The discharge of the credit function in a company embraces a number of activities for which the policies have to be clearly laid down. Such a step will ensure consistency in credit decisions and actions. A credit policy thus, establishes guidelines that govern grant or reject credit to a customer, what should be the level of credit granted to a customer etc. A credit policy can be said to have a direct effect on the volume of investment a company desires to make in receivables.
A company falls prey of many factors pertaining to its credit policy. In addition to specific industrial attributes like the trend of industry, pattern of demand, pace of technology changes, factors like financial strength of a company, marketing organization, growth of its product etc. also influence the credit policy of an enterprise. Certain considerations demand greater attention while formulating the credit policy like a product of lower price should be sold to customer bearing greater credit risk. Credit of smaller amounts results, in greater turnover of credit collection. New customers should be least favored for large credit sales. The profit margin of a company has direct relationship with the degree or risk. They are said to be inter-woven. Since, every increase in profit margin would be counterbalanced by increase in the element of risk.
Credit policy of every company is at large influenced by two conflicting objectives irrespective of the native and type of company. They are liquidity and profitability. Liquidity can be directly linked to book debts.… Read the rest