· Choose and Respond to 3 posts listed below. Advance the conversa.docx

· Choose and respond to 3 posts listed below. Advance the
conversation; provide a real-world application and experiential
examples;
· Conceptually discuss your key [most significant] learning
insight or take-away from the selected forum topic comments.
· Responses should be a minimum of 150-250 words, supported
by at least one reference outside of the textbook (use academic
journals), either supporting or refuting the position of the
author of the forum topic response or peer response.
Topic #1 Dividend Policy
Ming, 2013 defined a dividend policy as the policy that a
company uses to decide how much it will pay out to its
shareholders in dividends. Even though this sounds simple there
are many components to the dividend policy picture. The first
component is a company must look at how dividends might
influence capital structure. Dividends can often completely
adjust capital structure which is not always considered to be a
positive aspect. When looking at dividends the act of retaining
earnings often increases the common equity relative to debt. On
top of this when a company finances with retained earnings it is
cheaper for the company than issuing new common equity. Once
that is noted the effect of the dividend policy on stock value
becomes important.
When looking at dividend policy New Tax Law, 2003 explained
that there are four primary policy types which are stable
dividend per share which, constant payout ratio, compromise
policy and residual dividend policy. The stable dividend per
share states that the dividend should always be held constant
even in years that the company is reporting a loss, this gives the
shareholders the impression that the loss is not permanent which
can often be a motivating factor for investors to stay invested in

a company. The constant dividend payout means that a constant
percentage of the company earnings are paid out in dividends.
Problems happen in this policy when the company earnings are
down and shareholders receive significantly less in payouts.
Shareholders are often ok with this happening one year but tend
to want to move away from the company when they do not
quickly see a return in profits. The third policy is the
compromise policy; in this policy there is a compromise
between the policies of a stable dollar and the percentage of the
dividends for the year. This policy does tend to create a bit of
uncertainty for investors, and can be unattractive for less
experienced investors. The final policy is the residual dividend
policy, which is often used when investments are not stable.
Under this policy the dividends that are received represent the
residual earnings after a companies investment need has been
satisfied.
There are also three major theories that are often discussed in
finance. Ming, 2013 addresses the first theory, which is the
dividend irrelevance theory. This theory states that a firms
dividend policy has no effect on either the value or the cost of
capital everything is dividend equally. The problem though is
this; the idea of dividend policy was created in a perfect market.
In this perfect market there are no taxes, no bankruptcy and no
asymmetry of information. In this perfect market the value of
the firm is only determined by the companies cash flows. The
problem is that this is not the business world that any company
actually exists in. When these outlying factors are considered
the dividend policy no longer produced adequate numbers and
in a way becomes irrelevant. Yes it serves as a base line, but
that is about it. The ideal of dividing capital gains equally
would be great but is a bit idealistic.
The next policy is the optimal dividend policy. In this policy it
is believed that there is a dividend policy that strokes a balance
between current dividends and future growth that typically
maximizes the stock price of the firm. Jean-Paul Decamps, 2007
addressed the use of an optimal dividend policy in a real

business environment and its usefulness when trying to make a
firm solvent such as in bankruptcy. This policy is often used in
firms that have liquidity as it if often harder to use in firms that
lack liquidity.
The third and final theory is the dividend relevance theory.
Under this theory the firm is affected by its dividend policy.
The optimal policy is one that causes maximization of the
firms’ value. Ming, 2013 refers to this as the most reasonable
option for firms and felt that it had the best reflection on real
world value. In order though for any of these polices to work
there must be investors into the system. Garrison, 2014 defined
three investor areas that need to be considered when setting up
dividend policy. The first to understand is that investors can
regard dividend changes as a signal of management’s earnings
and forecast. This is referred to as the signaling hypothesis,
though it seems reasonable it can often set unrealistic
expectations for clients. The next is the clientèle effect. In this
effect it is assumed that the firm will attract the type of investor
who likes the dividend policy that is uses. Though this seems
simple customers can often have un true perceptions of the
company, which can lead to a mismatch in investor and
dividend policy. The final investor relation is the is free cash
flow hypothesis. Garrison, 2014 states this hypothesis states
that firms that pay dividends from cash flows that cannot be
reinvested in free cash flows often have higher values than
firms that retain free cash flows.
In all dividend policy is an idea that in a perfect market
society gives stockholders a firm understanding of what to
expect for a return for the year. It is a policy though that in
same cases is considered to be irrelevant. It still does have its
practical applications but adjustments to the policy often have
to be made in order to keep investors happy. There are various
types of policy that when used correctly can give a fairly
accurate representation of the dividends that are expected for
the year. A company often has to take into consideration the
make up of its stockholders when choosing the proper policy to

