ORTEGA, WENDY B.

MALANUM BSBA FTM 3-4

PROF.

CREDIT MANAGEMENT & COLLECTION POLICIES

What is CREDIT MANAGEMENT? Another term for credit control. Activity aimed at serving the dual purpose of (1) increasing sales revenue by extending credit to customers who are deemed a good credit risk, and (2) minimizing risk of loss from bad debts by restricting or denying credit to customers who are not a good credit risk. Effectiveness of credit control lies in procedures employed for judging a prospect's creditworthiness, rather than in procedures used in extracting the owed money. - (http://www.businessdictionary.com)

Importance of CREDIT MANAGEMENT Credit risk management is a very important area for for the banking sector and there are wide prospects of growth and other financial institutions also face problems which are financial in nature. Also, banking professionals have to maintain a balance between the risks and the returns.For a large customer base banks need to have a variety of loan products.If bank lowers the interest rates for the loans it offers, it will suffer In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too little that it leads itself to financial instability and to the risk of regulatory non-compliance. Credit risk management is risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must

be assessed so as to derive a sound investment decision. And decisions should be made by balancing the risks and returns. Giving loans is a risky affair for bank sometimes and certain risks may also come when banks offer securities and other forms of investments. The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected.A bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. Credit risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies. For assessing the risk, banks should plan certain estimates, conduct monitoring, and perform reviews of the performance of the bank. They should also do Loan reviews and portfolio analysis in order to determine risk involved. Banks must be active in managing the risks in various securities and derivatives. Still progress has to be made for analyzing the credits and determining the probability of defaults and risks of losses. So credit risk management becomes a very important tool for the survival of banks. -(http://toostep.com )

Importance of CREDIT / COLLECTION POLICIES Cash policies and cash procedures can prevent internal fraud and abuse. Externally, one the biggest threats to your cash are customers who fail to pay for what they purchase. When you deliver goods or services and you extend a business customer credit by accepting a promise to pay later through an invoice, then in a sense you are loaning your customers cash. What steps can you take to make sure you get your cash back? If you use good cash management practices to protect yourself from your employees and co-workers, then shouldnt you be taking the same precautions with those outside your business? Your Credit Policies Are a Part of Proper Cash Management

Of course, we are talking about a proper credit policy for clearly establishing the process of determining who can receive credit (can promise to pay later) and how much credit they are allowed. Since determining credit may not always be a straightforward matter, a credit manual that includes credit policies and credit procedures, as well as clear explanations of the strategy or intent behind the policy, can be very useful. Communicating the purpose behind credit policies can be a great help to those making the credit decisions. Clearly communicating information about the how the company wants to extend credit is one important goal of your credit manual, credit policy and procedures. Another important goal is to create consistency in how you handle and extend your business customer credit, both internally and externally. But most importantly, your credit policy is about risk reduction. It should be created in advance and take into account such things as its effect on sales, the impact on the companys cash flow, and legal liability. A Credit Manual Communicates Credit Policy and Intent

Internally, the credit manual can be an instrument to get various departments on the same page when it comes to customer credit. For example, the accounts receivable department and the sales department are frequently at odds regarding what the credit policy should be. Accounts receivable wants tight credit so they can collect within the proper period and not deal with delinquent accounts. Sales, obviously, wants to book sales and they are not prone to turning away customers. It is managements job to establish clear credit policies and clear credit procedures, as well as explain the reasoning, in order to minimize the inherent conflict created by varied interests of these two departments. Although it is frequently overlooked, part of the credit process should be regular communication between the various departments involved with using the credit policy manual. Imagine the synergy created when accounts receivable, collections, sales and marketing, and even design and production all agree and cooperate in managing business customer credit. The sales department knows and agrees not to waste its efforts on customers who dont pay, and those making credit decisions know and agree when exceptions need to be made. A Clear Credit Policy Helps Extend Credit Wisely

