Reflection

1) The document discusses credit and collection from the perspective of a student taking a class on financial management. 2) It explains that extending credit to customers can boost sales, but requires a thorough approval process to examine credit applications and evaluate risks. 3) Managing credit well through an effective credit policy is important for minimizing risks to businesses and helps them meet short-term obligations while balancing liquidity and profitability.

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Archie Baluyo

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Reflection

Uploaded by

Archie Baluyo

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Bicol University

College of Business, Economics, and Management

Sagpon, Daraga, Albay

Baluyo, Archie P.
BSBA Financial Management – IIIA
Credit and Collection

I had had this notion that lending/credit is good because money lent returns
with interest but was unaware of the risks it entails. The discussion provided me with
enlightenment on the relevant topics. I had understood and appreciated the significance
of credit and its management.
Extending credit to customers is indeed a way to boost the sales of a business,
but it is not as simple as that. I learned that before approval of credit to a client, it has to
undergo a process requiring thorough examination and evaluation of the application. It
is usually more common in medium and large businesses and companies. Smaller
businesses also practice credit application but not to the extent of what large
corporations do. Nevertheless, the significance of the process weighs as much as the
others on their respective context. The higher the credit value relative to company size,
the more critical it becomes. After all, this is a way of managing credit risk. The best way
to minimize it is to cut them off from the source and not let them get further. It is at the
creditor's discretion in choosing and trusting creditworthy individuals, corporations, and
the government (though I think one cannot say no to the government). With a
reinforcement of a well-crafted credit policy that works for the company and the clients.
Meanwhile, credit rating is not that new to me. I had encountered it in online video
materials and some finance textbooks. However, they were based on foreign land. I
used to associate it with a credit card. The more diligent payor an entity is the better the
credit rating.
On the contrary, a credit report could be made in favor of an entity even though
its record says otherwise. It was mentioned that we might have to manage such
scenarios in the future. One way I have thought of is to request another credit report
from a different credit bureau but suffering additional expense. Another way is to
diligently track the record of how the applicant does business with other businesses, it is
cost-effective but needs to exert extra effort.
To sum it up, credit is a big part of a business and so does the collection. It is one
of the deciding factors of a business's profitability. Based on the liquidity and profitability
trade-off principle. Having good company credit and collection could help meet short-
term obligations by establishing an effective credit policy to help manage the cash gap
of the company. Consequently, it is useful for companies that opted for profitability over
liquidity. It is better not to have an actual sale than to have one but not get paid. The
latter suffer loss. It emphasizes the importance of credit risk management.