Credit N Collection Notes Chapter 1

3104 – credit and collection Company B pays the invoice 60 days
1. warning signs of customers in late

trouble Company B takes a deduction for $45
2. importance of accurately for a variety of minor issues
evaluating credit
3. different types of financial Solution:
statements 1. profit
4. evaluate the creditworthiness of
customers $1000 x 5% = $50 -> expected profit
What is credit? 2. loss based on late payments

CREDIT is an arrangement to receive
cash, goods, or services now and pay 6%
2.a $1000 x = $5
12 𝑚𝑜𝑛𝑡ℎ𝑠
later
The transaction involving goods, 6%
services, funds, or property creating 2.b $1000 x = $5
12 𝑚𝑜𝑛𝑡ℎ𝑠
an obligation on the part of those
who receive them that must be $5 (monthly interest 30 days) x 2 (+30
complied with in the future. days) = $10
Why is credit important? 3. deduction

Many issues affect the policy $45 – minor issues
Corporate culture $5 – 30 days interest
Company’s margins $10 – 60 days interest
Competition
Existing inventory PnL or Profit or Loss
When the seller pays late, there is a
bottom line impact x = breakeven
x = $50 – ($45 + $5)
Sample of late payments x = $50 - $50
Company A sells B $1000 worth of x = $0
widgets
The company has a 5% margin y = loss
Company A is paying 6% interest on y = $50 – ($45 + $10)
its bank loans y = $50 - $55
Payment is expected in 30 days y = -$5
MJC BSBA-FM 3
Function of the credit department Conduct a credit check through credit
Open account – to order goods and industry groups
pay for them at a later date.
When goods are sold on open Check financial statements
account terms, the seller ships the
merchandise and then expects them Financial Statements
to be paid at some point in the
future, say 30 days after the buyer Audited statements compiled by an
receives the goods. independent accounting firm from
company records; in PH setting, those
Discount for early payments annual reports submitted to SEC
Implement certain discounted rates
during discount period (ex. 2/10 or Reviewed statements the numbers
2% within 10 days) or if not followed, put together by the client, but the
the debtor is to pay in full price. accountants have not audited the
company’s procedures
It is expected that the purchaser will
take the discount unless it is Compiled statements the numbers
experiencing financial problems put together by the client, but the
accountants have not audited the
Unearned discount – buyers take the company’s procedures
discount and do not pay within the
discount period The more current the statement, the
more reliable the numbers will be to
Cash in Advance (CiA) the credit manager using the
Credit Reports information to complete a credit
Build credit case (credit evaluation
investigation) to build business
legitimacy and basic profile (age, Footnotes – long and complicated
principal, etc) footnotes deserve extra attention;
Verify the company details about lawsuits pending
Mystery calls, checking of trade against the company, use of tax
references credits, the condition of the pension
Trade references plan, and the status of leases and
Check trade references to see how mortgages or deferred compensation
the potential customer pays its bills commitments
MJC BSBA-FM 3
Evaluating credit worthiness Inventory turnover – the average
days that the customer takes to turn
Ratio analysis its inventory once
𝐶𝑂𝐺𝑆
Trend analysis - If the company with ITR =
𝐴𝑣𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
a quick ratio of 1 also has a days sales
outstanding of 65, when the industry
Debt to tangible net worth – the
norm is 45 that quick ratio no longer
ability of a firm to leverage itself. It
looks so good.
shows how much the owners and
creditors have invested in the firm
X < 45 - good
X > 45 - bad 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
X = 45 – idk DTNW =
𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑁𝑒𝑡 𝑊𝑜𝑟𝑡ℎ
Quick ratio - the degree to which a Gross profit margin - Gross profit
company’s current liabilities are margin is a financial metric that
covered by the most liquid current represents the percentage of revenue
assets a company retains after deducting
the cost of goods sold (COGS) from its
𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠+𝐴/𝑅 total revenue. It measures a
QR =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
company's profitability from its core
Days sales outstanding (DSO) – business activities and is calculated
shows the average days it takes for as:
the customer to collect its receivables 𝑅𝑒𝑣𝑒𝑛𝑢𝑒−𝐶𝑂𝐺𝑆
GPM (%) = x 100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐴𝑣𝑔 𝐴/𝑅
Sales = 𝑥365
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Return on investment - the ratio of
net profit over the total cost of the
Accounts payable turnover – shows
investment
the average number of days that it
takes the customer to collect its 𝑉𝑓 −𝑉𝑖
receivables R=
𝑉𝑓
R = Return
𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑟 𝑐𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
APT = Vf = Final value
𝐴𝑣𝑔 𝐴/𝑃
Vi = Initial value
MJC BSBA-FM 3
Nonfinancial Factors that affect the Warning signs of customers in
credit decision trouble
1. The 5 Cs of credit: Character, - normally prompt paying customer

Capacity, Capital, Conditions, and begins to take longer and longer to
Collateral [Ch Ca Cap Con Coll] pay its invoices
- small customer suddenly places a
2. Relationship with the buyer much larger order than normal
- Other credit managers report late
3. The customer’s payment history payments at industry group meetings
- Sales finds a new customer that
4. Profit margin on the product in must have a large order quickly
question - Customer that took minimal
deductions suddenly starts taking
5. Status of the product large deductions
6. status of sales goals
7. Role of sales
8. Customer’s cooperation
9. Mean vs ends
MJC BSBA-FM 3

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3104 – credit and collection Company B pays the invoice 60 days

1. warning signs of customers in late

What is credit? 2. loss based on late payments

Why is credit important? 3. deduction

1. The 5 Cs of credit: Character, - normally prompt paying customer

6. status of sales goals

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