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What is trade credit?
When goods are sold and payment is delayed
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What are the motives for extending credit?
- Financial Motive
- Operating motive
- contracting motive
- pricing motive
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What is the financial motive for extending credit
- - More sales
- - higher price
- - lower probability of default because of specialized knowldge of seller
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What is the operating motive for extending credit?
Insentivise buyers if product is seasonal.
also operations are ... better?
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What is the contracting motive for extending credit?
- For buyer - they can inspect goods before payment
- For seller - Better internal controals, less theft
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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.
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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
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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.
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What is the basic credit granting model?
NPV = (Sales - Expenses)/(1+ daily intrest rate * credit period)
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What are 3 types of credit extension?
- Open account (or line of credit)
- Installment credit
- Revolving credit
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What is an open account or line of credit?
No interest, payment due on invoice terms, payment restores available credit.
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What is installment credit?
There is interest, Equal payments of principle and interest usually monthly, payment doesn't restore credit available.
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Revolving credit... what is it?
There is interest, monthly billing
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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
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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
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Where are some places you can collect data from?
- Field data collected (sales force)
- Internal pmt history
- Credit bureaus
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What do you use to analyze credit?
- The five "C"s
- Ratio analysis
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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
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What is the risk rating?
rating determines order size withour additional credit approval
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What elements go into setting size?
- Customer need/request
- 10% net worth
- percent of high credit
- suggestion in customers BIR from D&B
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Cash application
give up.
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order entry first to cash application. Magnetic Ink. MICR.... whatev
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what equation do you use for the credit?
The giant one.
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What are traditional methods of collection monitering?
- Aging schedules - most favored
- DSO - Almost as good
- Receivables turnover - worst
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What are some new credit monitering techniques?`
- Uncollected balance percentage
- DSO with monthly sales information
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what is the problem with traditional methods?
The are all influenced by sales changes. Sales increase improves aging schedules, worsens DSO and turnover.
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What are typical collection procedures?
- Contact within ten days of delequency
- Reminder letter and phone call
- Sales force notified
- refer to collection agency
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International credit is harder.
Longer periods, harder to get D&B reports
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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
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what are paper based payments
checks (primary paper) and drafts
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Types of float again
- collection - until credited to payees account
- disbursment - until its charged to payors account
depends on pov
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MICR code. Business check. Whateva.
- auxiliary on us field
- traurir routing no?
- Payor's #
- something encoded
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On us items
- payee deposits check in bank
- bank credits depositors acount
- bank debits payors account
- wtf?
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check clearing process
- the key event is presentment - the delivery to the paying bank
- wtf
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check clearing mechanisms
- paper
- - house/on us checks
- - transit items
- electronic
- - ECP - electronic check processor
- - Image exchange
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