Management of Receivables^225
The above discussion will suggest three ways of management control in connection
with credit policy:
(a) Debtors expressed in relationship to sales - either as a percentage or as a number
of weeks sales. This provides an overall confirmation that the business is effective
in carrying out its own credit policy.
With a seasonal business, however, these calculations could be misleading. Another
disadvantage of averages is that they may conceal the fact that some long-overdue
debts are being compensated by quicker collections from other customers. For
management control there is no substitute for a complete listing of debtor accounts,
analysed by age, compiled every month.
(b) Bad debts as a percentage of sales value, or reported otherwise in detail.
(c) Credit control costs.
This means that credit control involves three types of action:
(a) deciding the normal credit period to be allowed;
(b) establishing credit limits for individual customers;
(c) implementing the system (that is to say, ensuring that credit limits and the credit
period are not exceeded).
(a) Deciding the Credit Period: If a business is offering a unique product or service,
or one for which demand exceeds supply, there may be no need to offer credit
terms at all. In other cases the starting point in deciding credit policy is a review of
the credit terms offered by competitors, and from this basis the credit terms of the
particular business will be developed.
Other factors that affect the length of the credit period are the following:
l Buyer's inventory and operating cycle
l Perishability and collateral value
l Consumer demand
l Cost, profitability and standardisation
l Credit risk
l The size of the account
l Competition
l Customer type
Long credit period may be offered to the customers if this will enable the business to
capture a larger share of the available market, or the break into a new market. The