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CREDIT MANAGEMENT

CREDIT MANAGEMENT. IQRA EDUCATION NETWORK AND CONSULTANTS:. IQRA EDUCATION NETWORK AND CONSULTANTS: FREELANCE ACCOUNTING AND AUDIT SERVICES FOR SMALL & MEDIUM BUSINESSES, CO-OPERATIVE SOCIETIES, NGOs ETC. FINANCIAL & COST, INTERNAL AUDIT BEFORE FINAL AUDIT, BANK RECONCILIATION,

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CREDIT MANAGEMENT

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  1. CREDIT MANAGEMENT

  2. IQRA EDUCATION NETWORK AND CONSULTANTS: • IQRA EDUCATION NETWORK AND CONSULTANTS: • FREELANCE ACCOUNTING AND AUDIT SERVICES • FOR SMALL & MEDIUM BUSINESSES, CO-OPERATIVE SOCIETIES, NGOs ETC. • FINANCIAL & COST, • INTERNAL AUDIT BEFORE FINAL AUDIT, • BANK RECONCILIATION, • A/C RECEIVABLES AND PAYABLE, • PREPARATION OF FINAL ACCOUNTS. • CONTACT: • KHALID AZIZ • 0322*3385752 • KARACHI. • **************************************************

  3. IQRA EDUCATION NETWORK AND CONSULTANTS: • COACHING CLASSES FOR COMMERCE STUDENTS: • INTER COMMERCE • 1ST YEAR 2ND YEAR • ACCOUNTING • BUSINESS MATHS , STATISTICS • ECONOMICS , BANKING • B.COM • PART 1 ACCOUNTING, ECONOMICS & STATISTICS . • PART 2 ADVANCED ACCOUNTING • O / A LEVELS • ACCOUNTS, ECONOMICS, BUSINESS STUDIES, PAKISTAN STUDIES & URDU. • ICMAP SEMESTER 1,2,3,4 • PIPFA • ICAP MODULE B & D • CAT T1-T8 • ACCA F1,F2,F3,F5,F8,P1,P7 • MA-ECONOMICS • 100 % RESULT IN 2012-13 • KHALID AZIZ • 0322-3385752 • R1173, ALNOOR SOCIETY, BLOCK 19, POWER HOUSE, F.B.AREA, KARACHI. • **************************************************

  4. IQRA EDUCATION NETWORK AND CONSULTANTS: • GRAB THE GOLDEN OPPORTUNITY TO MARKET YOUR BUSINESS IN A MOST EFFICIENT WAY BY POSTING YOUR ADS ON BLOGS, SOCIAL MEDIA AND POWER POINT PRESENTATIONS ON DAILY BASIS. FOR FURTHER PLEASE FEEL FREE TO CONTACT. • KHALID AZIZ • 0322-3385752 • ONLY SERIOUS PERSONS MAY CONTACT. NO SMS PLEASE. • *************************************************** • IQRA EDUCATION NETWORK provides you the most qualified and experienced tutors for home tuitions from Primary to Masters level. For further information feel free to contact:Khalid Aziz0322-3385752Kaziz_cma@yahoo.com • ****************************************************

  5. TABLE OF CONTENTS • Terms of payment • Credit policy variables • Credit evaluation • Credit granting decision • Control of accounts receivable • Credit management in India

  6. TERMS OF PAYMENTS • Cash Terms • Open Account • Credit Period • Cash Discount • Billing

  7. TERMS OF PAYMENTS • Consignment • Bill of Exchange • Letter of Credit

  8. Credit Policy Variables • Credit Standards • Credit Period • Cash Discount • Collection Effort

  9. Credit Standards • ∆RI = [∆S (1 – V) - ∆S bn] (1 – t) -k ∆I Where • ∆RI = Change in residual income • ∆S = increase in sales • V = ratio of variables costs to sales • bn = bad debt loss ratio on new sales • t = corporate tax rate • k = post tax cost of capital • ∆t = increase in receivables investment.

  10. CreditPeriod ∆S *ACP * V 360 ∆S/360 = average daily change (increase) in sales. The divisor here can with equal justification be 365, rather than 360 ACP = average collection perid

  11. Cash Discount • ∆RI = [∆S (1 – V) - ∆DIS] (1 – t) + k∆I Where ∆S = Increase in sales V = ratio of variable cost to sales k = cost of capital ∆I = savings in receivables investment ∆DIS = increase in discount cost

  12. Collection Effort • ∆RI = [∆S (1 – V) - ∆BD] (1 – t) + k∆I Where ∆RI = Change in residual income ∆S = Increase in sales V = ratio of variable cost to sales ∆BD = increase in bad debt cost t = tax rate k = cost of capital ∆I = savings in investment in receivables

  13. Credit Evaluation • Type I Error : A good customer misclassified as a poor credit risk. • Type II Error: A bad customer misclassified as a good credit risk.

  14. TRADITIONAL CREDIT ANALYSIS • “Five C’s of credit” Charcter Capacity Capital Collateral Condition • Sources of informations about five c Financial statement Bank references Experiences of firm

  15. Numerical Credit Scoring • Identify factors relevant for credit evaluation • Assign weights to these factors • Rate the customer on various factors using suitable rating scale. • Multiply weights with the rating scale. • Add all score to get consumer rating index • Based rating index classify customer

  16. Discriminant Analysis • This technique is employed to construct better risk index. • e.g. ABC company manufacture some product for industrial customer, they take two financial ratio into consideration, namely return on Equity and Current ratio. Current Ratio + + + + + + + + O O O O O + O O O Return on Equity

  17. CREDIT GRANTING DECISION • P=Probability that customer pays his dues • 1-P=The Probability that Customer can not Pays his dues. • Revenue=Revenue from sale • Cost =Cost of good sold

  18. Formula • P(Rev-cost)-(1-P)Cost • Example ABC company is considering offering credit to a customer.the probability that customer would pay is 0.8 and the probability that customer would default is 0.2.The revenue from sale would be Rs 1200 and cost would be Rs.800 Sol:- 0.8(1200-800)-0.2(800) = 160

  19. REPEAT ORDER • FORMULA { P1(Rev1-cost1)-(1-P1)Cost1 } + P1{ P2(Rev2-cost2)-(1-P2)Cost2 } • SOLUTION {0.9(2000-1500)-0.1(1500)} + 0.9{0.95(2000-1500)-0.05(1500)= 660

  20. CONTROL OF ACCOUNTS RECEIVABLES • Two methods for that • Days’ sales outstanding • Ageing schedule

  21. Days’ sales Outstanding

  22. DSO= Account receivable Average daily sales Quarter First 320 = 62 days (150+156+158)/90 Second 320 = 54 days (190+170+180)/91

  23. Ageing Schedule

  24. Whether the Collection is improving stable or reduced . Collection of Matrix

  25. CREDIT MANAGEMENT IN INDIA • Credit Policy • Credit Analysis • Control of Receivables • Room for Improvement

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