Credit Management Flashcards
Contract
- A legally binding agreement enforceable in a court of law.
- Written or oral
Elements of a contract
1) Agreement
- offer: made either by the seller or buyer
- acceptance: firm, unambiguous, unconditional (spoken, written, implied by action)
2) Bargain
- promise: Seller promises to deliver the goods
- consideration: something of value is exchanged between parties involved in the contract. Payment paid by the buyer, the value of the goods handed over by the seller
* promise => consideration. Not the opposite.
3) Intention to create legal relations
- commercial agreements only. Social and domestic arrangements are not intended to be legally binding
Remedies for breach of contract
Depends on the contract
- damages: money compensation for loss/injury (to put the innocent parties in the position in which they would have been if the contract had been performed)
- specific performance: ordered by the court to complete the contract by a specific performance
- quantum meruit: terminate the contract and demand payment for what had been done
- action for the price: taking legal action in the courts for recovery of an unpaid debt
Invitation to treat
- an invitation to a person to make an offer.
- Examples: goods on supermarket shelves, advertisements
Termination of an offer
- time limit expires
- the offeror (person making the offer) may cancel or reject the order
- the making of a counter-offer
- acceptance/rejection of the offer
Trade Descriptions Act
-prevents manufacturers, retailers or service industry providers from misleading customers
Examples:
- making false statements about goods offered for sale
- making misleading statements about services
The Consumer Rights Act 2015
- One is entitled to expect goods received from a seller to be:
- of satisfactory quality
- fit for the purpose
- as described
- If any of these three conditions are not met:
- Part or full refund (applicable within 30 days of purchase only), depending on how soon the fault appears, how serious it is and how quickly the matter is taken up
- you can accept replacement goods but can also insist on a refund if a replacement is not wanted
- ownership title of goods passes from seller to buyer at the day that the parties of the contract intend that it should be transferred
The Consumer Credit Act
- regulates the majority of credit agreements.
- prevent the customer from being ripped off and pressurised into signing an unsuitable credit agreement
-both the seller and the credit provider have ‘equal liability’ for breach of contract or misrepresentation
(if you use the credit card for your purchases, and if the seller/provider goes bust, you can claim from the credit card company for loss incurred)
- Types of credit agreements:
- credit sale agreements
- hire purchase agreements
- hire agreements
Unfair Contract Terms Act
-protects buyers from any organisation/business that tries to insist on unfair terms
Data Protection Act 2018
- Applicable to:
- personal data about identifiable individuals (but not about companies)
- records held electronically
- manual records
- All organisations processing personal data must register with the ICO (Information Commissioner’s office) and should follow these principles:
- lawfulness, fairness and transparency
- purpose limitation
- data minimisation
- accuracy
- storage limitation
- integrity and confidentiality
- accountability
- One has the legal right to know the personal details held by an organisation.
1. Apply for a copy of the personal data held on file
2. ask to know why the data is being processed
3. seek compensation through the courts for damage or distress caused by the loss, destruction, inaccuracy or unauthorised disclosure of one’s data
4. apply to the courts or Registrar for inaccurate data to be corrected or removed from their files - Processing of personal data is accepted in these following circumstances:
1. with the consent of the individual
2. due to a legal obligation
3. in the public interest
4. to protect the vital interests of the individual
Late Payment of Commercial Debts (Interest) Act
Formula:
*Amount including VAT x (base rate + 8%) x (number of days debt overdue/365)
*Supplier has the right to claim interest from a customer when payment is withheld
annual equivalent cost of a discount
- Simple interest rate:
- [d/(100-d)] x [365/(N-D)] x 100
- Compound interest rate:
- ( { 1 + [d/(100-d)] } ^ [365/(N-D)] - 1 ) x 100
*d = pp discount percentage; N = normal settlement period in days; D = settlement period for early payment in days
- (annual equivalent rate of discount) > (cost of money…interest rate on overdraft facility/deposit account), then:
- accept discount (paying suppliers)
- (annual equivalent rate of discount) < (interest rate earned from deposit account or reduction in bank overdraft interest resulting from lower overdraft balances), then:
- offer discount (to debtors)
EBITDA
earnings before interest, tax, depreciation, & amortisation
overtrading
-A too-quick expansion of business in terms of sales, without the long term finance to support its growth (shortage of working capital and not enough cash available to support the increased level of sales)
- Warning signs:
- Significant increases in sales turnover without an increase in resources (such as capital to pay the increase of staff and inventories; staff; inventories)
- profit margins falling
- increased levels of current assets (a temporary increase in inventories to keep up with the sales demand before lack of payment to suppliers reduces the quantity of goods coming into the inventory of the company)
- increase in the inventory holding period
- increased trade cycle days (due to trade receivables not paying on time/at all & not paying suppliers on time)….trade cycle days above industry average
- an increase in irrecoverable debts
- Reduction in cash flow balances, bank account being overdrawn regularly or permanently
credit information sources (external)
- Bank references:
- The bank would need the following information, when requesting for a bank reference:
1. the credit period
2. the credit amount the company is thinking of giving the customer - bank references must be interpreted correctly as they are usually structured in one of three ways:
1. an unqualified, positive assurance
2. a general indication that the firm is operating normally
3. a guarded statement, indicating that “capital is fully employed” or “we are unable to speak for your figures” - banks have a duty of confidentiality to their customers and will not indicate how quickly a customer pays debts
- Hence, it’s unwise to rely on these references alone when evaluating creditworthiness of a customer
- Use this procedure in conjunction with other information
- Trade credit references/supplier references:
- request for the customer to supply at least two trade references from other suppliers that they trade with
- However, the opinions of the trade references may not reflect the overall payment pattern to suppliers, as it’s likely that the customer would have picked biased ones
- Hence, it’s unwise to rely on these references alone when evaluating creditworthiness of a customer
- Use this procedure in conjunction with other information
- Credit circle meetings
- meetings where people with a common interest (e.g. a trade association) meet on a regular basis to share information on credit-related matters, such as late payers
- However it’s possible that information shared could be limited….since competitors may be unwilling to give information about their customers
- Credit reference agency reports
- Credit reference agency reports have the following details:
1. 3 years’ accounts
2. payment history
3. directors details
4. any insolvency proceedings - The credit rating provided by the reports indicates the average amount of credit given to the firm.
- It’s therefore helpful to the credit manager when assessing the relative size of the proposed credit limit to the potential customer
- However, the information for new companies may be nil, as they have no track record. It is very difficult to form a judgement.
- The information could be outdated, too as it takes time for current information to be analysed and be inputted into the system
- Sometimes, relevant information such as the collapse of a major customer may not be in the report.
- Companies House
- this information is only available for companies and limited liability partnerships
- may not be current information, as it takes time for the accounts to end up in the Companies House
- information could be limited for small companies
- Management accounts
- These could be useful for identifying future plans (such as production and sales levels) of a company
- However, the accounts could be manipulated, showing distorted figures for an improved or stronger financial position
- Also, draft figures are produced internally….so they may not be accurate
- Official publications
- The press provides an up-to-date commentary on the situation within local and national companies
- Read The Financial Times, if the proposed customer is a big national company. This publication enables the credit manager to be kept up-to-date with half-yearly reports, comments on the customer as well as keeping abreast of industry trends and problems
- For small and more local companies, one can refer to regional and local newspapers
- Trade journals are another valuable source of information as they consist of commentaries on trends and results
- However, depending on the publications, the information could be out-dated. It could even be unreliable if exaggerated.