use for the year.
Reference:
Garrison, S. (2014, January 1). StudyFinance: Dividend Policy.
Retrieved January 30, 2015, from
http://www.studyfinance.com/lessons/dividends/?page=02
Jean-Paul Décamps, & Villeneuve, S. (2007). Optimal dividend
policy and growth option. Finance and Stochastics, 11(1), 3.
doi:http://dx.doi.org/10.1007/s00780-006-0027-z
Ming, J., & Xu, M. (2013, Sep 17). Does a dividend policy
matter? The Business Times Retrieved from
http://search.proquest.com.proxy.davenport.edu/docview/14330
25886?accountid=40195
New tax law triggers need for fresh analysis of dividend policy.
(2003). IOMA's Report on Financial Analysis, Planning &
Reporting,03(8), 1-1,12+. Retrieved from
Topic #2: Cost of Going Public
Top of Form
Going Public
Companies are responsible for a myriad of decisions
daily that ultimately shape the direction of the company. One
such decision is determining whether or not to remain a private
company or to go public. The answer to this decision has many
factors that need to be taken into consideration. There are many
advantages to going public which is why companies go through
with it although there are also many disadvantages. One such
disadvantage of going public is the cost. There are many
different expenses incurred and these will be explained below.

But first let’s look at the many advantages companies can
experience when transitioning from a private company to a
public company.
Advantages
First and foremost, if a company decides to go public it
will result in increased capital (Lewis & Kappes, 2015). The
first time a company offers its stock is called an initial public
offering (IPO). This is used to generate funding that does not
need to be paid back (JamieD, 2011). It is sometimes used as
an alternative to borrowing money from a bank. Companies can
also generate more money after the IPO by issuing additional
stock in a secondary offering (JamieD, 2011). So, going public
helps to generate a large sum of money for the company.
Additionally, by going public the company becomes more well
known and gains credibility. Even just by hearing about a
company going public raises awareness of the company and may
cause increased sales and profits. Google went public ten years
ago in 2004 and has seen a rise in their stock by 1,294%
(Russolillo, 2014). The benefits can be seen in many other
companies such as Apple, which has seen a rise in stock by
4,419.6%, Monster Beverage Corp. with a rise of 6,569.68% and
Keurig Green Mountain Inc. with a gain of 7,729.25%
(Russolillo, 2014). Each of these companies have gained great
benefits from going public, however there are some
disadvantages as every company does not benefit from going
public.
Disadvantages
The biggest disadvantage of holding an IPO and
becoming public is the cost. It can typically cost a company
thousands to millions of dollars to become public however; I
will cover each of the costs in detail later on. Another
disadvantage of holding an IPO is that it is very time
consuming. The whole process takes months to put together
everything needed from retaining a law firm to finding an
investment bank responsible for handling the underwriting. The
underwriters are accountable for setting the price of the stock as

