Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

CREDIT POLICY
A firm’s credit policy is the set of principles on the basis of which it determines who it will lend money to
or gives credit (the ability to pay for goods or services at a later date)
In simple terms, the credit policy of a financial institution or business is a set of guidelines that highlight
the following points –
•
•
•
•

The terms and conditions for supplying the goods on credit
Customer credit worthiness
Collecting procedure
Precautionary steps in case of customer default

In economics, credit policy is government policy at a particular time on how easy or difficult it should be
for people and businesses to borrow money and how much it will cost
...

Credit policy varies from firm to firm and is based on particular business, cash flow circumstances,
industry standards, current economic conditions and the degree of risk involved
...

Example: The use of clauses such as “3/10 net 30” is a part of credit policy
...

TYPES OF CREDIT POLICY:
Credit policy is an important part of the overall strategy of a film to market its products
...
e
...
Credit
policy can be lenient or stringent
...
Let us know about them in brief
...
Because of liberal policy, sales
increases and as a result, profit also increases but bad debts also increase and hence the firm
faces the liquidity
...
Credit sales are made only to those customers who
have proven worthiness
...

Therefore, the objectives of credit management should be the achievement of balance that maximizes
the overall return of the firm
...

1
...
These are with
regard to the repayment of the credit sales
•

Credit Period:

It is time duration for which credit is extended to the customers
...
For example, ‘net 30’ refers to the payment to be made within 30 days from the date of the credit
sale
...
It indicates
the rate of discount and the period for which discount is offered
...

2
...
Credit standards are
the basic criteria for extension of credit to customers
...
Character: The willingness of the customer to pay
...
Capacity: The ability of the customer to pay
...
Condition: The prevailing economic condition
...
But, this increases the incidence of
bad debts loss, investment in receivables and cost of collection
...

3
...
The
collection program should consist of the following:
•
•
•
•

Monitoring the state of receivables
...

Telegraphic and telephonic advice to the customers around the due date
...


If the firm is strict in its collection policy with the permanent customers who are temporarily slow
payers, they get offended and shift to the competitors and thus, the firm loses its permanent business
...


Hence, the optimum collection policy is a trade-off between costs and benefits which maximizes
profitability and the value of the firm
...
That means you may
need to establish receivable accounts for most business-to-business transactions
...
Luckily, you can minimize the risk or delinquent accounts by creating strong payment and credit
policies
...
Credit Eligibility standards:
Research new clients by purchasing business credit reports or contacting credit departments in
your industry
...

2
...
In some industries, new customers might start with a “net 30” standard, allowing them
30 days before payments become delinquent
...
Your best
customers may warrant longer payment terms, such as 60 to 90 days
...


3
...
The policy should all be documented
and made clear to the client
...
Having
formal procedures in place will make clear to your clients that you are diligent about the
payment process and expect timely payment
...
Collections:
Your policy guidelines should explain in clear language the steps you’ll take if an account
becomes delinquent
...

IMPORTANCE OF A CREDIT POLICY:
The Importance of a written Credit Policy
•

A written policy provides a structured approach to risk management and the debt
collection process
...

It helps ensure a consistent approach among customers, reducing the chance of
personal bias affecting the decision making process
...


FORMULATING A CREDIT POLICY:
Formulating a Cedit Policy
•
•
•
•

The process begins by understanding the objectives established for the credit
department
...

Credit policies must also change over time
...

In other words, credit policies must be reviewed and updated
periodically
...


ADVANTAGES & DISADVANTAGES:
Advantages of a Customer Credit Policy:
1
...
One of the advantages of a credit policy that
accepts electronic forms of payment such as credit cards is that the math is already
done for you
...
S dollars while the person making the purchase will get charged in their own
currency
...

2
...
Using electronic forms of credit are extremely easy these days with the
advent of point-of-sale technologies
...
Customers more likely to spend more
...
Psychologically, it’s much more
difficult to watch cash disappear
...

4
...
That paper trail you’ve been trying to keep on your
customers becomes much easier when you have an itemized list of credit
transactions your bank can provide on monthly statements
...

Potential Disadvantages of Customer Credit:
1
...
You may offer discounts on your services to entice
customers to spend their money with you by paying cash only, or early payment on
their credit accounts
...
It’s a
gamble, and you’ll have to decide if the payoff is worth it
...
Dealing with bad debts and potential fraud
...
The same thing can occur if a bad actor
uses a stolen credit card to make a fraudulent purchase at your shop; most card
companies won’t hold customers liable for those purchases
...
Transaction fees
...
Most
services will charge your business a fee, usually about 3%, to accept credit card
transactions, which can add up for small business
...
Complicated accounting
...
You may need to hire people to deal with sales,
accounting and collections to track down late accounts or handle legal issues
stemming from non-payment
...
Loss of goodwill
...
Everyone
falls into tough financial times, and while no one wants to repeatedly ask for
payment or charge late fees, it’s a part of business
...




---