Credit Policy

The credit policy relating to sales and purchases also affects, the working capital. The credit policy influences the requirement of working capital in two ways: (i) through credit terms granted by the firm to its customers buyers of goods; (ii) credit terms available to the firm from its creditors.

The credit terms granted to customers have a hearing on the magnitude of working capital by determining the level of book debts. The credit sales result in higher book debts (receivables). Higher book debts mean more working capital. On the other hand, if liberal credit terms are available from the suppliers of goods (trade creditors), the need for working capital is less, The working capital requirements of a business are, thus, affected by the terms of purchase and sale, and the role given to credit by a company in its dealings with creditors and debtors.

Such discretion may, however not be available to a company which highly competitive market. To win and retain customers, It may be forced, among other things, to offer generous credit terms to them. The investment in book debts will consequently he of a higher order, necessitating large working capital in another way. To be able to enjoy consumer patronage on a continuous basis, a firm will have to offer a variety of products quite unlike a firm which has a hold on the market and, hence, does not need special efforts to satisfy customer requirements. The consequence of a higher level of inventories would be an additional need for working capital. The degree of competition is, therefore, an important factor influencing working capital requirements.

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