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Topic 6 - Credit Management Slides

This document discusses credit management. It defines credit types as trade credit and retail credit. It outlines the key steps in credit management: 1) terms of sales, 2) trade agreements, 3) credit analysis using qualitative and quantitative methods, 4) credit decisions, and 5) collection policies including aging schedules. It also briefly discusses bankruptcy, workouts, liquidation and reorganization. The overall goal of credit management is to effectively extend and collect credit.

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Dr-Wasim Abbas Shaheen
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39 views10 pages

Topic 6 - Credit Management Slides

This document discusses credit management. It defines credit types as trade credit and retail credit. It outlines the key steps in credit management: 1) terms of sales, 2) trade agreements, 3) credit analysis using qualitative and quantitative methods, 4) credit decisions, and 5) collection policies including aging schedules. It also briefly discusses bankruptcy, workouts, liquidation and reorganization. The overall goal of credit management is to effectively extend and collect credit.

Uploaded by

Dr-Wasim Abbas Shaheen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Topic 6: Credit Management

By Dr. Wasim Abbas Shaheen


Course Instructor:
Dr. Wasim Abbas Shaheen
Assistant Professor - Finance
QASMS, QAU, Islamabad

1
Learning Objectives
• Discuss the nature of Credit decisions
• Understand the importance and need for Credit management
in a business
• Develop and implement credit management policies and

By Dr. Wasim Abbas Shaheen


system

2
Credit Management

• Mostly the trade today is done on credit basis as we can


see the Accounts Receivables are around 1/3 of the
current assets of the company’s balance sheet
• Credit Types:

By Dr. Wasim Abbas Shaheen


• Trade credit – to firms
• Retail credit – to customers

3
Steps in Credit Management
Terms of
Sales

Trade
Agreement

By Dr. Wasim Abbas Shaheen


Credit
Analysis

Credit
Decision

Collection 4
Policy
1. Terms of Sales
• Cash on Delivery (COD)
• Cash Before Delivery (CBD)
• Progressive Payments (30% on contract, 30% 1 month after
delivery, 40% 2 month after delivery

By Dr. Wasim Abbas Shaheen


• Cash discount for prompt payment
• 2/10, net 30
• 3/10, EOM, net 30 - here EOM = End of Month
• Seasonal Dating – to cover up seasonal price fluctuations of
seasonal products (Contract is made today with future dates)

5
2. Trade Agreement
• Open Account – no formal agreement
• Promissory note
• Commercial draft
• Sight draft

By Dr. Wasim Abbas Shaheen


• Time draft
• Bankers Acceptance

6
3. Credit Analysis
• Credit Analysis – the procedure to analyze the likelihood
a customer will pay or not
• Qualitative Analysis
• SWOT Analysis
• PEST Analysis

By Dr. Wasim Abbas Shaheen


• Five C’s Analysis (Character, Capacity, Capital, Collateral, Condition)
• Quantitative Analysis
• Financial Statement Analysis
• Z-Score (1.81 – 2.99)

7
4. Credit Decision
• Credit Decision – the standard set to determine the amount
and nature of credit to extend to customer

By Dr. Wasim Abbas Shaheen


8
5. Collection Policy
• Collection Policy – procedure to collect and monitor
receivables
• Aging Schedule – classification of accounts receivables by time
outstanding
• Aging Schedule:

By Dr. Wasim Abbas Shaheen


9
Bankruptcy
• Bankruptcy – The situation when the firm is unable to
pay its debts
• Workout – Informal arrangement between debtors and creditors
establishing steps the debtors may take to avoid declaring
bankruptcy.

By Dr. Wasim Abbas Shaheen


• Liquidation - sale of bankrupt firm’s assets
• Reorganization – restructuring of financial claims on failing firm
to allow it to keep operating

10

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