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Credit in the Company

NACM 1

Learning Objectives

� Why credit is a function of business

� The strategic role of credit

� Where credit typically fits within the business organization

� The role of credit in financial management

� The role of credit in the operating cycle

� The goals and core activities of a credit department

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Credit in the Company� Credit as a Business Function

� The Strategic Role of Credit

� Credit Within the Business Organization

� The Role of Credit in Financial Management

� Credit and the Operating Cycle

� The Core Activities of the Credit Department

� The Credit Department’s Goals

� The Credit Department’s Multi-Functional Role

� The Credit/Sales Relationship3

Credit in the Company (continued)

� The Credit/Purchasing Relationship� The Credit/Manufacturing Relationship� The Credit/Information Systems Relationship� Credit Department Relationships with Other

Departments� Organizing the Credit Department� Day-to-Day Administration� Lockbox Operations� Collecting Accounts Receivable� Control and Follow-Up

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Credit as a Business Function

�Business

�Business organization

�Strategy

�Strategic planning

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The Strategic Role of Credit

�Amassing Information

�Credit Analysis

�Collection

�Cash Application

�Deduction Resolution

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Credit Within the Business Organization

� Management of Accounts Receivable

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The Worth of Credit & A/R

A/R is 2nd largest asset of most companies

Credit Within the Business Organization

� Management of Accounts Receivable

� Net Working CapitalCurrent Assets – Current Liabilities = Working Capital

� Finance-Related Functions

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Cash Management

Cash Flow

Purchase Materials

Convert Inventory

Product Sold

Receivable Generated

Cash Collected

The efficient management and use of cash in a manner that is consistent with the strategic objectives of the business.

Credit and the Operating Cycle

Sale Recorded – Invoice/Receivable Created Payment Received Cash Application

Credit Department Review & Investigation

Credit Decision – Order Approval

Customer Credit ApplicationInitial Order

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The Core Activities of the Credit Department

� Customer credit analysis

� Develop credit policy

� Manage collection function

� Set credit availability thresholds

� Management reporting

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Clean up the crime scene!

Knowledge & Skills for Credit

� Accounting, Financial Analysis

� Business and Credit Law

� Communication

� Management & Negotiation

� Customer Service

� Analytical

� Computer

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The Credit Department’s Goals

Increase sales and profit.

The ultimate goal of credit decisions is to assess businessrisk to maximize reward.

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Marginal Accounts

� Marginal accounts - accounts with poor payment history, inadequate working capital or deteriorating financial condition are taken on for strategic reasons . . .

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The Credit/Sales Relationship

The credit-sales relationship is one of the most important tasks of the credit manager.

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Credit Department

The Credit Department’s Multi-Functional Role

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Credit Relationships

� Purchasing

� Information Systems

� Personnel

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Organizing the Credit Department

�Two essential functions:�Defining responsibility

�Staffing

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Day-to-Day Administration

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The major functions performed daily by the credit department:

� Credit approval process

� Establishment of accounts

� Order processing

� Accounts receivable administration

� Collection & adjustments

� Control & follow-through

Lockbox Operations

A lockbox is a check collection system operated by a bank.

� Economic benefits

�Mail time

�Processing time

�Availability time

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Collecting Accounts Receivable

Collection effort when payment is not received when due.� Letters

� Phone calls

� E-mail - text

� Visits

� Third-party collections

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Thank you!

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