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Credit

Credit is the trust which allows one party to provide resources to another party where that second party does not pay the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date.

Credit
The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment.
Credit is extended by a creditor also known as a lender, to a debtor, also

known as a borrower.

Introduction to Credit and Collection


Credit is a contractual agreement in which a borrower

receives something of value now and agrees to repay the lender at some later date.

Introduction to Credit and Collection


When consumer purchases
something using a credit card, they are buying on credit (receiving the item at that time, and paying back the credit card company month by month).

Introduction to Credit and Collection


Any time when an individual finances

something with a loan (such as an appliances, automobile or a house), they are using credit in that situation as well.

Consumer Credit
Consumer debt can be defined as

money, goods or services provided to an individual in lieu of payment.

Consumer Credit
Common forms of consumer credit

include credit cards, store cards, motor (auto) finance, personal loans (installment loans), consumer lines of credit, retail loans (retail installment loans) and mortgages.

Functions ofisCredit The credit function an important


component of any company's business operations. Using creative methods when necessary to structure transactions so that sales can be approved, the credit department can make a significant contribution to sales and profit maximization.

Functions of Credit
The key is knowing when and

how to accomplish the sale safely. The key is to find the best way to minimize the risk of late payment or non-payment by customers.

Core Activities of Credit


1. Maximizing sales 2. Accelerating cash flow 3. Minimizing bad debt losses 4. Reviewing and approving new accounts 5. Developing and updating credit and collection policies 6. Establishing appropriate credit limits and terms of sale for new and active customers 7. Creating new or more appropriate payment terms [terms of sale]

Core Activities of Credit


8. Placing accounts on credit hold, and

releasing orders from credit hold 9. Managing the collection function 10.Maintaining current information in the credit file on each active customer 11.Documenting credit decisions and actions 12.Performing financial analysis on customer financial statements

Core Activities of Credit


13.Researching and resolving disputes and

deductions that would otherwise delay or prevent payment of accounts receivable 14.Communicating with other departments within the company including order entry, sales and shipping 15.Management reporting, and 16.Safeguarding the company's investment in accounts receivable

Collections and Credit Holds


Customers occasionally overreact to a decision by a

creditor company to place orders on credit hold. However, most debtors understand the collection process that creditors use, and understand the risk they face when they delay payment. Occasionally, the penalty for delaying payments to creditors involves a credit hold.

Collections and Credit Risk Management


Most collection problems and bad debts result from a

flawed or inadequate initial credit investigation. It may be helpful to think of credit extension as making a loan to an applicant. We know that a bank would not make a loan without a completed and signed application, and without a detailed understanding of the creditworthiness and financial worth of the applicant.

Collections and Credit Risk Management


The care that banks take in approving loans should not

be lost on trade creditors. A creditor should not approve open account terms until there is sufficient documentation to show the applicant is creditworthy.

The Credit Department


Strategy
The credit department is involved in the quote to cash

process, meaning the process from order approval to the cash collection. The cycle involves the important task of information collection, credit analysis, collections and cash application, and deduction resolution. All of these elements have both financial and strategic implications in the business process.

The Role of Credit Department


Collection of Information
The collection of information enhances the quality of

financial analysis. That same information also has strategic implications; it can strengthen a company's understanding of its customer base and lead to expanding that base. The credit department is, in effect, an information warehouse within any company. The information collected by a credit department can be used by a purchasing department to screen vendors or by the marketing department to help find new customers.

The Role of Credit Department


Credit Analysis
Credit analysis provides financial protection by

determining whether the customer has the ability to pay the debt. Depending on a company's strategic goals, becomes an important factor in the sales decision.

The Role of Credit Department


Collection
While the credit department is responsible for the

enforcement of payment terms, credit terms are a part of a company's strategic business plan. Whether credit terms are restrictive or liberal will have a direct impact on a company's strategic business plan as well as on the credit process. Cash forecasting is a natural transition for the credit department.

The Role of Credit Department


Cash Application
The financial impact of cash application is related to

the timing of cash flow and the cost of carrying a receivable. The strategic implication of cost of carrying receivables is related to a company's financial strength and its need for cash flow.

The Role of Credit Department


Deduction Resolution
The financial implication of the cost of carrying

unresolved deductions or customer disputes impacts a company's operating costs. Deduction resolution has very critical strategic implications because it is directly related to customer satisfaction, which in turn, impacts sales.

The Credit Department Role in Customer Retention


Establishing a customer relationship is one thing,

maintaining it is quite another. Customers require a high level of support and after sale service, in addition to quality products at competitive prices, in return for their loyalty. Companies have come to realize that it is far more expensive to locate, solicit, qualify and establish a relationship with the new customer than it is to find ways to keep existing customers.

