What is trade credit?
When goods are sold and payment is delayed
What are the motives for extending credit?
- Financial Motive
- Operating motive
- contracting motive
- pricing motive
What is the financial motive for extending credit
- - More sales
- - higher price
- - lower probability of default because of specialized knowldge of seller
What is the operating motive for extending credit?
Insentivise buyers if product is seasonal.
also operations are ... better?
What is the contracting motive for extending credit?
- For buyer - they can inspect goods before payment
- For seller - Better internal controals, less theft
What is the pricing motive for extending credit?
In a govt regulated industry you can extend the credit terms to decrease PV in leiu of changing the price.
How can you add value through trade credit?
- - Manage total investment in recievables
- - How long you make the terms
- - Who you extend credit to
- - Ensuring you collect
Who is the example of messing everything up becuase of credit and billing problems.
Xerox totally screwed up when they tried to consolidate their stuff and got nothing right.
What is the basic credit granting model?
NPV = (Sales - Expenses)/(1+ daily intrest rate * credit period)
What are 3 types of credit extension?
- Open account (or line of credit)
- Installment credit
- Revolving credit
What is an open account or line of credit?
No interest, payment due on invoice terms, payment restores available credit.
What is installment credit?
There is interest, Equal payments of principle and interest usually monthly, payment doesn't restore credit available.
Revolving credit... what is it?
There is interest, monthly billing
What are the four componenets of a credit policy?
- 1. credit standards (minimally acceptable customer)
- 2. Credit terms (credit period and discount, collateral)
- 3. Credit limit (per customer and aggregate)
- 4. Collection procedures
What are the four steps to the credit?
- 1. Gather neccecary information
- 2. Complete a credit analysis
- 3. Determine risk rating
- 4. Set size of credit limit
Where are some places you can collect data from?
- Field data collected (sales force)
- Internal pmt history
- Credit bureaus
What do you use to analyze credit?
- The five "C"s
- Ratio analysis
What are the 5 "C"s?
- Character - Precieved honesty/willingness to pay
- Capacity - Cash flows, can they pay?
- Capital - If insufficiant cash flows, can they be created?
- Collateral - Can they secure it?
- Conditions - general economic environment
What is the risk rating?
rating determines order size withour additional credit approval
What elements go into setting size?
- Customer need/request
- 10% net worth
- percent of high credit
- suggestion in customers BIR from D&B
order entry first to cash application. Magnetic Ink. MICR.... whatev
what equation do you use for the credit?
The giant one.
What are traditional methods of collection monitering?
- Aging schedules - most favored
- DSO - Almost as good
- Receivables turnover - worst
What are some new credit monitering techniques?`
- Uncollected balance percentage
- DSO with monthly sales information
what is the problem with traditional methods?
The are all influenced by sales changes. Sales increase improves aging schedules, worsens DSO and turnover.
What are typical collection procedures?
- Contact within ten days of delequency
- Reminder letter and phone call
- Sales force notified
- refer to collection agency
International credit is harder.
Longer periods, harder to get D&B reports
What are some kinds of float?
- Mail float - controaled by payor by being far away
- Processing float - controalled by payee
- Clearing or availablility float - bank
what are paper based payments
checks (primary paper) and drafts
Types of float again
- collection - until credited to payees account
- disbursment - until its charged to payors account
depends on pov
MICR code. Business check. Whateva.
- auxiliary on us field
- traurir routing no?
- Payor's #
- something encoded
On us items
- payee deposits check in bank
- bank credits depositors acount
- bank debits payors account
check clearing process
- the key event is presentment - the delivery to the paying bank
check clearing mechanisms
- - house/on us checks
- - transit items
- - ECP - electronic check processor
- - Image exchange