04 - 10/4/2010 Accounts Receivables Goods sold on credit...

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10/4/2010 1 Management of Receivables Credit Standards Credit Terms Collection Policy Monitoring Receivables Accounts Receivables z Goods sold on credit { Credit sales increases sales and hence profits. { Too much receivables has an opportunity Too much receivables has an opportunity cost. { Improper credit sales management z raises chances of delinquency resulting in bad- debt losses. Credit Policy z Set of decision guidelines regarding the firm s credit sales. A. Credit Standards: • The minimum financial strength of customers • The amount of credit to be allowed to credit customers. B. Credit Terms: • Credit period • Discount Credit Policy C. Collection Policy: The toughness or laxity in collection. D. Monitoring Receivables: The periodic evaluation of receivables and customers payment patterns to ensure that the firm s credits policies are administered correctly The determination of need for changes in credit policies. A. Setting the Credit Standards z Which customers qualify for regular credit terms? z How much credit should each customer receive? z The major factors considered while setting credit standards relate to the likelihood { slow payment { delinquance causing bad debt losses The Five Cs System 1. Character: { Will the customer make an honest effort to pa yo ri si tl i ke l ytot r ytoge tawa yw i th something? A. Setting the Credit Standards z Credit reports z Analysis of credit reputation by talking to stakeholders
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10/4/2010 2 The Five Cs System 2. Capacity: { Customer s ability to pay, z i.e. the ability to generate adequate cash to service debt. { Evaluation based on the cash income of the A. Setting the Credit Standards customer s business, gauged in part by z the customer s past records and business methods, z physical observation of the customer s plants and stores, and z judgemental information from a variety of sources. The Five Cs System 3. Capital: { General condition of the customer as indicated by financial statements. { Special emphasis given to A. Setting the Credit Standards z the debt-asset ratio, z liquidity ratios; z the times interest ratio and so on. The Five Cs System 4. Collateral: { Assets available for security credit. { Particularly important if the credit sales is large. A. Setting the Credit Standards 5. Conditions: General economic trends and special developments in certain geographic regions or sectors of economy likely to affect the customer’s ability to meet its obligations. Sources of Credit Information z Intelligence system. z Audited financial statements. A. Setting the Credit Standards z Professional credit associations and credit reporting agencies { maintaining database on various customers, which they sell to other firms. The Credit Report A. Setting the Credit Standards z Maintained and updated regularly to evaluate credit worthiness of customers z Include.
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This note was uploaded on 04/23/2011 for the course FIN 427 taught by Professor Mahmudulhaque during the Spring '11 term at BRAC University.

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04 - 10/4/2010 Accounts Receivables Goods sold on credit...

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