Credit in the Business World


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Topics include the historical development of credit, primary reasons credit is offered, the important elements of credit, the different types of credit, etc.

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Credit in the Business World

  1. 1. Credit in the Business World Chapter One NACM
  2. 2. Learning Objectives <ul><li>The historical development of credit </li></ul><ul><li>The primary reasons credit is offered </li></ul><ul><li>The important elements of credit </li></ul><ul><li>The credit process and where credit fits in a business cycle </li></ul><ul><li>The different types of credit </li></ul><ul><li>The Federal Reserve System and its impact on the economy </li></ul>
  3. 3. Primary Reasons to Offer Credit <ul><li>Increase Sales </li></ul><ul><li>Competition </li></ul><ul><li>Promotion </li></ul><ul><li>Credit Availability </li></ul><ul><li>Convenience </li></ul><ul><li>Demand </li></ul><ul><li>Price </li></ul>
  4. 4. Important Elements of Credit <ul><li>Risk of Nonpayment </li></ul><ul><li>Timing </li></ul><ul><li>Security </li></ul><ul><li>Extra Costs </li></ul><ul><li>Legal Aspects </li></ul><ul><li>Economic Influences </li></ul>
  5. 5. The Five Cs of Credit <ul><li>Character </li></ul><ul><li>Capacity </li></ul><ul><li>Capital </li></ul><ul><li>Conditions </li></ul><ul><li>Collateral </li></ul>
  6. 6. Credit Transaction
  7. 7. Types of Credit <ul><li>Public credit </li></ul><ul><li>Private credit </li></ul><ul><ul><li>Investment credit </li></ul></ul><ul><ul><li>Consumer credit </li></ul></ul><ul><ul><li>Agricultural credit </li></ul></ul><ul><ul><li>Business credit </li></ul></ul><ul><ul><li>Bank credit </li></ul></ul>
  8. 8. Business Credit <ul><li>Important Characteristics </li></ul><ul><li>Unsecured Open-Account Credit </li></ul><ul><li>Secured Credit </li></ul>
  9. 9. The Federal Reserve and the U.S. Payment System <ul><li>Federal Reserve Banks </li></ul><ul><li>Federal Districts and Branches </li></ul><ul><li>Demand for Reserves </li></ul><ul><li>Changing the Reserve Requirement </li></ul><ul><li>Supply of Reserves </li></ul>
  10. 10. Role of the Fed <ul><li>Administrator </li></ul><ul><li>Banker </li></ul><ul><li>Controller </li></ul><ul><li>Guardian </li></ul><ul><li>Lender </li></ul><ul><li>Regulator </li></ul><ul><ul><li>Reserve requirements </li></ul></ul><ul><ul><li>Discount rate </li></ul></ul><ul><ul><li>Open market operations </li></ul></ul>
  11. 11. Check Processing <ul><li>The MICR line contains the following information: </li></ul><ul><ul><li>Routing number </li></ul></ul><ul><ul><li>Payor account number </li></ul></ul><ul><ul><li>Sequence number </li></ul></ul><ul><ul><li>Encoded check amount </li></ul></ul>
  12. 12. Check Clearing for the 21st Century Act (Check 21) <ul><li>Effects of Check 21: </li></ul><ul><ul><li>Customers no longer receive cancelled checks with their monthly bank statements </li></ul></ul><ul><ul><li>Checks clear faster </li></ul></ul><ul><ul><li>Fraudulent checks are identified earlier as a result of the speed of check processing </li></ul></ul><ul><ul><li>Availability float time is reduced </li></ul></ul>
  13. 13. Electronic Funds Transfer <ul><li>Fedwire </li></ul><ul><li>Automated Clearing House (ACH) </li></ul><ul><li>The Clearing House Interbank Payments System (CHIPS) </li></ul>
  14. 14. Credit in the Company Chapter Two NACM
  15. 15. Learning Objectives <ul><li>Why credit is a function of business </li></ul><ul><li>The strategic role of credit </li></ul><ul><li>Where credit typically fits within the business organization </li></ul><ul><li>The role of credit in financial management </li></ul><ul><li>The role of credit in the operating cycle </li></ul><ul><li>The goals and core activities of a credit department </li></ul>
  16. 16. Credit in the Company <ul><li>Credit as a Business Function </li></ul><ul><li>The Strategic Role of Credit </li></ul><ul><li>Credit Within the Business Organization </li></ul><ul><li>The Role of Credit in Financial Management </li></ul><ul><li>Credit and the Operating Cycle </li></ul><ul><li>The Core Activities of the Credit Department </li></ul><ul><li>The Credit Department Department’s Goals </li></ul><ul><li>The Credit Department’s Multi-Functional Role </li></ul><ul><li>The Credit/Sales Relationship </li></ul>
