NaimExplain

How do firms decide whether it makes sense to grant credit to a customer? Answer: CREDIT POLICY refers to the decision to extend credit to a customer. The job of the credit manager is not to minimize the number of bad debts; it is to maximize profits. This means that you weigh the odds that the customer will pay, providing you with a profit, against the odds that the customer will default, resulting in a loss. Remember not to be too short-sighted when reckoning the expected profit. It is often worth accepting the marginal applicant is there is a chance the applicant might become a regular and reliable customer.

How do firms assess the probability that a customer will pay? Answer: Credit analysis is the process of deciding which customers are likely to pay their bills. There are various sources of information: your own experience with the customer, the experience of other creditors, the assessment of a credit agency, a check with the customer's bank, the market value of the customer's securities, and an analysis of the customer's financial statements. Firms that handle a large volume of credit information often use a formal system for combining the various sources into an overall credit score.

How do we measure the implicit interest rate on credit? Answer: The effective interest rate for customers who buy goods on credit rather than taking the discount for quicker payment is: [ 1+ (discount / discounted price) ^(365/extra days' credit) ] -1

What are the usual steps in credit management? Answer: - The first step in credit management is to set normal TERMS OF SALE. This means that you must decide the length of the payment period and the size of any cash discounts. In most industries these conditions are standardized. - Your second step is to decide the form of the contract with your customer. Most domestic sales are made on OPEN ACCOUNT. In this case the only evidence that the customer owes you money is the entry in your ledger and a receipt signed by the customer. Sometimes, you may require a more formal commitment before you deliver the goods. For example, the supplier may arrange for the customer to provide a trade acceptance. - The third task is to access each customer's creditworthiness. - When you have made an assessment of the customer's credit standing, the fourth step is to establish sensible credit policy. - Finally, once the credit policy is set, you need to establish a collection policy to iden...