CREDIT POLICIES CREDIT POLICIES
The credit policy of a firm provides the framework to The credit policy of a firm provides the framework to determine whether or not to extend credit to a
determine whether or not to extend credit to a customer and also howcustomer and also how much credit to extend. It has two broad
much credit to extend. It has two broad dimensions, the first is creditdimensions, the first is credit standard and second is the credit analysis. Credit
standard and second is the credit analysis. Credit standards represent thestandards represent the basic criteria for the extension of
basic criteria for the extension of credit to customers. The trade- off withcredit to customers. The trade- off with reference to credit standards covers collection costs, average collection reference to credit standards covers collection costs, average collection period, level of bad debts losses
period, level of bad debts losses and level of sales. With a relaxed creditand level of sales. With a relaxed credit standard the collection costs, bad debts expenses and sales goes
standard the collection costs, bad debts expenses and sales goes up and inup and in reverse case vice-versa happens. The second aspect of
reverse case vice-versa happens. The second aspect of credit policy iscredit policy is credit analysis. It begins with obtaining credit information of the
credit analysis. It begins with obtaining credit information of the customers and ends up with the analysis
customers and ends up with the analysis of the obtained creditof the obtained credit information. Information can be
information. Information can be collected either internally or externally.collected either internally or externally. Internal source of credit information is derived from the records of the Internal source of credit information is derived from the records of the firm. The analysis of credit information should cover
firm. The analysis of credit information should cover both qualitative asboth qualitative as well as quantitative aspects. The quantitative aspect is based on the
well as quantitative aspects. The quantitative aspect is based on the available financial statements whereas qualitative aspects cover the available financial statements whereas qualitative aspects cover the quality of management.
quality of management.
CREDIT TERMS CREDIT TERMS
The second decision area in accounts receivable management is The second decision area in accounts receivable management is the credit terms.
the credit terms. After the credit standard hAfter the credit standard have been establish and ave been establish and thethe credit worthiness of the customers is assessed, the management of a firm credit worthiness of the customers is assessed, the management of a firm must determine the terms and
must determine the terms and conditions on which trade credit will beconditions on which trade credit will be made available. Credit terms have three components :
made available. Credit terms have three components : credit period, cashcredit period, cash discount and cash discount period. Credit period is the duration of ti
for which trade credit is
for which trade credit is extended whereas cash discount is the amount byextended whereas cash discount is the amount by which the over the due amount will be
which the over the due amount will be reduced thus benefiting thereduced thus benefiting the customer
customer. . The credit terms like the crediThe credit terms like the credit standard affect the profit standard affect the profitabilitytability as well as the
as well as the cost of cost of the firm therefore a the firm therefore a firm should determine firm should determine thethe credit terms on the basis
credit terms on the basis of cost-benefit trade-off.of cost-benefit trade-off.
COLLECTION POLICIES COLLECTION POLICIES
The collection policies refer to the procedures followed to The collection policies refer to the procedures followed to collect account receivable when after expiry of the credit period they collect account receivable when after expiry of the credit period they become due. This po
become due. This policy covers two aspects : first ilicy covers two aspects : first is the degree of s the degree of efforteffort to collect the over due and second is
to collect the over due and second is the type of collection efforts.the type of collection efforts.
Escort Limited
Escort Limited has a zero has a zero debt credit policydebt credit policy. However it . However it is giving theis giving the following facilities to its dealers to promote the s
following facilities to its dealers to promote the sales, as liberal creditales, as liberal credit policy has a direct impact on sales.
policy has a direct impact on sales.
CHANNEL FINANCE FACILITIES CHANNEL FINANCE FACILITIES
The company arranges these facilities with various The company arranges these facilities with various bankers for the company dealers to
bankers for the company dealers to support their cash needs. The goodssupport their cash needs. The goods are sold on credit against hundis. Hundis can be
are sold on credit against hundis. Hundis can be drawn for 50 or 75 drawn for 50 or 75 or 90or 90 days subject to qualifying criteria of bank.
days subject to qualifying criteria of bank.
CREDIT FACILITIES CREDIT FACILITIES
Escort provides thirty days interest free
Escort provides thirty days interest free credit to the dealers. For this incredit to the dealers. For this in respect of all hundis the company bears
respect of all hundis the company bears 30 days interest and the30 days interest and the remaining cost of interest, delayed payment charges are borne by the remaining cost of interest, delayed payment charges are borne by the dealers.
dealers.
PENALTY ON BOUNCING OF HUNDIES / CHEQUES PENALTY ON BOUNCING OF HUNDIES / CHEQUES
Bouncing of hundis/ cheques drawn in favor of Bouncing of hundis/ cheques drawn in favor of thethe company is viewed very strongly and usually following actions are taken. company is viewed very strongly and usually following actions are taken.
Tractor supplies are suspended and restored only after all dues Tractor supplies are suspended and restored only after all dues areare cleared.
cleared.
All charges debited by the bank such as collection charges, penalAll charges debited by the bank such as collection charges, penal interest are debited
interest are debited to the dealer.to the dealer.
The bank extending channel financing policy have The bank extending channel financing policy have clearly statedclearly stated that if a dealer has
that if a dealer has two or more bouncing he will be black listedtwo or more bouncing he will be black listed and his limit will be withdrawn with immediate effect. Company and his limit will be withdrawn with immediate effect. Company also makes sales to
also makes sales to such dealers only against letter of credit or such dealers only against letter of credit or demand draft.
demand draft.
CASH DISCOUNT ON
CASH DISCOUNT ON EARLY PAYMENTEARLY PAYMENT Cash discount of 1% is
Cash discount of 1% is payable on tractors dispatched againstpayable on tractors dispatched against funds available in the form of letter of credit or demand draft. Interest is funds available in the form of letter of credit or demand draft. Interest is charged/ paid at 12% per annum on outstanding/ credit balance early charged/ paid at 12% per annum on outstanding/ credit balance early payment incentive.
payment incentive.