  17. 17. Credit in the Company (continued) <ul><li>The Credit/Purchasing Relationship </li></ul><ul><li>The Credit/Manufacturing Relationship </li></ul><ul><li>The Credit/Information Systems Relationship </li></ul><ul><li>Credit Department Relationships with Other Departments </li></ul><ul><li>Organizing the Credit Department </li></ul><ul><li>Day-To-Day Administration </li></ul><ul><li>Lockbox Operations </li></ul><ul><li>Collecting Accounts Receivable </li></ul><ul><li>Control and Follow-Up </li></ul>
  18. 18. The Strategic Role of Credit <ul><li>Amassing Information </li></ul><ul><li>Credit Analysis </li></ul><ul><li>Collection </li></ul><ul><li>Cash Application </li></ul><ul><li>Deduction Resolution </li></ul>
  19. 19. Credit Within the Business Organization <ul><li>Management of Accounts Receivable </li></ul><ul><li>Net Working Capital </li></ul><ul><li>Finance Related Functions </li></ul>
  20. 20. The Role of Credit in Financial Management <ul><li>Financial Management: </li></ul><ul><ul><li>Obtain cash from investors </li></ul></ul><ul><ul><li>Use that cash to buy productive assets </li></ul></ul><ul><ul><li>Operate those assets to produce additional cash </li></ul></ul><ul><ul><li>Return cash to the business and/or investors </li></ul></ul>
  21. 21. Credit and the Operating Cycle <ul><li>Collection System </li></ul><ul><li>Owner/Customer Application </li></ul><ul><li>Initial Order Request Logged in or Input into a Computer System </li></ul><ul><li>Credit Department Reviews Order and Customer </li></ul><ul><li>Credit Investigation </li></ul><ul><li>Credit Decision: Order Approved </li></ul><ul><li>Sales Recorded - Invoice and Receivable Created - Order Shipped </li></ul><ul><li>Payment Received </li></ul><ul><li>Cash Application </li></ul>
  22. 22. The Core Activities of the Credit Department <ul><li>Customer and credit analysis </li></ul><ul><li>Developing credit policy </li></ul><ul><li>Managing the collection function </li></ul><ul><li>Setting credit availability thresholds </li></ul><ul><li>Management reporting </li></ul>
  23. 23. The Credit Department’s Goals <ul><li>It is the responsibility of the manager of the credit department to plan and direct the activities of the credit function within the guidelines of company policy. </li></ul>
  24. 24. Credit Department Relationships with Other Departments <ul><li>Accounting </li></ul><ul><li>Legal </li></ul><ul><li>Engineering </li></ul><ul><li>Traffic/Shipping </li></ul><ul><li>Personnel </li></ul>
  25. 25. Day-To-Day Administration <ul><li>The major functions performed daily by the credit department include: </li></ul><ul><li>The credit approval process </li></ul><ul><li>The establishment of an account </li></ul><ul><li>Order processing </li></ul><ul><li>Accounts receivable administration </li></ul><ul><li>Collections and adjustments </li></ul><ul><li>Control and follow-through </li></ul>
  26. 26. Lockbox Operations <ul><li>A lockbox is a check collection system operated by a bank. </li></ul><ul><li>Wholesale lockboxes </li></ul><ul><li>Retail lockboxes </li></ul><ul><li>Economic benefits </li></ul><ul><ul><li>Mail time </li></ul></ul><ul><ul><li>Processing time </li></ul></ul><ul><ul><li>Availability time </li></ul></ul>
  27. 27. Collecting Accounts Receivable <ul><li>A collection effort is needed when payment is not received for invoices when they are due. </li></ul><ul><li>Letters </li></ul><ul><li>Phone calls </li></ul><ul><li>E-mail </li></ul><ul><li>Visits </li></ul><ul><li>Third-party collections </li></ul>
  28. 28. Organizing the Credit Department Chapter Three NACM
  29. 29. Learning Objectives <ul><li>Organizational options for credit </li></ul><ul><li>The importance of ongoing training </li></ul>
  30. 30. Organizing the Credit Department <ul><li>How a Credit Department is Organized </li></ul><ul><li>Centralization and Decentralization </li></ul><ul><li>Types of Credit Organization </li></ul><ul><li>Management Responsibilities </li></ul><ul><li>Business Organization </li></ul>
  31. 31. Types of Credit Organization <ul><li>Centralized - Credit Controlled and Administered at a Headquarters Office </li></ul><ul><li>Decentralized - Credit Controlled at Headquarters but Administered from Decentralized Locations </li></ul><ul><li>Decentralized - Credit Controlled and Administered from Decentralized Locations with a Staff Office at Headquarters </li></ul>
  32. 32. Management Responsibilities <ul><li>Planning </li></ul><ul><li>Organizing </li></ul><ul><li>Staffing </li></ul><ul><li>Leadership </li></ul><ul><li>Control </li></ul>
  33. 33. End of Session 1