Development of Capacity Bias

Credit and Collection Policies

Credit and Collection Principles and Practices
To Adhere To and Abide By For Business
1. Credit is earned; and a privilege, not a right;
2. The financial security, sustainability of the creditor
is the principal consideration rather than the
attainment of sales or credit objectives;
3. Credit must be granted only to person possessing
the positive traits and attributes of trustworthiness,
integrity, capability, and capacity to earn, save and
repay one’s financial obligations;
4. The credibility, collectibility and protection of the
credit granted must take precedence over
expansion or growth; and, must be given
expeditious positive attention, action;
5. Financial soundness, operational effectiveness,
efficiency and security of the creditor must be balance
against risks, diversification, expansion and profitability;
6. Debtors must not be given credit much more than what
they can reasonably, effectively, efficiently repay;
7. To balance risks of credit granting for growth and
expansion, realistic credit limits and terms be set for the
target market within the geographical areas of operation;
8. Credit must not be extended to one who is a habitual
delinquent;
9. Each credit applicant must properly be credit
investigated and evaluated.
10. Credit grant must not be motivated and granted
principally by reason of collateral or security offered.
11. Set a workable system for monitoring, evaluating
and expeditious action on perceived and/ or actual
credit danger signals of debtors;
12. The credit and collection and sales operations must
be in positive synergy to attain overall objectives;
13. Decisiveness and expeditiousness in collection
efforts on all fronts of collection venues be effectively
undertaken within and without the creditor’s organization
to prevent, avoid and minimize bad debts.
14. A bad compromise is better and pragmatic than a
long contentious, expensive litigation.
15. Don’t cry over spilled milk.
A. Objectives of Establishing Credit Policies

1. To maximize sales;
2. To minimize costs and bad debt losses;
3. To attain profit or income objectives;
4. For control/incentives;
5. For sustainability and growth;
B. Factors to Consider in Formulating
Credit and Collection Policies
1. Capital
2. Competition
3. Product
4. Kind of customer
C. Credit and Collection Policy
Equation
1. Liberal credit policy complimented by strict
collection policy
2. Strict credit policy complimented by liberal
collection policy
3. Liberal credit policy with a liberal collection
policy
4. Strict credit policy complimented with strict
collection policy
D. Factors Dictating for Liberal
Credit Policy
1. High overhead cost necessitates high
volume to prevent losses;
2. High advertising and promotion expenses;
3. Demand for products service is temporary
due to the fad/nature of your product(s)
service(s);
4. When opening new accounts;
5. Developing a market for new
product/service;
6. If you are in a very competitive market;
7. A sunset market for your
product/service;
8. Heavy, abnormal, obsolete inventory;
9. The selling season of your
product/service is ending and not
financially strong to carry your inventory to
the next year.
E. Factors Dictating Restrictive Credit
Policy
1. Having extended or leveraged financial condition;
2. There is more demand for your product/service
than your ability to produce or serve;
3. The inventory is low and not in a position to build
up inventory expeditiously to meet the demand;
4. The general economic condition among your
customers are slumping badly;
5. Business condition among your customers are
slumping badly;
6. The selling season of your product/service is
ending and not financially strong to carry your
inventory to the next year.
Setting of Credit Limit Lines
Represent an estimated ceiling that
represent in the judgment of the creditor
as to the amount of credit which may be
extended safely to a credit applicant or
debtor.
Advantages of Setting Credit Limits

1. It is the overall tool for the control of credit

extension, promotion of sound credit practices;
and, the effective collection of the accounts.
2. Prevents misunderstanding and confusion within
the sales operation and with the customers.
3. It aids in reducing the cost of credit and collection
operations; and, contributes to efficiency.
4. Credit limits work as a check against imprudent,
reckless buying of customers and their abate
extravagance imprudence in using credit.
Objection to Credit Limits

1. Difficult to set up and keep current;

2. Unless keep current, credit limit is of little value;
3. Facts and figure are difficult to gather from
different sources;
4. Necessitate readjustment every time an order
causes an excess in the limits set;
5. May precipitate losing rapport with the customers
due to frequent discussion of their credit limits;
Why Set Credit Limits
1. To extend credit;
2. On what terms and conditions shall credit
be granted;
3. Setting or determining a limit to the
amount of credit to be extended under the
specified terms and payment conditions.
Factors Necessary to Arrive at a
Credit Line
A. The customer’s or debtor’s positive debt
paying capacity and ability to pay.
B. The positive need and requirements of the
customers-debtors of the merchandise/
service of the seller-creditor.