> The optimum level of trade credit which provided for debtors as always, a balance between:
- Profit improvement from sales obtained by allowing credit, and
- The cost of credit allowed
> As a results, management will be anxious to do the following:
- Establish a credit policy in relation to normal periods of credit and individual credit limits
- Develop a system which will control the implementation of credit policy
- Prescribe reporting procedures which will monitor the efficiency of the system
> When constructing the credit control policy on debtors, management ought to take into consideration on factors like:
- Administrative costs of debt collection
- Efforts and task on controlling credit to individual customers and debts collection
- Extra amount of capital required to finance any extension of total credit provided to debtors
- Credit terms offered by competitors
> However, individual credit policy and limits are dependent on an assessment of the creditworthiness of a particular customer which will helps in deciding:
- Whether the customer would be allowed credit at all, and maximum amount of credit that should be allowed
- Normally, types of information which obtained from various sources for the assessment of a customers creditworthiness were:
Type of information
a) Past experience of selling to firm
b) Financial standing of the firm
c) Credit rating of the company
d) Reputation of firm within its business sector
e) Profile of qualitative characteristics
Source of information
a) Trade reference
b) Bank reference
c) Analysis of accounts
d) Credit scoring
e) Credit agency
f) Sales staff representative
g) Trade association
h) Supplier own sales ledger
> Tools used in credit control system are normally including:
- Preventing credit limits from being exceeded
- Prompt invoicing
- Collection of overdue debts by
a) Raising reminders letters or telephone calls
b) Withholding suppliers
c) Debt collection agencies and trade associations
d) Legal action (only act as a ‘last resort’)
> And the reports that used to monitor and evaluate the effectiveness of the credit control policy should contain information like.
- Age analysis of outstanding debts
- Ratios, compared with the previous period or target, to indicate trends in credit levels and the incidence of overdue and bad debts
- Statistical data to identify causes of default and the incidence of bad debts among different classes of customer and types of trade
Management Of Debtors
