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Published by Dushyant Sinha

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Published by: Dushyant Sinha on Apr 14, 2011
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Receivable Management may be defined as collection of steps and procedure required to properly weigh the cost and benefits attached with the credit policies.

Cost of Financing Administrative Cost Delinquency Cost Cost of Default by Customers.

Increase in Sales Increase in Profits Extra Profit

The Credit Policy may be defined as the set of parameters and principles that govern the extension of credit to the customers. Determination of credit policy involves a trade off between the profit on additional sales that arise due to credit being extended on one hand and the cost of carrying those debtors and losses suffered on account of bad debts on the other hand.

Dimensions of a firm·s credit policies
Credit Standard Credit Terms: Cash Discount Cash Discount Period Credit Period

Credit Standard
Credit Standard refers to the minimum quality of credit worthiness of a credit applicant that is acceptable to the firm. There are two categories of credit standard: Liberal Credit Standard Restrictive Credit Standard

Effects of Liberal Credit Standard: 
The firm can stimulate sales and attract more customers.  It involves larger working capital investment in receivables.  Higher rate of defaults because of the inability of the customers.  It incurs higher costs for capital tied in account receivables.  Average collection period may be slower.

Effects of strict credit standard 

Decrease in sales as few customers are attracted. Reduce the incidents of bad debts losses. Difficult to attract or satisfy the customers. Low cost carrying the debtors. Extension of credit facilities available to more credit worthy customers only.

The term credit terms refers to the stipulation under which the firm sales on credit is extended to the customers. Three important dimensions of the credit terms are:  Credit Period  Cash Discount  Cash Discount Period.

Important Components of the credit terms
Credit period: It refers to the period of credit which is extended to the customers. It is generally stated in terms of net date. Cash Discount: It indicate the rate of discount and the period for which discount has been offered. Cash Discount Period: It represents the period of time during which a cash discount can be taken for early payment.

The evaluation of credit process consists of three steps:  Gathering Credit Information  Analysis of Customer·s Credit Worthiness  Credit Decision.

A. GATHERING CREDIT INFORMATION: Before granting credit facilities to a customer, a firm must identify the source of information to assess clients credit worthiness. The sources of such information are: 1. Financial Statements 2. Bazar Reports 3. Reports of Credit Rating Agencies 4. Report from Banks 5. Firm·s Own Records 6. Trade References 7. Other Sources

B. Analysis of Customer·s Credit Worthiness: To analyze the customer·s credit worthiness the financial manager consider the four important approaches:  Traditional Credit Analysis: Five ¶C· of credit: Character Capacity Capital Conditions Collateral  Sequential Credit Analysis 

Numerical Credit Scoring Method  Risk Class Credit Analysis

C. Credit Decisions and line of Credit: The term line of credit refers to a limit to the amount of credit extended to an account.


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