How should you decide on the optimal credit policy?
Deciding on a credit policy
- The size of the business.
- The specific cash flow of the business.
- The industry of which the business is a part.
- The overall economic climate.
What is an example of a credit policy?
Credit Policy Main Body
For example: The company will extend credit to customers if they meet its threshold criteria for the granting of credit. … The credit department will review the credit applications of all new customers to determine their worthiness to receive credit, and the amount of that credit.
What is a credit policy explain in brief?
Definition: Guidelines that spell out how to decide which customers are sold on open account, the exact payment terms, the limits set on outstanding balances and how to deal with delinquent accounts.
What is a lenient credit policy?
a) Lenient/Loose/expansive Credit Policy:
Under this policy, firms sell on credit to customers very liberally even to those customers whose creditworthiness is not known or doubtful.
Why do we need a credit policy?
Credit policies are important because they keep your clients accountable and boost your cash flow. Credit policies should detail your company’s credit qualifications, credit limits and terms, and invoice and debt collection terms.
What should be in a credit policy?
Your credit policy should determine the total amount of credit your firm will allow. Next, calculate how much of this amount you will allow your customers to borrow from you. Arrange customers in bands according to their risk such as low, medium, high. The lower the risk, the more credit can be allowed and vice versa.
How do you establish a credit policy?
Typically, a credit policy states your credit evaluation criteria, the maximum amount of credit you will extend to a customer, your specific payment terms, and any penalties or interest that will accrue on late payments. Start by drafting a credit application, which should ask for references from other creditors.
What are 3 C’s of credit?
Character, Capacity and Capital.
What is the objective of credit policy?
A credit policy is necessary to show the company’s intended way of doing business and avoids confusion and potential misunderstanding.
What happens if the credit policy is strict?
Your credit policy has a direct effect on the cash flow of your business. A credit policy that is too strict will turn away potential customers, retard sales and eventually lead to a decrease in the amount of cash inflows to your business.
What are the consequences of a credit policy that is too lenient?
However, if their credit policy is too lenient the business may expose itself to a high risk of clients failing to pay on time or at all. This in turn could create considerable cash flow problems for the business.
What happens if the credit policy is too liberal?
A major disadvantage of a liberal credit policy is the possibility of losses from unpaid debts. Your liberal policy means you will give credit to some customers who will be unable to pay.