The Credit Department Role in Customer Retention


As a result, customer service has become an important

task for every department in the company - including the credit department. The goal of the credit and collection department is to accomplish the goals assigned to it with as little damage to the relationship between the company and its customer base as possible.

Techniques to minimize impact of customer relations


Tell customers that you appreciate their business.
Make your appreciation more tangible by being more

flexible when addressing collection problems involving customers that have been purchasing from your company for a long time.

Techniques to minimize impact of customer relations


Recognize that your company does not offer its

products and services in a vacuum but in a competitive environment. A customer is more likely to move its business to a competitor if offered a more tempting balance of price, performance an terms of sale. Therefore, as competitors change the way they [a] establish credit limits [b] collection past due balances or [c] determine the terms of sale you must consider making similar changes.

Techniques to minimize impact of customer relations


Before addressing a problem with a customer, the

credit department must be sure it has all of the relevant facts and there is no doubt that its position is the correct one.

Techniques to minimize impact of customer relations


To borrow an idea from baseball: All ties go to the

customer. What this means is that if there is some doubt about the validity of the seller's position, in the interest of customer retention there should be a bias toward accepting or allowing the customer's point of view to prevail.

Techniques to minimize impact of customer relations


Try to limit interactions with customers to their

accounting department. Any time a creditor is working outside of its normal collection channel [such as dealing directly with the buyer] the seller's relationship is at greater risk. Why? Because the accounts payable department is accustomed to the types of questions and challenges a collector may ask - but the buyer may be shocked or offended by the directness of the collector's approach.

Techniques to minimize impact of customer relations


Don't think of debt collection as a zero sum game,

meaning the only way that the creditor wins is if the customer loses. Think of it instead as a mutually beneficial process in which the customer has the opportunity to continue to buy your company's goods and services in exchange for payment of the past due balance.

Techniques to minimize impact of customer relations


Make certain that credit holds are used sparingly, and

are truly used as a last resort. Try to notify the customer and the sales department about the possibility of a credit hold... and try to give as much advanced notice as is practical under the circumstances.

Techniques to minimize impact of customer relations


Negotiate, don't litigate.
Litigation should only be considered after every effort

has been made to resolve problems amicably. Litigation should never be initiated until the credit manager and his or her manager have discussed options and alternatives, and until frank and earnest discussions have taken place with the customer [assuming it is still in business] about the seller's desire to avoid litigation if other options present themselves.

Techniques to minimize impact of customer relations


One final thought: Even though the credit department

has an obligation to support and if possible strengthen the relationship between the company and its customers, it also has a duty to address and resolve past due balances as quickly and as effectively as possible. This is the tightrope that credit professionals have chosen to walk

The Credit Manager


A credit manager is a person employed by an

organization
to manage the credit department and make decisions concerning credit limits, acceptable

levels of risk and terms of payment to their customers.

Duties of Credit Manager


Controlling bad debt exposure and expenses, through the direct management of credit terms on the company's ledgers.
Maintaining strong cash flows through efficient collections. The efficiency of which is measured using Days Sales Outstanding (DSO).

Duties of Credit Manager


Days Sales Outstanding (also

called Days Receivables) is a calculation used by a company to estimate their average collection period. A low number of days indicates that the company collects its outstanding receivables quickly. Typically, Days sales outstanding is calculated monthly.

Duties of Credit Manager


The days sales outstanding (DSO) figure is

an index of the relationship between outstanding receivables and credit account sales achieved over a given period. The Days sales outstanding analysis provides general information about the number of days on average that customers take to pay invoices.

Duties of Credit Manager


Controlling bad debt exposure and expenses, through the direct management of credit terms on the company's ledgers. Maintaining strong cash flows through efficient collections. The efficiency of which is measured using Days Sales Outstanding (DSO). Ensuring an adequate Allowance for Doubtful Accounts is kept by the company. Monitoring the Accounts Receivable portfolio for trends and warning signs.

Duties of Credit Manager


Ensuring an adequate Allowance for Doubtful

Accounts is kept by the company. Monitoring the Accounts Receivable portfolio for trends and warning signs. Enforcing the Stop List. Setting and ensuring compliance with a corporate credit policy. Obtaining security interests where necessary, such as a Debenture or a Cross Company guarantee, against credit extended. Initiating legal or other recovery actions against nonpayers.

Types of Credit Manager


Credit managers tend to fall into one of two groups

due to the differing specialty legal and jurisdictional knowledge required. Commercial Credit Managers Consumer Credit Managers large companies which sell to both markets will require a Credit manager familiar with both aspects of Credit management.

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