Week 5 Flashcards
What is the objective of accounts receivable management?
To collect accounts quickly without losing sales from high-pressure collection te techniques such as offering to strict credit terms
What are credit selection and standards?
Minimum requirements for extending credit to customers
- Firms evaluate customers credit compared to own standards
What information is required for Credit selection?
Financial Statements
Credit reporting Organisations
Banks
Company’s prior experience with customer
What are the 5 C’s of credit?
Character Capacity Capital Collateral Conditions
What is credit scoring?
Firms commonly use with high volume/small dollar requests
What is the purpose of a credit score?
To make a relatively informed decision quickly and inexpensively
What are the effects of relaxing credit standards or extending a credit term?
Sales increase = Profit INcrease
AR increase = Profit decrease
Inventory Increase = Profit Decrease
Bad Debts Increase = Profit Decrease
Why does and increase in AR and/or Inventory decrease profit?
Opportunity Costs
There is cashed tied up in these accounts that could be used in other ways.
what does “net 30” mean?
30 days to pay the invoice in full
what does “2/10 net 30” mean?
2% discount if paid within 10 days or payment in full within 30 days
what is the effect of early payment discounts?
Sales increases = Profit Increase
AR Decreases. = Profit Increase
Bad debts decrease = Profit Increase
Direct Cost Discount = Decreass profit
What is credit monitoring?
An ongoing review of firms accounts receivable to determine whether customers are paying attention to credit standards
How can the firm use ACP to monitor credit?
Alerts firms to any problems with accounts receivable
How can a firm use the aging schedule to monitor credit?
Enables us to pinpoint problems
- If problems are with specific accounts
What are the collection techniques?
Letters Telephone calls Personal Visits Collection agencies/Attorney Legal Action