Besides establishing consistency internally, the credit manual can also ensure consistent and fair treatment for external customers. The ability to extend short term credit is an important business tool, and if customers feel they are being treated unfairly or without a modicum of trust or respect it can mean lost business. When it comes to completing credit applications, references and credit checks, a certain level of consistency is expected, and this is especially true for making credit decisions. The name or size of the company should not be a major factor in deciding who gets credit. For example, I recently worked with training at a large construction company, and one of their regular customers was somewhat of a celebrity businessman. Apparently, as a matter of practice, this well-known businessman delayed payment of owed invoices until they fell intocollections, and then he would attempt to negotiate to a lesser settlement amount. Eventually, however, the construction company had to tell their customer youre fired. By the time they considered the delay, the collection efforts, and the reduced payment, they were lucky to break even. Apparently, this person relied on people wanting to do business with him because of his celebrity status. You cant, however, put a customers wellknown name or brand in the bank to cover your payroll and your own accounts payable. Your company is better off finding lesser knowncustomers

who pay their bills. Consistent and fair company credit policies can help make sure that happens. Cash Controls Include Company Credit Policy

Your credit manual and credit policies and procedures are directly related to protecting your cash, and you should understand that component as you develop and update them. But just as critical as development of the credit manual is how clearly you communicate your policies and procedures clearly to all affected parties in your organization. Poor credit practice is tantamount to leaving you cash drawer open maybe no one will take advantage of your carelessness, but why take that chance? - (http://www.ehow.com)

The establishment and execution of credit and collection policies can minimize problems associated with accounts receivable. As with all policies, they must be reevaluated from time to time in order to determine their effectiveness. If your business already has policies for receivables management, evaluate them according to the check list on the following pages. If you do not presently have credit and collection policies, you can use the check list as a guide in establishing policies. Your answer to all questions should be "Yes" or "Not Applicable." If you have any "No" answers, you should consider revising your policy or have a strong and valid reason for not doing so. For example, you may have a "No" answer to the question, "Do you offer a cash discount?" If your accounts are primarily personal, this might be a valid answer. If your accounts are primarily major industries, a "No" answer would suggest that you consider the possibility of offering a cash discount.

CREDIT AND COLLECTION POLICIES CHECK LIST Credit Approval

Is a written application required with every credit request?

Do you have a standard form for credit applications? Is it completed personally by the applicant? Is it reviewed for completeness? Is all information verified for accuracy and timeliness? Are applicants checked out with a credit bureau? Does your evaluation consider income? Does your evaluation consider fixed obligations? Does your evaluation consider job stability? Does your evaluation consider residential stability? Does your evaluation consider credit history? Does your evaluation consider bank balances? Does your evaluation consider other assets?

Invoices

Are invoices prepared promptly? Is invoice preparation always accurate? Are payment terms clearly stated? Are customers' special instructions followed carefully?

Terms of Sale

Do you offer a cash discount? Do you use a late payment penalty? Is the time limit for payment clearly stated?

Statements

Are monthly statements submitted to all open accounts? Are statements prompt and accurate?

Problems of Identification

Do you determine your average collection period on a regular basis? Do you compare your collection period with industry averages? Do you compare your current collection period with your previous experience? Do you compare your collection period with your payment terms? Do you have a monthly aging of all outstanding accounts? When a problem is identified, is corrective action prompt and firm?

Follow-up

Do you have a systematic procedure for follow-up on slow accounts? Is there a standard sequence of follow-up letters? Is the tone of these letters progressively stronger? Do you use the telephone to contact delinquent accounts? Is your telephone technique effective? Do you offer special arrangements for collecting past-due accounts? Do you have a late-payment penalty? Do you put delinquent accounts on a C.O.D. basis?

External Resources

Do you have a working relationship with a collection agency? Are accounts turned over automatically after a specific time period? Do you refer the most serious delinquencies to an attorney?

- (http://www.zeromillion.com)