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Introduction
•Defination & Meaning Of Credit Policy
•Objective Of Credit Policy
•Goals Of Credit Policy
•Credit Policy Variables
•Collection Policies AND Procedures
•Collection Responsibility
•Customer Rating
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A Credit Policy is a document providing clear, written
guidelines that set
(1) the terms and conditions for supplying goods or
services on credit,
(2) customer qualification criteria,
(3) procedures for making collections
(4) steps to be taken in case of customer delinquency.”
A firm's credit policy determines the
amount of risk a firm is wiling to
undertake in its sales activities.
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The objective of credit policy are:
a) To maintain optimum level of investment in
receivables;
b) To keep down the average collection period;
c) To obtain the optimum level of sales.
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If the credit policy is liberal and lenient, receivables
will be at a higher level as compared to, in case of a
rigid policy.
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There are three steps in credit
policy.
1. First, the credit policy is to
be formulated by deciding
credit conditions, terms and
standards.
2. Secondly, the credit policy
is to be executed.
3. Thirdly, the credit policy is
to be evaluated by collecting
and analyzing information.
Goals of Credit Policy
1) Achieving growth in sales
2) Increasing profits
3) Maintaining liquidity
4) Meeting competition
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Credit Policy Variables
The financial manager must consider the variables
that influence the credit policy of a firm.
The following are important variables of credit policy:
1) Credit Standard;
2) Credit Period;
3) Cash Discount; and
4) Collection Efforts.
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Effectively managing accounts receivable is about ensuring
consistency in your credit and collection processes. The
secret to this consistency is designing and actively
implementing a credit and collection policy. Properly
constructed and applied, this policy has the power to
breathe new life into your entire credit-to-cash process
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Collection Policies & Procedures
On-time payments keep the business cycle flowing and make it
possible for a business to meet operational and short-term
debt obligations.
Strict collection policies and procedures that encourage
customers to pay can result in fewer bad debts, better cash
flows and an increase in business profitability.
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Systematize Collection Procedures
The section should include:
• When to contact a customer.
• How to contact a customer.
• When to place an account on credit hold.
• How to resolve disputes, deductions, etc.
• When to turn over delinquent accounts to
an outside collection agency.
• When to write an account off to bad debt
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Handling the aged portion of your organization's accounts receivable
portfolio requires planned action that reflects the mission and goals of
the credit department. Clearly written policy on important collection
procedures will ensure consistent and effective management that
contributes to realizing those goals
Collections procedures
can not only outline steps
to collecting on delinquent
accounts but also include
steps to preventing
accounts from becoming
delinquent.
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Collection Responsibility:
Depending upon the size or particular organization of the
company, the credit and collection function is assigned to
one of the following staff members:
• Credit manager
• Accounting manager
• Accounts receivable manager
• Accounts receivable staff credit
• Collections staff
These staff members will be working under the direction of
the owner of the company, controller, director of finance,
director of credit or CFO.
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Customer ratings can be categorized as follows:
A or Prime:
Almost always prompt, therefore may require less monitoring, but should
depend upon company size and/or balance owed.
B or Good:
Usually prompt, collection can also be minimal.
C or Limited:
Requires regular monitoring of balance, credit line and any past dues.
D or Marginal:
Requires constant scrutiny, often high maintenance accounts,
terms are limited
E or COD Only:
No terms for whatever reason determined by credit.
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References
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• https://www.abc-amega.com/articles/credit-management/developing-a-credit-
policy#:~:text=A%20well%2Dwritten%2C%20comprehensive%20credit,the%2
0credit%20and%20sales%20departments.
• https://www.dnb.com/resources/how-to-write-a-business-credit-policy.html
• https://www.levelset.com/blog/what-is-a-credit-policy-and-how-do-i-make-a-
good-one/
• https://www.brookings.edu/bpea-articles/corporate-debt-overhang-and-credit-
policy/
• Class PPT