well as lining up investors that will help make the IPO
successful on Wall Street. All of the time needed to line
everything up for the IPO can potentially distract business
leaders from running the company and be detrimental to their
growth. Additionally, once a company becomes public they
have less privacy and may have to operate under greater
scrutiny. They have to comply with the reporting requirements
under the Exchange Act of 1934 (Lewis & Kappes, 2015). This
alone can add to cost of being a public company. There is an
initial large cost generated by the preparation of the IPO and the
IPO itself but then there are maintenance costs as well. The
pressures to succeed are greater because the shareholders want
to see increased profits since they have a stake in the company.
So what are the main costs of going public?
The Cost of Going Public
There are many costs to going public such as the
preparation required before hand along with the costs associated
with the IPO. There are six categories of costs including gross
spread or underwriting discount, other direct expenses, indirect
expenses, abnormal returns, underpricing, and the green shoe
option (Ross & Westerfield & Jaffe, 2013). The gross spread
is, “The fraction of the gross proceeds of an underwritten
securities offering that is paid as compensation to the
underwriter of the offering” (Nasdaq, n.d.). The mean gross
fees underwriters take in the United States is 6.45% (Raghavan,
2010). At first glance this does not seem like a large percentage
but when an IPO is expected to bring in billions of dollars this
6.45% can mean companies are paying millions to the
underwriters to be able to go public. Some of the other direct
expenses include filing fees, legal fees and taxes (Ross &
Westerfield & Jaffe, 2013). Even if each of the individual fees
do not seem like a lot, they all add up to thousands if not
millions. It must not be forgotten that a large amount of time is
required to prepare everything for the IPO. This takes away
from the productivity of the company for a period of time.
Another cost of going public is abnormal returns. When a

company announces its intent to issue securities the price of the
stock typically drops 3-4% (Ross & Westerfield & Jaffe,
2013). However, financial research has shown that about 75%
of IPOs increase on their first day of trading with only 16%
falling (Jagerson, 2013). Even though less than the majority of
companies see a fall in their stock prices it is still a cost that
should be considered. Underpricing is another concern as a cost
to the company. Once the stocks are issued for the IPO the
prices typically rise. This is at a cost to the company because
that means that the stocks are being sold at a price less than it’s
worth. The last category of costs is called the Green Shoe
option. This allows the underwriters to buy additional shares to
cover overallotments. Most recently JP Morgan decided to
exercise this option when they purchased 3,333,333 newly
issued shares from the Tele Columbus company (telecompaper,
2015).
Going public requires a lot of thought and planning by a
company. There are many advantages and disadvantages to
having an initial public offering. Companies can gain a large
capital from the IPO but at the expense of a lot of different
costs. Going public can be detrimental to some companies
however, if planned correctly companies can reap great benefits
by selling stock in an initial public offering.
References
Jagerson, J. (Aug 2013). In How IPOS Work and What Can Go
Wrong. Retrieved Feb. 2, 2015 from
http://research.scottrade.com/public/knowledgecenter/knowhow
news/intheknow.asp?nlid=c2b0fa5353fb42b88fe3d6b52b2de7de
JamieD. (10 Feb. 2011). In Should Your Small Business Go
Public? Consider the Benefits and Risks of Becoming a Publicly
Traded Company. Retrieved Feb. 2, 2015 from
https://www.sba.gov/blogs/should-your-small-business-go-
public-consider-benefits-and-risks-becoming-publicly-traded
Lewis & Kappes. (2015). In The Advantages and Disadvantages

