Obtaining Credit Information.

Obtaining Credit Information. The first step in credit analysis Is obtaining credit information on which to base the evaluation of a customer. The sources of information, broadly speaking, are. Internal and (ii) external. Internal Usually, firms require their customers to fill various forms and documents giving details about financial Operations. They are also required to furnish trade references with whom the fi

Bad Debt Expenses

Bad Debt Expenses Another factor which is expected to be affected by changes in the credit . standards is bad debt (default) expenses. They can he expected to increase with credit standards and decrease if credit standards become more restrictive. Credit Analysis Besides establishing credit. standards, a firm should· develop procedures for evaluating credit applicants. The second aspect of credit policies of a

Investments in Receivables or the Average Collection Period

Investments in Receivables or the Average Collection Period The investment in accounts receivable involves a capital cost as funds have to he arranged by the finn to finance them till customers make payments. Moreover, the higher the average accounts receivable, the higher is the capital or carrying cost, A change in the credit standards-relaxation or tightening to a change in the level of accounts receivable e

Collection Costs

Collection Costs The implications of relaxed credit standards are (i) more credit, (ii) a large credit department to service accounts receivable and related matters, (iii) increase. in collection costs. The effect of tightening of credit standards will be exactly the opposite, These costs .are .likely to be semi-variable. This Is because up-to a certain point the existing staff will be able to carry on the incr

Credit Standards

Credit Standards The term ‘credit standards’ represents the basic criteria for the extension of credit to customers. The quality is of establishing credit are factors such as credit ratings, credit references. an-rage payments period and certain financial ratios.” Since we are interest in illustrating the trade-off between benefit and cost to the firm as a whole, we do not consider here these


CREDIT POLICIES In the discussions it has been clearly shown that the firm’s objective with respect management is not to collect receivables quickly, hut attention should also given to the benefit-cost trade-off involved in the various areas of accounts receivable management. The first decision area is credit policies. The credit of a fine provides the -framework to determine (a) whether or not to extend


Benefits A part from the costs, another factor that has a bearing on accounts receivable management is the emanating from credit sales. The benefits are the> increased sales and anticipated profits bee.ruse or :I more liberal policy when firms extend trade credit, that is, invest in receivables, the intend to increasing the sales. The impact of a liberal trade credit policy is likely to take two forms First,

Delinquency Cost

Delinquency Cost This cost arises of the failure of the customers to meet their obligations when payment on credit come due after the expiry of the credit period, Such costs are called delinquency. The important components of this (i) blocking up of funds for an extended period, (ii) with steps that have to he initiated to collect the over dues, such as, reminders and other collection efforts, legal charges, w

Capital Cost

Capital Cost The capital cost is a term used in the field of financial investment to refer to the cost of a company’s funds (both debt and equity), or, from an investor’s point of view “the shareholder’s required return on a portfolio company’s existing securities” It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing ca


Costs The major categories of costs associated with the extension of credit and accounts receivable are: (i) collection cost, (ii) capital cost, (iii) delinquency cost, and (iv) default cost. Collection Cost Collection costs are administrative incurred in collecting the receivables from the customers whom credit sales have been made. Included in this category of costs arc: (a) additional express on the creation