Topic 6: Credit Management

By Dr. Wasim Abbas Shaheen

Course Instructor:
Dr. Wasim Abbas Shaheen
Assistant Professor - Finance
QASMS, QAU, Islamabad

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Learning Objectives
• Discuss the nature of Credit decisions
• Understand the importance and need for Credit management
in a business
• Develop and implement credit management policies and

By Dr. Wasim Abbas Shaheen

system

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Credit Management

• Mostly the trade today is done on credit basis as we can

see the Accounts Receivables are around 1/3 of the
current assets of the company’s balance sheet
• Credit Types:

By Dr. Wasim Abbas Shaheen

• Trade credit – to firms
• Retail credit – to customers

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Steps in Credit Management
Terms of
Sales

Trade
Agreement

By Dr. Wasim Abbas Shaheen

Credit
Analysis

Credit
Decision

Collection 4
Policy
1. Terms of Sales
• Cash on Delivery (COD)
• Cash Before Delivery (CBD)
• Progressive Payments (30% on contract, 30% 1 month after
delivery, 40% 2 month after delivery

By Dr. Wasim Abbas Shaheen

• Cash discount for prompt payment
• 2/10, net 30
• 3/10, EOM, net 30 - here EOM = End of Month
• Seasonal Dating – to cover up seasonal price fluctuations of
seasonal products (Contract is made today with future dates)

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2. Trade Agreement
• Open Account – no formal agreement
• Promissory note
• Commercial draft
• Sight draft

By Dr. Wasim Abbas Shaheen

• Time draft
• Bankers Acceptance

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3. Credit Analysis
• Credit Analysis – the procedure to analyze the likelihood
a customer will pay or not
• Qualitative Analysis
• SWOT Analysis
• PEST Analysis

By Dr. Wasim Abbas Shaheen

• Five C’s Analysis (Character, Capacity, Capital, Collateral, Condition)
• Quantitative Analysis
• Financial Statement Analysis
• Z-Score (1.81 – 2.99)

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4. Credit Decision
• Credit Decision – the standard set to determine the amount
and nature of credit to extend to customer

By Dr. Wasim Abbas Shaheen

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5. Collection Policy
• Collection Policy – procedure to collect and monitor
receivables
• Aging Schedule – classification of accounts receivables by time
outstanding
• Aging Schedule:

By Dr. Wasim Abbas Shaheen

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Bankruptcy
• Bankruptcy – The situation when the firm is unable to
pay its debts
• Workout – Informal arrangement between debtors and creditors
establishing steps the debtors may take to avoid declaring
bankruptcy.

By Dr. Wasim Abbas Shaheen

• Liquidation - sale of bankrupt firm’s assets
• Reorganization – restructuring of financial claims on failing firm
to allow it to keep operating

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