Question

Explain the determinants of credit policy variables.                     

Answer 1

Credit policy variables:

There are 4 important variables of a firm’s credit policy. These variables are interrelated and have an overall affect on the level of sales, discounts, collection expenses and bad debt.

i) Credit standards:

There are a Wide Variety of choice in this respect. For Eg. Company may decide not to extend credit to any customer or they may decide to grand credit to all customers. These 2 Example is Very extreme, there are many other practices also

Liberal credit guidelines will in general push sales up by drawing in more clients it will also result in higher occurrence of bad debt, a bigger interest in receivables, and a greater expense of assortment. Stiff credit standard have inverse impacts. They will in general decreases sales, lessen the occurrence of bad debt, decline the interest in receivables, and lower the assortment cost.

ii) Credit period:

The credit time frame alludes to the period of time clients are permitted to pay for their buys. It for the most part changes from 15 days to 60 days. At the point when a firm doesn't expand any credit, the credit time frame would clearly be zero. In the event that a firm permits 30 days, state, of credit, with no rebate to initiate early installments, its acknowledge terms are expressed as "net 30".

Increase of the credit time frame pushes deals up by prompting existing clients to buy more and pulling in extra clients. This is, notwithstanding, joined by a bigger interest in receivables and a higher rate of bad debt. Shortening of the credit time frame would have inverse impacts: It will in general lower sales, decline interest in receivables, and lessen the occurrence of bad debt.

iii) Cash discount: Firms commonly offer discount to instigate clients to made brief installments. The rate rebate and the period during which it is accessible are reflected in the credit terms. For instance, credit terms of 2/10, net 30 imply that a rebate of 2 percent is offered if the installment is made by the tenth day; in any case the full installment is expected by the thirtieth day.

Changing the money rebate approach may imply that the markdown rate is expanded or potentially the markdown period are stretched. Such an activity will in general upgrade deals (in light of the fact that the markdown is viewed as cost decrease), diminish the normal assortment time frame (as clients pay quickly), and increment the expense of rebate.

iv) Collection Effort:

The collection program of the firm, focused on convenient assortment of receivables comprising of – checking the condition of receivables, dispatch of letters to clients whose due date is drawing closer, transmitted and telephonic counsel to clients around the due date, danger of legitimate activity to late records and lawful activity against past due records.