Credit Managment

7/28/2019 Credit Managment

http://slidepdf.com/reader/full/credit-managment 1/17



2

Costs

Major categories of costs associated with

the extension of credit and accounts

receivables are:

1. Collection Cost

2. Capital Cost

3. Delinquency Cost4. Default Cost



3

1. Collection Cost : They are administrative costsincurred in collecting the receivables from thecustomers to whom credit sales have beenmade. It includes:

a. Additional expenses on the creation andmaintenance of a credit department with staff,accounting, records, postage etc.

b. expenses involved in acquiring creditinformation either through outside specialistagencies or by the staff of the firm itself.



4

Capital Cost

Granting credit and creating debtors amount

to blocking of firms funds. The interval

between the date of sale and the date of

payments has to be financed out of

working capital. This necessitates the firm

to get funds from banks and other sources

which comes with a cost. This is called ascapital cost.



5

Delinquency Cost

This cost arises out of the failure of the customers

to meet their obligation when payment on credit

sales becomes due after expiry of the credit

period. Important component of this cost are:a. Blocking up of funds for an extended period.

b. Cost associated with steps that have to be

initiated to collect the overdue such as

reminders and other collection efforts, legal

charges.



6

Default Cost

Finally the firm may not be able to recover the overdue because of the inability of the

customers. Such debts are treated as bad

debts and have to be written off as theycannot be realized. Such costs are known

as default costs.



7

Benefits

Another factor that has a bearing on accounts

receivables management is benefits emanating

from credit sales. The benefits are the increases

sales and anticipated profits because of a moreliberal policy.

The decision to commit funds to receivables will be

based on a comparison of the benefits and costs

involved , while determining the optimum level of

receivables.



8

Credit policy

Credit policy is used to refer to the

combination of three decision variables:

1. Credit standards

2. Credit terms

3. Collection policies



9

Credit Standards

Credit standards are the criteria which a firm follows inselecting customers for the purpose of creditextension. Credit standards influence the quality of firm’s customers. There are two aspects of quality of

the firms customers:1. Time taken by customers to repay credit obligation

2. The default rate

To estimate the probability of default, financial manager should consider three C’s and they are

a. Character b. capacity c. condition



On the basis of credit standards Firm may

categories its customers in the following

three categories:

1. Good accounts

2. Bad accounts

3. Marginal Accounts

10



11

Credit Analysis

Credit analysis is very important as thedecisions to grant credit to the customersas well as quantum of credit is based on

this.1. First step in credit analysis is obtaining

credit information on the basis of whichevaluation of customer will be done.

2. Second step is analysis of creditinformation



12

Obtaining Credit Information

Sources of credit information may be

1. Internal 2. External

Internal source is derived from the recordsof the firm contemplating an extension of

credit

External sources includes FinancialStatement, Bank Reference, Trade

Reference, Credit Bureau Reports.



13

Analysis of credit information

Information collected should be analyzed to

determine the credit worthiness of the

applicant. There are no established

procedures to analyze the information,procedures to be devised to suit individual

needs. Analysis should cover two aspects:

1. Quantitative

2. Qualitative



14

Credit Terms

The stipulations under which the firm sells

on credit to customers are called credit

terms. It includes:

a. Credit period

b. Cash Discount



15

Credit Period

The length of time for which credit is

extended to customers is called the credit

period. Generally stated in terms of a net

date.

For examples, if the firms credit terms are

net 35, it is expected that customers will

repay credit obligation not later than 35days.



16

Cash Discount

Cash discount is a reduction in payment offered tocustomers to induce them to repay creditobligation within a specified period which will beless than the normal credit period. It is usuallyexpressed as a percentage of sales.

Credit terms may be expressed as ‘2/10,net30.

This means that a 2 percent discount will be

granted if the customers pay within 10 days, if he does not avail the offer he must make thepayments within 30 days.



17

Collection policies

The third area involved in accountsreceivable management is collectionpolicies. They refer to procedure followed

to collect account receivables when after the expiry of credit period they becomedue.

These policies cover two aspects:

1. Degree of collection effort.

2. Type of collection effort.

Credit Managment

Documents

Transcript of Credit Managment