of Going Public. Retrieved Feb. 2, 2015 from http://www.lewis-
kappes.com/CM/FSDP/PracticeCenter/Securities/Securities--
Business-Focus.asp?focus=topic&id=3
Nasdaq. (n.d.). In Gross Spread. Retrieved Feb. 2, 2015 from
http://www.nasdaq.com/investing/glossary/g/gross-spread
Raghavan, A. (30 Dec. 2010). In High I.P.O. Fees Weigh on
U.S. Firms, Study Finds. Retrieved Feb. 2, 2015 from
http://dealbook.nytimes.com/2010/12/30/high-i-p-o-fees-weigh-
on-u-s-firms-study-finds/?_r=0
Ross, S. A. and Westerfield, R. W. and Jaffe, J. (2013).
Corporate finance. New York, NY: McGraw-Hill/Irwin.
Russolillo, S. (19 Aug. 2014). In Google’s IPO, 10 Years Later:
Just 10 Stocks Beat It. Retrieved Feb. 2, 2015 from
http://blogs.wsj.com/moneybeat/2014/08/19/googles-ipo-10-
years-later-just-10-stocks-beat-it/
Telecom. (2 Feb. 2015). In JP Morgan exercises greenshoe
option on Tele Columbus shares from
http://www.telecompaper.com/news/jp-morgan-exercises-
greenshoe-option-on-tele-columbus-shares--1062714
Bottom of Form
Topic #3: Raising Capital
In simple words, raising capital refers to arranging new capital
for the business. Whether you've been in business one week or
five years, an infusion of funds is always welcome
(Entrepreneur, n. d.). There are certain ways of raising capital
but a careful analysis is required to choose the most suitable
way. Generally, small businessmen like to invest their saved
money into their business but then what will happen if
businessman does not have sufficient amount of capital to invest
in his business? In this paper, we will study about different
ways by which capital can be raised or arranged.
Ways to Raise Capital
There are number of ways to raise capital for the business.

However, the choice of way depends upon number of factors
like growth and profitability of the business, choice of owner,
time period, form of business organization and more. Some of
the ways are discussed as under:
Past –Savings or Using own Funds: It is often seen that a new
businessman does not start his business entirely on the basis of
outside capital only. At first he collects his own saving and
raises some part from outside. Thus, investing savings is one of
the popular ways to raise capital which is adopted by most of
the businessman especially small scale. The main benefit using
this source is that the businessman will not be liable to pay any
interest and he will be free from pressure of repaying the funds.
Raising loans from Family and Relatives: This is the first option
which comes to mind, if a person does not have sufficient funds
to invest in a business. In 2010, 5% of U.S. adults polled said
they had provided funding to someone starting a business in the
past three years, according to a survey by the Global
Entrepreneurship Monitor, a research consortium which
includes Babson College (Gunn, 2011). Investors and other
lenders lend money on the basis of profitability of the business.
But the problem arises when the business is not working well.
In this case, businessman can convince his family members or
relative to lend the money.
Generally, both these options-using own funds and
raising loans from family and relatives are used by sole
proprietors and partnership firms because they have limited
opportunities of raising capital.
Loan from Angel Investors or Private Lenders: There are many
lenders in the market which lend their money at some specified
rate of interest. Taking loan from these people does not require
much legal formalities. The people who are in urgent need of
cash often visit these lenders. Further, generally they charge

higher rate of interest.
Raising Loans from Banks and Financial Institutions: A
businessman can also raise capital by taking loan from banks
and financial institutions. Of course, this depends on your credit
profile and the type of collateral you can offer up (Hendricks,
2014). In other words, it is the time when credit scores can be
utilized. To take loan from bank, one needs to have a good
business proposal which a bank likes and can offer a loan. Such
loans are also offered by governments of many countries to
businessmen who want to start something on their own. Many
banks also offer such business loans to forthcoming business
entrepreneurs. Another way is to take a personal loan from a
bank which will have comparatively lower interest rates than a
bank loan. While raising money from bank, one has to mortgage
his property. In case non-recovery of loan, the property is
ceased by the bank and taken by the banks.
Raising Capital through Joint Ventures: If a business can
demonstrate that it has a strong reputation and a potential
quantifiable profit, then it will be easier to arrange capital
through joint venture. It is necessary to analyze whether the
venture capital firm shares the same goals or not. Generally,
ventures do not invest in new business, along with the
companies they also invest in individuals too. Further, a decent
place to search for while searching for approaches to raise
capital is your office – your own representatives. In the event
that you have a dedicated workforce that truly has confidence in
the organizational objectives, then you may even find a
representative who would help you financing and turn into a
potential investor.
Issue of Shares: It is widely used option for raising funds for
companies. In this, companies sell shares to obtain money.
“Selling securities means that all purchasers become part
owners of the company and have equity in the company. They,

