it will show you the simple explanation of accounts receivable and inventory management

1. a. Credit and Collection Policies
b. Analyzing credit applicant
c. Inventory management and control
Accounts Receivable and Inventory
Management

2. What is Accounts Receivable or A/R?
 All firms by their very nature are involved in
selling either goods or services. Although
some of these sales will be for cash, the large
portion will involved credit. Whenever a sale is
made on credit, it increases the firm’s
accounts receivable.
 The more that is sold on credit, the higher the
proportion of assets that are tied up in
accounts receivable.
 On the other hand, firms can use credit terms
as a marketing tool to attract new customers (
or to keep current customers from defecting to

3. Effective Accounts Receivable
Management
Effectively managing the credit and
accounts receivable process
involves cooperation among
SALES, CUSTOMER SERVICE,
FINANCE, and ACCOUNTING
STAFFS. The key areas of
concerns involve:

4. 1. Setting and communicating the company’s
general credit and collection policy;
2. Determining who is granted credit and how much
credit is allowed for each customer;
3. Managing the billing and collection process in
timely and accurate manner;
4. Applying payments and updating the accounts
receivable ledger;
5. Monitoring accounts receivable on both an
individual and aggregate basis; and
6. Following up on overdue accounts and initiating
collection procedures, if required.

5. Analyzing the credit applicant
Credit analysis is the process of evaluating an
applicant’s loan request or a corporation’s debt
issue in order to determine the likelihood that the
borrower will live up to his/her obligations.
In other words, credit analysis is the method by
which one calculates the creditworthiness of an
individual or organization.

6. 3 Steps followed by banks for credit
analysis
1. Collecting information about the applicant:
The first step in credit analysis is to collect
information of the applicant regarding his/her past
record of loan repayment, character, individual and
organizational reputation, financial solvency, ability
to utilize the load(if granted) etc.
Collecting information about the business for which
loan is required: The loan officer should know the
purpose of the loan, the amount of the loan and if it
is possible to implement the project by that amount.

7. Collecting information about the recovery
process: The loan officer should collect information
about the sources from which the borrower would
repay the loan.
Collecting additional information if necessary:
When the loan under consideration is for a large
amount a bank may find it necessary to gather
additional information like the overall business
activities in the economy, probable political and
economic condition of the country, efficiency and
candidness of the management team, likely effect of
local and international competition on the project
etc.

8. 2. Steps During the Information Analysis Stage
Analyzing the accuracy of information: The
information given in and along with the application
are analyzed to judge their accuracy.
Analyzing the financial ability of the applicant:
In this stage, the financial ability of the applicant is
taken into consideration. The financial solvency of
the applicant and his skill and capability are
important factors in this regard.
Analyzing the effectiveness of the project: One
aspect of credit analysis is the analysis of quality,
purpose, and future prospect of the project for
which loan has been applied. The banker will be at
ease to grant loans if the project is productive,
expandable, and of course profitable.

9. Analyzing the possibility of loan repayment: The
analyst looks into what effect the proposed loan will
have on increasing the liquidity and income of the
applicant.
3.Decision Making Stage
Depending on the analysis the analyst identifies
and measures the credit risk associated with a loan
application and determines whether the level of risk
inherent is acceptable or not.
If the analyst is satisfied that the risk is acceptable
and is convinced that the loan will be repaid, he/she
prepares and submits a recommendation to the
appropriate loan approval authority for sanctioning
the loan.

10. Five C’s of Credit
Applying five C’s does not speed up collection
of accounts, it lowers the probability of default.
The five C’s defined as follows
1. CHARACTER refers to the applicant’s
record of meeting past obligation. The lender
would consider the applicant’s payment
history, as well as any pending or resolved
legal judgement against the applicant.
2. CAPACITY is the applicant's ability to repay
the requested credit. The lender typically
assesses the applicants capacity by using
financial statement analysis focused on cash
flows available to service debt obligation.

11. 3. CAPITAL refers to the financial strength of
the applicant as reflected byits capital
structure. The lender frequently uses analysis of
the applicants debt relative to equity and its
profitability ratios to assess its capital. The
analysis of capital determines whether the
applicant has sufficient equity to survive a
business downturn.
4. COLLATERAL is the assets the applicant has
available for securing the credit. In general, the
more valuable and more marketable these
assets are, the more credit lenders will extend.
However, trade credits are rarely secured loans.
Therefore, collateral is not the primary
consideration in deciding to grant credit but
serves to stregthen the creditworthiness of a

12. 5. CONDITIONS refer to current general and
industry specific economic condition. It also
considers any unique conditions surrounding a
specific transaction. For example, a firm that
has excess inventory of a given item may be
willing to accept a lower pricenor extend more
attractive credit terms in order to sell the item.

13. Collection Policy
A company must determine what its COLLECTION
POLICY will be and how it will be implemented. As
in the case of the credit standards and terms, the
approach to collections may be a function of the
industry and the competetive environment. For
many overdue or delingquent accounts, a reminder,
form letter, telephone call, or a visit may facilitate
customer payment. At a minimum, the company
should generally suspend further sales until the
deliquent account is brught current. When these
action fail to generate customer payment, it may be
necessary to negotiate with the customer for past
due amounts and report the customer to credit

14. It is possible that the goods were sold with lien
attached, collateral was pledge against the
account, or additional corporate or personal
guarantees were given. In these cases, the
company should utilize these options for obtaining
payment. Generally the last resort, the account can
be turned over to a collection agency or referred to
an attorney for direct legal action.

15. Inventory Management and
Control
Inventory is an important current asset that for the
typical manufacturer represents between 10% and
20% of total assets-a sizable investment. It is made
up of the firm's stock of raw materials, work in
process, and finished goods. Although inventory
management is the responsibility of production and
operations manager, given its large investment, it is
a major concern of the financial manager.

16. Techniques in Controlling
Inventory
Although inventory control is production/operations
management responsibility, the financial manager
serves as a watchdog over this activity. This
oversight is a quite important given the firms typical
sizable investment in inventory. A variety of
techniques, such as ABC system, the basic
economic order quantity (EOQ) model, reorder
points and safety stock, material requirements
planning (MRP) and the just in time (JIT) system,
are commonly used to control inventory.A good
financial manager should understand them.

17. REFERENCES
Financial Management by Scott B. Smart and
William L. Megginson
Financial Management by Geoffrey Knott 4th
Edition
https://iedunote.com/credit-analysis-steps