Page 299 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes  Credit terms have three components which are Credit period, Cash discount and Cash
discount period.

 The collection cost of the firm has to work in a manner that it does not create too much
resentment amongst the customer.
 Factoring is a collection and finance service designed to improve the cash flow position of
the sellers by converting sales invoices into ready cash.
 Factoring offers a very flexible mode of cash generation against the receivables.
 Credit management is difficult task for managers that operate internationally because
international operations typically expose a firm to exchange rate risk.

13.6 Keywords

Collection Policy: It is the procedures passed to collect amount receivables, when they become
due.

Credit Standards: It refers to the minimum criteria for the extension of credit to a customer.
Credit Terms: It means the stipulations under which goods or services are sold on credit.
Receivables: It is defined as debt owed to the firm by customers arising from sale of goods or
services in the ordinary course of business.
Receivables Management: It involves decision areas: credit standards, credit period, cash discounts
and collection procedures.

13.7 Review Questions

1. Explain the objectives of credit polity of/or firm. What are the elements of a credit policy?
2. What are the techniques of control of receivables? Explain the “Ageing Schedule”.
3. Who do you mean by factoring? Explain the benefits of factoring.

4. Why are a firm’s regular credit terms typically conform to those of its industry?
5. What are the basic trade-offs in a tightening of credit standards?
6. Why are the risks involved in international credit management more complex than those
associated are true or false with purely domestic credit sales?
7. Analyse the benefit of the receivables management to the corporates.
8. Elucidate the consequences of liberal versus stiff credit standards.
9. Examine the different sources of credit information to the corporates and to the agencies.
10. Examine the factors that influence the size of investment in receivables.

Answers: Self Assessment

1. Delinquency 2. Collection cost
3. stringent 4. marginal
5. credit standards 6. bad debt
7. Credit period 8. higher

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