like the founder are interested in the survival and profitability
of the company” (Caribbean Community Secretariat, 2011). For
instance, if a person purchased 100 shares of $100 each
($10,000), then he will be owner of that part in the company. It
means his liability will be limited for that amount only.
Further, these shares are transferable from one person to
another. There are two types of shares; they are equity and
preference. Equity shareholders are the owners of the company
and can participate in the operations of the business where
preference shareholders do not have right to participate in the
operations of the business and get dividend at some fixed
percentage. “Capital equity is more risky than any other type of
funding. There are tons of legal points that surround this
project, especially if it’s for budding business enterprises
“(Venture Giant, 2011).
Apart from these, companies do have opportunity to raise
capital by issuing debentures, bonds and more. All in all, it can
be said that raising capital is one of the very important aspect of
the business. Further it is equally important for the businessman
to invest the raised capital in a best manner so that business can
get maximum returns. So before you act, deliberate on the ways
to raise capital best suited for your business, make sure you
budget right, adhere to the timelines, analyze the method of
investment, formulate a backup plan, buffer for contingencies
and garner more value from your investment (Venture Giant,
2011).
References:
Caribbean Community (CARICOM) Secretariat (2011). How
does a company raise capital? Retrieved from
http://www.caricom.org/jsp/community/regional_issues/compan
y_raise_v2.jsp?menu=community

Entrepreneur (n. d.). How to raise money for your business.
Retrieved from
http://www.entrepreneur.com/howto/raisemoney/
Gunn, E. P. (2011, May 24). Five Tips for Asking Friends and
Family for Funding. Retrieved from Entrepreneur
http://www.entrepreneur.com/article/219693
Hendricks, D. (2014, July 16). The 5 best ways to raise capital.
Forbes Magazine. Retrieved from
http://www.forbes.com/sites/drewhendricks/2014/07/16/the-5-
best-ways-to-raise-capital/
Venture Giant (2011). Different ways to raise capital. Retrieved
from
http://www.raise-capital.co.uk/ways-to-raise-capital.php
Topic 4: Inventory Management
Inventory management is a process by which companies manage
their inflow and outflow of materials and products. There are
numerous inventory management systems that are available, and
depending on the type of business, one or more system may be
utilized. These systems create a method of communication with
suppliers, allow for the creation of invoices, purchase orders,
receipts, and related accounting (Guillen, 2007).
The most important aspect of inventory management is the
relationship with suppliers. Having reliable suppliers that have
good communication and are willing to adjust when necessary
to the needs of the business is important. Many suppliers can
also provide assistance in managing inventory if they have

access to a company’s inventory information. Often times, the
supplier can adjust purchases based upon trends and the needs
of the company which prevents the company from situations
where there is too little or too much product. When a company
produces products or services that require several suppliers, it is
necessary that the inventory management system that is in place
coordinates all the materials on hand and in transit so that all
the materials required for operation is balanced (Guillen, 2007).
Since suppliers are likely to deliver at different times, it is
necessary to create “lead time reports” so that orders are placed
in a proper time frame where deliveries are in sync.
In addition to ensuring that there is sufficient inventory for
operation, the company must also adjust for times when
inventory is too high. Holding too much inventory increases
overhead costs and decreases available cash the company may
need to pay their obligations. Therefore, managing inventory
effectively helps companies keep their budgets on track and
enables them to efficiently manage their operating capital
(Buzacott, 2004). In order to do so, companies must have a good
measure of how often their products sell. This gives the
company and the suppliers estimations of inventory needs and
can adjust based upon trends. Monitoring turnaround times from
production to customer delivery and payment can provide
information on how long cash will be tied up and when new
product will be required.
Strong inventory management is a key characteristic of
successful businesses who's operations require continuous
supply of product. Keeping just the minimum inventories
necessary allows companies to free up cash for other
opportunities like purchasing equipment or making new
investments (Rein, 2010). The lower the inventory on hand at
any given time, the lower the carrying costs a company absorbs
(Rein, 2010). Carrying costs include things like storing
materials, insurance, interest costs associated with purchasing
the product. Striking a balance between keeping inventory costs
low and efficiently meeting demands for your customers is key.

