Reynel C.

Llaban BS Financial Management

Amax Corporation has completed the ambitious P100 M expansion program which would allow
them to sell special alloy bars and sheets for various specialty metal products manufacturing
shops in Manila. Amax estimated its markets for special alloys to run up to P 250 M per annum,
boosting its sales by over P 20 M per month. The net profit on such products after deducting
plant operating cost and general selling and administration expenses would be 10% a neat
addition to the already existing profitable product lines.

In the past years, Amax had the sales of P 1 B and a net profit of P 805 M and the bad debt losses
were less than ½%. Amax believes that its new special alloy bars and sheets could not only add
another P 250 M in new product sales but could open up a vast reservoir of new demand which
in 2-3 years could help the double company’s present sales volume and profits.

Sales department therefor, presented Credit department with a list of firms which they believed
were typical of the new batch of small manufacturing companies that could soon be their
customers. Within the week, Rosman Credit Investigation Services submitted to Amax its report
on Allied Products Inc and Sales department pressed credit department for a decision to sell
Allied on 30 days’ credit an initial supply of 1,200 kgs valued at P 200,000.

Answer:

As a person who is responsible for investigating and assessing the creditworthiness

of customers and to predict risk for the company, I would give credit to but for a lower
amount of P 100,000 than the amount requested of P 200,000. Because, the new lines
of product were very profitable and could stand a little more aggressiveness and of
course, a slightly higher bad debt loss in valuating new customers for the new product.
Hence I would grant the decision to grant a credit line of P 100,000, net 30 days on
clean basis.

As a credit manager, I would take into account the credit report of the company, if it
will show as stable and satisfactory, it will be a favorable indication. Also, I would also
consider the business current ratio, and they must not have much debt. Their profits
should also be modest but on the upswing with increasing sales. Lastly, I would also
check their assets if they are well-used with the sales figure close double the value of
assets.

In every business, it is necessary to check further more details about a company.

Hence, considering the urgency of the decision, I would till call for additional data for
checking. This is to further investigate the reputation pf the company. Also, checking
other data will be beneficial, so we can confirm if the company could pay the credit in
due time or not.

To reach the decision, I would use the credit analysis process as an analytical
procedure. It is the assessment of a borrower's loan application to see whether the
Reynel C. Llaban BS Financial Management

company produces sufficient cash flows to pay off its debts. Its procedure entails
gathering information from the applicant, reviewing the data, and deciding whether or
not the loan should be approved. Also, aside from this, as credit manager I would also
use a variety of methods, including ratio analysis, pattern analysis, cash flow analysis,
and pro forma analysis.