Question

Assess the external and internal factors that influence credit policy and decision making within a company that extends credit to its customer when providing a good or service on account. Next, indicate which factor you believe is most significant in today’s business environment. Provide support for your rationale.

Answer 1

There are many internal and external factors that influence credit policy & decision making of a company. So let’s see those factors;

Internal factors;

1. Condition of liquidity will influence credit policy of a company because if a company has poor liquidity then such company can not give more credit to its’ customers.

2. Condition of avaialble credit facility from its suppliers. It also affect credit policy of a company because if a company is not getting proper credit facility from its’ suppliers then it can not grant more credit to its’ customers.

3. Level of sales of a company also affect credit policy. If a company already have proper sales then it will not try to offer more credit to their customers.

4. Inventory turnover ratio of company also affect credit policy.

5. Length of collection period is also a key factor that affect credit policy of a company.

6. Requirement of short-term funds also affect credit policy, if company have no more requirement of short-term funds then it will not grant credit to its’ customers.

7. Level of unsold inventory is also a determinant of credit policy etc.

External factors;

Followings are the main external factors that affect credit policy of a company;

1. Level of competition in the market.

2. Credit policy of the other companies in the market.

3. Types & nature of the customers.

4. Geographical distributions.

5. Economic conditions of the market.

6. Rules & regulations of the government.

7. Risk and possibilities of bad debts.

8. Monetary policy of the appex bank in the country.

9. Size & nature of order for goods & services.

10. Business cycle.

11. Fiscal policy of the government.

12. Local economic development in the country.

13. Industrial & poltical factors.

14. Desired & wants of the prospective customers etc.

As we know that both internal & external factors same importance in case of credit policy of a company but when we compare both then clearly find out that internal factors are more important because a company can control these factor as per credit policy whereas external factors can not be controlled by a company. No doubt a company completely can not ignore external factors while determining its’ credit policy but a company first of all should consider its’ internal factors because after all internal factor are main basis for determining credit policy. Such as if a company has high need of short-term funds and these funds can not be arranged from market then sale on cash basis will be must option for a company. That is why we can say that internal factors are main in case of credit policy.