What it means
When a business sells on credit, it usually sets a ceiling on how much each customer can owe at any one time. That ceiling is the credit limit, and utilisation tells you how close the customer is to hitting it.
Finance and sales teams use the figure to decide whether to ship the next order or ask for payment first. Utilisation matters because it links two things that often pull in opposite directions.
Sales wants customers to keep buying, while finance wants the money to arrive on time. A customer who is steadily moving from 40% to 95% utilisation may be growing fast, or may be struggling to pay and simply stacking up invoices.
The figure is normally tracked at the level of each customer and then rolled up across the whole ledger. Credit controllers often set trigger points, such as a review at 80% and an automatic order hold at 100%.
Those triggers turn a number on a report into an agreed action that does not depend on someone remembering to chase. Utilisation should always be read alongside ageing, which shows how old the unpaid invoices are.
A customer at 60% utilisation with every invoice inside terms is healthier than one at 40% utilisation with half the balance more than 90 days overdue. The ratio alone says how much is owed, not how well the customer is paying.
A related nuance is that open orders not yet invoiced may or may not count toward the limit. Some businesses include confirmed orders in the exposure figure, because those goods will become receivables within days.
Whichever rule you choose, apply it consistently so the percentages can be compared across customers and over time.
In practice
Real-world examples.
Example
A building materials supplier gives a contractor a $100,000 limit. The contractor's balance reaches $92,000, or 92% utilisation, just as a large new order arrives. The credit controller approves a part shipment and asks for the oldest invoices to be paid first.
Example
A software reseller reviews its top 20 accounts every month. One channel partner has moved from 35% to 88% utilisation in a quarter while payments have slowed. The finance manager schedules a call to understand whether this is growth or a cash squeeze.
Example
A food distributor sets an automatic hold in its order system at 100% utilisation. A restaurant group places an order that would take it to 104%, so the system pauses it. A salesperson calls the customer, collects a payment, and the order is released the same afternoon.
Formula
Calculation
Credit limit utilisation (%) = (Outstanding balance / Credit limit) x 100
Suppose a wholesaler has granted a customer a credit limit of $50,000. The customer currently owes $35,000 in unpaid invoices. Utilisation = 35,000 / 50,000 x 100 = 70%. The customer has $15,000 of headroom left (50,000 - 35,000), so a new order of $20,000 would take the balance to $55,000 and push utilisation to 110%, which should trigger a hold or a deposit request.Case study
Seen in the real world.
Harbourline Packaging is an illustrative, fictional manufacturer that sells cartons to around 150 customers on 30-day terms. Its finance director noticed that overdue balances were climbing even though total sales looked healthy. When she added a utilisation column to the weekly report, four customers stood out at over 95% of their limits.
Two of those customers were simply large and growing, so the team raised their limits after reviewing their financial statements. The other two were paying later each month, so the team moved them to payment before shipment until the oldest invoices were cleared.
Within a quarter the illustrative company had cut its overdue balance by a meaningful margin and avoided a bad debt on one customer that later entered insolvency. The lesson was that a single percentage per customer, reviewed weekly, gave the sales team a clear and fair rule to follow.
Watch out
Common mistakes.
- Looking only at the percentage and ignoring invoice ageing, so a customer who pays very late but sits at a comfortable 55% looks safe when they are not.
- Setting a credit limit once and never reviewing it, so utilisation becomes meaningless when the customer has doubled in size or its finances have worsened.
- Excluding confirmed but unshipped orders from the exposure figure, which lets a customer place large orders that together far exceed the intended limit.
Questions
People also ask.
What is a healthy utilisation level?
There is no universal figure, but many businesses are comfortable below 70% to 80% and start reviewing above that, with the right level depending on the customer's payment record and your own risk appetite.
Can utilisation be above 100%?
Yes, it can if invoices were released before a hold was applied or if the limit was reduced after the balance was built up, and any such case should be escalated and explained.
Who should own the credit limit decision?
Ideally finance or credit control owns it, with input from sales, so that the person with the most to gain from a sale is not the only one approving the risk.
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