, and a conversation began. Client made a $40K payment to continue work. The proactive management prevented another large loss.