1 / 14

Chapter 6 Credit Policy and Collections

Chapter 6 Credit Policy and Collections. Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection < Inventory > < Receivable > < Float >

harper-richardson
Télécharger la présentation

Chapter 6 Credit Policy and Collections

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 6Credit Policy and Collections • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • Accounts Disbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

  2. Objectives • Specify advantages of NPV in evaluating credit policy alternatives. • Calculate the NPV of alternative credit policies and select the best policy. • Identify the 3 major traditional measures of collection patterns, calculate them, and understand their flaws. • Calculate and interpret uncollected balance percentages and relate to traditional measures. • Describe present corporate credit policy practices. • List and explain the major differences encountered when extending credit internationally.

  3. Evaluate Changes in Credit Policy • Credit term change decision variables • effect on dollar profits • sales effect • receivables effect • return on investment effect • 84% of credit executives believe they can estimate: • default probability • credit limits • opportunity cost of funds invested in receivables • company’s overall cost of capital

  4. Incremental Profit vs NPV • Financial statement approach • Choose the alternative with the highest profits • Does not give value effect • NPV approach • Choose the alternative with the highest NPV • Directly measures value effect

  5. Changing Credit Terms, EQ 6.1 ZN = [(1+g)SE](1-dN)PN(1-bN) / (1 + iDPN) PV discount pmts + [(1+g)SE](1-PN)(1-bN) / (1 + iCPN) PV non-discount pmts - VCR [(1+g)SE] Variable cost - EXPN[(1+g)SE] / (1 + iCPN) PV credit expense See page 196 for variable definitions

  6. Changing Credit Terms, EQ 6.2 ZE = SE(1-dE)PE(1-bE) / (1 + iDPE) PV discount pmts + SE(1-PE)(1-bE) / (1 + iCPE) PV non-discount pmts - VCR (SE) PV variable cost pmts - EXPE SE / (1 + iCPE) PV credit expense pmts

  7. Changing Credit Terms, EQ 6.3, 6.4 EQ 6.3 Z = ZN - ZE Decision Rule: IF Z > 0 then Accept policy change IF Z < 0 then Reject policy change EQ 6.4 NPV = Z / i

  8. Monitoring Collections • Receivables turnover • least favored technique • Days sales outstanding, DSO • ranked almost as high as aging schedules • Aging schedules • ranked as most favored technique

  9. Problem • All three traditional measures have a serious flaw • All three are influenced by sales trends • Choice of averaging period impact turnover and DSO • Increasing sales tends to: • improve aging schedules • worsen DSO and turnover

  10. Solution • Uncollected Balance Percentage • Uncollected monthly receivables computed as a percent of the credit sales in the month they originated. • Compare trend through time

  11. Collection Procedures • Typical collection effort • initial contact within 10 days of delinquency • then reminder letter followed by phone call • sales force notified • last resort, reference to collection agency/legal action • Collection agency • Phase 1 - computer generated collection letter, when accounts are 45 to 90 days past due • Phase 2 - commissioned collectors used • Companies tend to be more aggressive the larger the receivables balance • Companies understand the good-will tradeoff when selecting collection methods

  12. Evaluating the Credit Department • Reducing investment in receivables • reduce invoice float • fine-tune credit administration and credit policy • outsourcing and automating • reduce discrepancies and deductions • improve monitoring and collections using benchmark data • Organizational integration and key account management • develop better understanding of needs and wants of key accounts • prioritize accounts by potential value • make credit terms and policies integral part of well designed sales and marketing offering

  13. International Credit Management • Credit policy analysis • lengthening terms increases exchange rate risk • also increases default risk • harder to get D&B reports • harder to get bank credit information • Modifying monitoring and collections • legal remedies for late payment or nonpayment differ by country

  14. Summary • This chapter developed the framework for applying the NPV model to credit policy decisions. • The NPV approach was applied to changes in credit standards, the credit period, cash discounts. • Traditional monitoring tools include aging, DSO and receivables turnover. • Improved monitoring measure • uncollected balance percentage • a reliable and unbiased measure of customer payment behavior • Collection procedures were reviewed. • The chapter concluded with a look at benchmarking and the impact of foreign sales.

More Related