Cooperation between financial managers, inventory managers,
and sales force is beneficial to monitoring how well this lean
practice is being observed (Guillen, 2007). Ideal inventory
management software is one that can track trends in movement
of product as well as bridge the gap between inventory budgets
and the overall financial picture of the business (Buzacott,
2004).
When implementing an inventory management system, a
company should consider a method that takes into account the
financial state of the business as well as the operational needs.
There are models that incorporate “asset-based financing” into
production decisions (Buzacott, 2004). Instead of setting pre-
determined budgets for inventory, like traditional systems, there
are models now that function to monitor “available cash in each
period as a function of assets and liabilities” that can be
continually updated in accordance with trends in production
(Buzacott, 2004). Some of these newer systems also adjust for
different interest rates on cash and loans, which provides a more
accurate financial picture since the cost of cash financed may be
significantly higher than using cash on hand. Management
systems like these that consider both production and financing
as a coordinated decision making process are particularly
valuable to new businesses where growth is restricted by limited
capital and hindered by loan financing (Rein, 2010). Companies
requiring financing for purchase of inventory will benefit from
a model that factors in their fluctuations in cash flow to their
inventory management practices since lenders may evaluate
their practices when determining financing (Rein, 2010). When
companies use inventory as collateral for financing, this adds
another layer of difficulty to combining financial position to
inventory accounting. Balance sheets are often not a true
reflection of available cash in these cases. Therefore, it is very
easy to get into trouble with lenders. A company’s inventory
management system is only reliable if its underlying data
reporting is reliable (Rein, 2010).

Businesses can end up with their operating decisions limited by
their lack of ability to access enough loans. For example, a
bookstore chain had to return a large number of books -
approximately $25M in inventory in addition to it’s regular
returns in an attempt to improve inventory levels and liquidity.
The bookstore was having liquidity issues because of a
stipulation from it’s lender that restricted borrowing to $25M if
the company’s net worth were under $70M. The liquidity issues
and the poor performance of it’s newer stores had forced the
company to halt expansion plans (Buzacott, 2004). This
example illustrates just how the amount of money a company
can access to purchase inventory (asset-based financing) is
linked to inventory decisions, and these decisions are limited by
available funds. Therefore, there are direct financial constraints
that factor into making inventory management decisions.
Though there has been a long history of models that address
business finance and operational management independently,
there has been suggestions of new models that focus on the
relationship between business finance and production through
systems that control inventory flows and cash flows together
(Buzacott, 2004). This seems to be a model that should be
further explored to enhance company’s ability to utilize cash
flow more successfully.
References:
Buzacott, J. A., & Zhang, R. Q. (2004). Inventory management
with asset-based financing. Management Science, 50(9), 1274-
1292.
Guillen, G., Badell, M., & Puigjaner, L. (2007). A holistic
framework for short-term supply chain management integrating
production and corporate financial planning. International
Journal of Production Economics, 106(1), 288-306.
Rein, Howard,C.P.A., C.F.E., & Costello, J., C.P.A. (2010).
How do your borrowers' inventory practices stack up. The
Secured Lender, 66(1), 34-36. Retrieved from

