Management of Accounts Receivable

Question 1

What are the five Cs of credit

Answer 1

Capital.
Capacity.
Collateral.
Conditions.
Character.

Question 2

What are some of the sources of information on business may use to judge a customers ability to pay debts on the due date. (6)

Answer 2

Trade references.
Bank references.
Annual accounts.
The customer.
Credit agencies.
Other supplies.

Question 3

How does the business decide the appropriate credit limit to adopt

Answer 3

There is no theories on models to go to business here. Some businesses adopt the rule of thumb method based on the amount of sales to the customer or the maximum the business is prepared to be owed. For example a maximum of 20% of its working capital by all of its customer.

Question 4

What determines the length of credit period offered (6)

Answer 4

Typical credit terms operating in the industry.
The degree of competition in the industry.
Bargaining power of particular customers.
Risk of non-payment.
Capacity the business to offer credit.
Marketing strategy of the business

Question 5

What is the risk of increasing the length of credit

Answer 5

It increases the risk of an increase in bad debts.