Credit Policies & Collection Management

Module 3:
Cash, Receivables, Payables

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Define credit policy and collection management

➛ Explain why businesses sell on credit

➛ Identify key elements of a credit policy

➛ Understand risks associated with credit sales

➛ Describe methods used to collect overdue accounts

➛ Analyze how credit policies affect cash flow and profitability

➛ Link credit management to accounts receivable control

➛ Credit Policy
➛ Credit Sale
➛ Accounts Receivable
➛ Credit Period
➛ Credit Limit
➛ Collection Policy
➛ Bad Debts
➛ Cash Flow

A credit policy defines who gets credit, how much, and for how long.

It balances
➛ Increasing sales
➛ Minimizing bad debts
➛ Maintaining healthy cash flow

✓ Attract more customers
✓ Increase sales volume
✓ Stay competitive
✗ Risk of non-payment
✗ Delayed cash inflow

Credit Standards
Who qualifies for credit

Credit Terms
Payment period | e.g., 30 days

Credit Limits
Maximum amount allowed

Discounts
Incentives for early payment | e.g., ➧ 2/10, n/30

Collection Procedures
Steps for overdue accounts

➛ Reminder emails or calls
➛ Statements of account
➛ Late payment penalties
➛ Credit suspension
➛ Legal action | last resort

Income Statement
Bad Debt Expense

Balance Sheet
Accounts Receivable | net of allowance

Cash Flow Statement
Cash collections from customers

Match each item to the correct element

➛ Maximum 5,000 allowed per customer

➛ Payment required within 30 days

➛ Customer creditworthiness check

➛ 2% discount if paid within 10 days

➛ Follow-up calls after due date

State whether each is an Advantage or Disadvantage of credit sales

➛ Increased sales
➛ Bad debt risk
➛ Customer loyalty
➛ Cash flow delay
➛ Competitive advantage

A customer’s account is 60 days overdue.

Choose the most appropriate action
➛ Friendly reminder
➛ Suspension of credit
➛ Legal action
➛ Discount offer
➛ Write-off

Explain your choice.

Explain what the following terms mean

➛ 2/10, n/30
➛ n/60
➛ Cash on delivery

A wholesale company allows customers 45 days to pay. Recently, overdue accounts have increased, affecting cash flow.

Questions

➛ Identify two weaknesses in the company’s credit policy

➛ Suggest two improvements

➛ How does poor collection management affect cash flow?

➛ Which accounts are affected in the financial statements?

➛ Should the company tighten or relax credit terms? Why?

➛ What is a credit policy?

➛ Name one risk of selling on credit.

➛ What does a collection policy aim to achieve?

➛ True or False | All customers should be given unlimited credit.

➛ Which account records uncollectible receivables?

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Answers ➧ Here

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