Management of current assets

Credit policy

Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and pay for them at a later date. This has its advantages and disadvantages as follows:

Advantages of credit trade
Usually results in more customers than cash trade.

•  Can charge more for goods to cover the risk of bad debt.
•  Gain goodwill and loyalty of customers.
•  People can buy goods and pay for them at a later date.
•  Farmers can buy seeds and implements, and pay for them only after the harvest.
•  Stimulates agricultural and industrial production and commerce.
•  Can be used as a promotional tool.
•   Increase the sales.
•   Modest rates to be filled.
•   can be a marketing tool

Disadvantages of credit trade

•   Risk of bad debt.
•   High administration expenses.
•   People can buy more than they can afford.
•   More working capital needed.
•   Risk of Bankruptcy.

Forms of credit

• Suppliers credit:
• Credit on ordinary open account
• Installment sales
• Bills of exchangeCredit cards
•  Contractor's credit
•  Factoring of debtors
•  Cash credit
•  Cpf credits
•  Exchange of product

Factors which influence credit conditions

•  Nature of the business's activities
•  Financial position
•  Product durability
•  Length of production process
•  Competition and competitors' credit conditions
•  Country's economic position
•  Conditions at financial institutions
•  Discount for early payment
•  Debtor's type of business and financial position

Credit collection
Overdue accounts

•  Attach a notice of overdue account to statement.
•  Send a letter asking for settlement of debt.
•  Send a second or third letter if first is ineffectual.
•   Threaten legal actions.

Effective credit control

• Increases sales
• Reduces bad debts
• Increases profits
• Builds customer loyalty
• Builds confidence of financial industry
• Increase company capitalisation
• Increase the customer relationship

Sources of information on creditworthiness

•  Business references
•  Bank references
•  Credit agencies
•  Chambers of commerce
•  Employers
•  Credit application forms

Duties of the credit department

• Legal action
• Taking necessary steps to ensure settlement of account
• Knowing the credit policy and procedures for credit control
• Setting credit limits
• Ensuring that statements of account are sent out
• Ensuring that thorough checks are carried out on credit customers
• Keeping records of all amounts owingEnsuring that debts are settled promptly
• Timely reporting to the upper level of management for better management.

Read Full story