Topic 5: Credit Policy
In managing a business it is a good idea to have a
policy on almost all aspects of what goes on. Of course in the
real world not all situations will fit a policy, but hopefully the
policy can be written to fit the needs of the common situations.
One of the policies that need to be addressed is a credit policy.
When writing a credit policy the first thing a firm needs to
decide is whether or not to offer its customers credit, the easiest
policy being to not offer credit. If the firm decides to offer
credit the next three things it needs to address is terms of sale,
credit analysis, and collection policy.
The terms of sale portion of the credit policy would
address whether or not a firm accepts credit, the credit period,
cash discounts, discount period, and the type of credit
instrument. The credit period would be the amount of time until
the balance is due. The cash discount would be an amount of the
total amount owed if the customer paid before the due date. The
time the customer has to pay this amount with the discount
would be the discount period. The credit instrument would be
the document that secured the customer to the amount owing. It
would usually be some time of document that the customer
agrees to sign that makes them liable for the amount owing.
Once a firm has the terms of sale decided upon they could offer
credit to any of its customers.
The next choice the firm would have to make would be
to decide on how it will handle its credit analysis. For example
an individual getting a credit card or a loan usually has to have
a somewhat good credit score. As firms obviously want to
receive its revenues it would not want to extend credit to those
that would not be likely to pay it back. A firm could decide to
run a credit check on each of its customers that request a line of
credit. The firm could also use a number of other devices and
procedures to calculate the probability of repayment. Some

firms may keep it simple and only extend credit to customers
who have purchased from the firm for a year or more. Other
firms may have more drawn out and detailed procedures for
credit analysis.
The collection policy is pretty straightforward in that it
is the policy the firm has on how it will collect the cash that is
owed. If a customer’s cash payment is overdue how will the
firm go about collecting the cash? The firm could choose to
charge a service fee or interest rate on amounts overdue. They
could also have a policy for how often to call a customer that is
past due. Lastly a firm could choose to send all overdue credit
to a collections agency.
The important thing to remember when thinking about
offering a credit policy is that the firm takes on the liability of
its own revenue; the book refers to this as an investment in
receivables. Too much investment in receivable could lead to
the firm not having enough cash to meet its expenses. A
company could have a million dollars in net income, but could
still go under if that entire amount was in accounts receivables.
That is why it is important for a firm to evaluate what kind of
risks it can take when extending credit to its customers.
Deciding on what credit policy to put into place
depends upon the specific firm and its needs. Frederick Scherr
in advanced Credit policy states “telling analysts to "maximize
sales and minimize bad debt" is not good credit policy because
these are conflicting objectives and there is a tradeoff between
the two.” (Scherr, 2011) These could be conflicting objectives
because the people you could be selling might not pay it back.
A furniture store could sell out the entire store if they offered
credit to anyone, but if they did do that it might become
unlikely that they would actually see any cash from those sales.
The furniture store would only end up incurring more expenses
trying to collect from people they should not have loaned to in

the first place.
Credit policies are difficult to put into place. It can be
complicated to figure out the needs of the firm and update
policies when those needs change. What kind of policy needs to
be put in place might seem like commonsense, but there can be
complicated nuances. In an article on effective credit policies it
states “Fully 85% of credit departments either don't have a
written credit policy or haven't revised their policy within the
past three years.” (CRF Experts, 2005) This just goes to show
that a lot of businesses are unsure of the best policy to have and
may be suffering because of it. If a policy is too strict the
business may be missing out on potential sales. If the policy is
too lax the business could be incurring even greater cost
through collection.
In an article by Dev Strischek he recommends
differentiating credit policy and procedure. What he means is
that the policy addresses issues in a broad sense. They are put
into place with the ideal client in mind. It explains what the
rules are for issuing credit. A procedure on the other hand is the
step by step instructions on what to do with a customer that is
given or asks for credit. Until the procedures and policy are in
order it would be very risky for a firm to offer credit to its
customers.
References

CRF expert outlines essentials of writing an effective credit
policy. (2005). IOMA's Report on Managing Credit, Receivables
& Collections, 05(09), 1-1,6+. Retrieved from
Ross, S. A., Westerfield, W. R., & Jaffe, J. (2013). Corporate
Finance (10th ed.). New York: McGraw-Hill/Irwin.
Scherr, F. (2011). Advanced credit policy. Business Credit,
113(2), 4-5. Retrieved from
Strischek, D. (2008). Writing a credit policy much to do about
something. The RMA Journal, 90(5), 60-62,64-65,9. Retrieved
from

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