Credit Policies & Collection Management

Maximum 5,000 allowed per customer
➛ Credit Limit

Payment required within 30 days
➛ Credit Terms

Customer creditworthiness check
➛ Credit Standards

2% discount if paid within 10 days
➛ Discount

Follow-up calls after due date
➛ Collection Procedures

Increased sales
➛ Advantage

Bad debt risk
➛ Disadvantage

Customer loyalty
➛ Advantage

Cash flow delay
➛ Disadvantage

Competitive advantage
➛ Advantage

A customer’s account is 60 days overdue.

Choose the most appropriate action

Friendly reminder
➛ Most appropriate action ➧ Friendly reminder or follow-up call | first step

Suspension of credit
➛ If still unpaid | second step

Legal action
➛ Last resort

Discount offer
➛ Could be used as incentive for early payment

Write-off
➛ Only if uncollectible

2/10, n/30
➛ 2% discount if paid within 10 days; full payment due in 30 days

n/60
➛ Full payment due in 60 days, no discount

Cash on delivery
➛ Payment required at 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
➛ No effective collection procedure
➛ Credit limits may be too high

Suggest two improvements
➛ Introduce stricter collection follow-ups
➛ Reduce credit period or enforce credit limits

How does poor collection management affect cash flow?
➛ Delays in cash inflow
➛ Difficulty paying suppliers or meeting expenses

Which accounts are affected in the financial statements?
➛ Accounts Receivable | Balance Sheet
➛ Allowance for Doubtful Accounts / Bad Debt Expense | Income Statement

Should the company tighten or relax credit terms? Why?
➛ Tighten ➧ To reduce overdue accounts and improve cash flow

What is a credit policy?
➛ Rules a business sets for granting credit to customers | who, how much, for how long

Name one risk of selling on credit.
➛ Bad debts / delayed cash flow

What does a collection policy aim to achieve?
➛ Ensure timely payment and minimize uncollectible accounts

All customers should be given unlimited credit.
➛ False

Which account records uncollectible receivables?
➛ Bad Debt Expense | and Allowance for Doubtful Accounts

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Module 4 ➧ Here