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Competitiveness and Bad Debt Losses

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By Steven Kozack
Reprinted by permission from Covering Credit News

Credit Policy

One of my clients recently asked me to comment on the fact that the company had almost no bad debt losses over the last two years. Management expressed concern about the possibility that their credit policies might be too conservative. I responded that this is a complex issue. Specifically, a companyís credit policy is influenced by any number of factors including:

  • The companyís strategic goals

  • Its market share goals

  • Its profit margin

  • The impact of any new product launches

  • The companyís overall competitive positions and its current market share

  • Its bad debt reserves

  • The goals established for the credit department

  • The policies written for the credit department

  • Managementís sensitivity to credit risk and loss

  • The credit managerís Management by Objective [M.B.O.] goals

  • The credit departmentís goals

I was able to make the following general comments:

  1. It is unusual to have no significant bad debt losses over a two-year

  2. However, it may be that the credit department is on a lucky streak.

  3. It is possible that there are un-collectable balances ìburiedî in the A/R
    that have not yet been acknowledged as un-collectable and written off.

  4. If write offs are calculated net of recoveries, it is possible that
    recoveries made against balances written off more than two years ago have
    affected the net amount recorded and written off over the last two years.

  5. It is also possible that the credit department is too conservative in its
    approach to risk management. The credit manager may be at fault, but it is
    possible and even likely that the credit manager is doing what they believe
    that senior management expects them to do.

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