Credit and Accounts Receivable Management

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Credit and Accounts Receivable Management
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Responsibility for Credit and A/R

• Credit Manager
• - credit granting standards
• - terms of credit extensions
• - setting credit limits
• A/R Management
• - billing and payment processing
• - monitoring payment patterns
• - collecting delinquent accounts

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Importance of A/R

• Cash Flow Timing
• - credit and collection policies affect the
  timing of cash inflows
• Information
• - tracking payments
• - forecasting
• - collections processing and cash application

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Reasons for Offering Credit

• Increase Market Share
• Competition
• Promotional Reasons
• Facilitate Sales
• Convenience
• Profit (Interest)

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Costs of Offering Credit

• A/R Carrying Costs
• Credit Department Employee Costs
• Credit Evaluation
• Discounts
• Collection Expenses
• Bad Debts
• Insurance
• Administrative
• Monitoring and Investigating Payment Discrepancies

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Information Sources

• Internal
• - credit application
• - firms own records
• External
• - financial statements
• - references
• - banks
• - agencies (Experian, Duff Phelps)

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Five Cs of Credit

• Character
• Capacity (Income)
• Capital (Savings)
• Collateral (Assets)
• Conditions

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Business Credit Analysis

• Ratios
• Credit Scoring

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Consumer Credit Analysis

• Credit Scoring

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Forms of Credit Extension

• Open Account- most common in U.S.
• Installment Credit- automobile purchase
• Revolving Credit- account is considered current
  if the credit outstanding is lower than a set
  amount
• Letter of Credit- bank guarantees a customers
  payment

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Common Terms of Sale

• Cash Before Delivery- very safe for seller
• Cash on Delivery- better for the buyer
• Cash Terms- 7 to 10 days
• Discount Terms- 2/10 net 30
• Monthly Billing- similar to installment payments
• Draft/Bill of Lading- documentary collection
• Seasonal Dating- based on the buyers selling
  season
• Consignment- title of goods is with the seller
  until sold

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Annualized Cost of Trade Credit

• Cost of Trade Credit
• Discount X 365
• (100-Disc.) (Net Pmt. Period- Disc.
  Period)
• If this calculation yields a figure greater than
  a firms cost of capital, then they should borrow
  and take advantage of the discount.

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Financing A/R

• Unsecured Borrowing
• Secured Borrowing (A/R are pledged)
• Securitization
• Captive Finance Subsidiary (GMAC)
• Third-Party Financing (financial institution)
• Credit Cards
• Factoring

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Factoring

• Advantages
• - reduces or eliminates the cost of a credit
  department
• - reduces uncertainty
• - extends the range of customers
• - improves credit extension process

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Factoring

• Disadvantages
• - high fees
• - loss of control
• - stigmatism