The document discusses various aspects of credit management and control, including:
1. Liquidity and external methods to improve liquidity such as credit insurance, factoring, and invoice discounting.
2. The credit control process and sources of information on customers both internally and externally.
3. Granting credit, setting up customer accounts, and factors to consider such as ownership, overseas customers, and sales policies.
4. Additional topics covered include discounts, credit insurance, legal considerations around contracts, remedies for breach of contract, and terminology.
2. Introduction to Credit
Management
Liquidity
How easily can a person or an
organisation raise cash to meet
immediate, or short term
liabilities.
2
3. External methods of
improving liquidity
Credit insurance – against risk of non payment
Factoring – money lent against invoices with
factoring company taking over the sales ledger
Invoice discounting – money lent against
invoices but sales ledger remains in the
company’s control
3
5. Information on
Customers
External
Bank references
Supplier (trade)references
Credit circles – businesses in the same business
Credit rating agencies – Dun & Bradstreet,
Experian, Equifax
Accounts filed at Companies House
Official publications
5
6. Information on
Customers
Internal
Conversations and emails
Records of meetings, visits by employees of the
organisation
The company should have a Credit Control
Policies and procedures document to hand
setting out clearly the criteria for assessing and
the granting of credit together with details on
how to chase up debts.
6
7. Activities
This now finishes chapter 1 of the
text book.
Can you please complete the
activities starting on page 17
7
8. Financial Analysis of
customer accounts
This involves calculation of and use of the
following financial ratios:
Profitability
Liquidity
Use of Resources
Financial Position
These have been studied earlier in the course and
will not be taught again.
Work Through the case study on page 25 Firth
Electronics Credit Assessment Procedures
8
9. Credit Scoring
Numerical values given to the performance
indicators calculated the total of which indicates
the level of credit risk.
High score - LOW RISK
Low score - HIGH RISK
See page 28 for example of credit rating system
Work through the case study on page 30
Chapter 2 has now been completed
Work through the activities from page 36
9
10. Grant Credit, Set Up
Customer Accounts
As well as calculating the credit rating system for
a company the following factors may be taken
into consideration:
Ownership of the company – BBC
Overseas company – high risk?
Insufficient information – new business
Sales policy – tension between
sales staff and
credit control staff
10
11. Discounts
High interest rates – discount is attractive
Low interest rates – discount is less attractive
Annual equivalent cost of offering a discount
See formula on page 49 and worked example on
page 50
Interest for late payment
Retention of title
11
12. Credit Insurance - UK
Specialist insurance companies will offer cover
for cash lost because of bad debt. Options
include
Whole turnover insurance – around 90% coverage
Key account – up to 40 customers with up to
100% coverage
Single account insurance – 100% cover
12
13. Credit Insurance
Abroad
Export Credit Insurance
Available cover from private insurance
organisations for companies supplying goods
and services on credit to overseas companies.
Coverage will include
Credit risk
Political risk
This covers chapter 3 of the book
Please complete the activities at the back of the
book
13
14. Legal Considerations
Contract
This is a legally binding agreement which is
enforceable by law
Invitation to treat
Essential characteristics of a contract are:
Offer and Acceptance - are an agreement
Intention to create legal relations
Consideration – exchange something lo value
14
15. Breach of Contract
Terms in a contract must be fulfilled as part of
the agreement. If not this is a breach of contract.
Express terms – explicit, stated and binding on
all parties
Conditions – fundamental terms if broken can
sue for damages
Warranties – minor terms if broken can lead to
action for damages, the contract remains in force
Implied terms – implied by custom or law but not
stated in contract i.e. Satisfactory quality
15
16. More Terminology
Void Contract – cannot be enforced by law i.e.
Carry out an illegal act
Voidable Contract – a valid contract that can be
broken i.e. Adult and a minor
Unenforceable contract – a valid contract but if
one party withdraws the law will not enforce them
to meet the requirements.
16
17. Remedies for Breach of
Contract
Action for damages – loss suffered by the breach
Action for price – to recover the amount of the
bad debt
Specific performance – force the other party to
complete the contract
Retention of title – retain ownership of the goods
17