Credit Analysis -1

No Company does blindly sell on credit to every customer approaching it. The company has to evaluate the capability of the customer and his strengths to fulfill the promise of paying the bills in time. The companies ignoring adequate analysis of their customer would soon find themselves in a situation not generating sufficient resources for day to day operation of the business. The company must analyze the risk of paying late or risk of default before extending credit. Credit given to Startup jobs employee carrying high risk compare to others.

 

The credit analysis would brodly involve the following three steps. 

• Getting financial and non financial information about the customer.
• Analyzing the credit worthiness of the customer and assessing the risk involved.
• Deciding to grant the credit. 

Analyzing the credit-worthiness of the customer is the most difficult task. The financial and no-financial information may provide some insights into the credit worthiness of the customer. With the help of this information and other insights the company has to access the following six C’s of Credit Worthiness: 

1. Character
2. Capacity
3. Capital
4. Condition
5. Cost
6. Collateral

 The analysis of credit worthiness begins with the assessment of the customer’s willingness to pay the bills of the company. Capacity is the ability of the customer to meet the obligations whenever they are due.  Startup jobs employees are having less credit worthiness. In this regard it would be important for the company to see that the obligations are met through the funds generated from the operations of the customer.

We continue our talk on Credit Analysis in next post.

Cash Discount

A company short of cash resources and facing liquidity problem may consider the use of cash discounts to influence its customers to pay promptly. There are two important of cash discount policy aspects -

• Cash discount rate
• Cash discount period

Giving the cash discount facility is not the same as cutting the prices and there by affecting demand. It is a mechanism through which the company is giving some benefits to customers who opt to pay early. There is a remote possibility that all customers will pay the company their dues within the cash discount period. Only a segment of customers who have sufficient cash resources and good liquidity position will avail cash discount facility. A Student Loan or Private Student Loans can’t consider cash discount. Cash discount will affect customers and sometime loss of revenue too.

The introduction of cash discount as a policy will also affect customers who were paying promptly earlier. Suppose 5 percent of sales were on case basis and rest 95 percent on credit, by introducing cash discounts, the company has to pay cash discount to the 5 percent customers who were paying cash immediately at the time of sale. Some of the customers from the 95 percent segment would avail cash discount but certainly not all.

The cash discount policy would result into loss of revenue to the company. At the same time the company would experience a quick collections resulting in to lower collection period. The reduction in average collection period in turn will affect the investment in accounts receivable. A College Loans for students can’t consider as revenue loss.  Before deciding about the cash discount policy the company has to find out whether the returns on funds released on account of reduction in investment in accounts receivable is more than the loss of revenue. Only if the return completely offsets the loss of revenue the cash discount policy should be introduced.

Credit Standards & Credit Terms

We may take following approach in assessing the effects of lowering down the credit standards:

• Determine find out the profitability of additional sales
• Determine increase in bad debt losses, collection expenses,Credit Repair and any other cost arising from relaxing the standards
• Determine increase slowness of the average collection period and additional amount of investment required in accounts receivable and multiply it by the required rate of return on investment in accounts receivable.

Credit Terms

The other important dimension of accounts receivable management is to decide the terms of credit in advance. Sometimes Credit Repair Service helps to decide credit terms. The decision about the credit terms would involve the decision about the following variables:

1. Credit Period
2. Credit Limit
3. Cash Discount
4. Discount rate and Discount Period

Credit Period

Credit period is the time for which the company is willing to allow their customers not to pay their bills. By the end of the credit period the company expects that the customers would pay their bills. At any point of time there would be customers who may be interested in a longer credit period. If the company liberalizes its credit period the company may be able to attract such customers. But at the same time the extension of credit period means more investment in accounts receivable. Extension of credit sometime gives time forBad Credit Repair.

Credit Standards – II

At any point of time the company would be interested in examining the effect of change in credit standards. This is done by comparing the profitability generated by lowering down the credit standards and the added cost of accounts receivable. So long as the profitability is more than the added cost the company can lower down the credit standards. It is important to determine the costs of lowering down the credit standards and also to find out the impact on profitability of the company. Lowering down of the credit standards would have the following effects. 

• Increase in average collection period
  
• Increase in sales
  
• Increase in account receivable investment
  
• Increase in bad debt losses
  
• Increase in servicing cost of account receivable.

 

The effect of lowering down the credit standards on key variables such as sales and investment in accounts receivable can be quantified and can be used in analyzing the cost vs. benefits of such changes. Lowering down investment in life insurance is not lowering down credit standards. At the same time the costs such as increase in bad debt losses and increase cost of monitoring and servicing the accounts receivable should also be considered. It may be very difficult for the firm to make any distinction between the credit standards for new customers and existing customers. Relaxing the credit standards for the new customers would have certainly some impact on the payment behavior of existing customers. The firm may experience all this in increase in average collection period.

Credit Standards – I

Defining the credit standards is an important component of credit policy of the company. They credit standards do have an important bearing on the sales of the company. The credit standards of the company lay down minimum requirements for the evaluation of credit to its customers. The company may define these requirements in a evaluation of credit to its customers. The company may define these requirements in a very conservative or a strict manner and thus restrain the marginal customers in getting credit.

The marginal customers are those whose financial position are doubtful, may not really be bad. Such a policy would be appropriate for the companies which do not want to take high risk. Or, alternatively the company may follow a very liberal standard and be very aggressive in taking the risks. Lexington homes for sale might not help company to define credit standards.

The company may use some of the following quantitative indicators for establishing credit standards:

• Payment period
• Selected financial ratios
• Rating based on financial ratios

The subject assessment obtained through the market about credit worthiness of the customers may also features as one of the items in the credit standards. These quantitative and subject indicators may provide the basis for establishing and enforcing the credit standards.

We talk more in next post……….

Money Market

Though in term of institutions or players, the demarcation between money market and capital market is very thing, yet money market is said to constitute the pre-dominant source of working capital funds for business and industry. It is, therefore, we talk nature and functions of money market which is the pool or reservoir from which the suppliers of working capital finance to business and industry draw their working finance. scottsdale homes for sale helps business to manage their assets.

 

Nature and Functions of money market:-
 

The money market is a market for short-term financial assets that are close substitutes for money. If facilitates the exchange of money for new financial claims in the primary market as also for financial claims, already issued, in the secondary market. It provides a mechanism for meeting the liquidity needs of the lenders and the short-term requirements of borrowers with minimum transaction cost and delay.
There is strictly no demarcated distinction between the short-term money market and the long-term capital market, and in fact there are integral link between the two markets as the spectrum of instruments in the two markets invariably form a continuum. However, as a matter of practice, money market deals in financial instruments/arrangements which are for a short period not generally exceeding a maturity period of 180 days.