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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:
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The companyís strategic goals
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The impact of any new product launches
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The companyís overall competitive positions
and its current market share
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The goals established for the credit department
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The policies written for the credit department
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Managementís sensitivity to credit risk
and loss
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The credit managerís Management by Objective
[M.B.O.] goals
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The credit departmentís goals
I was able to make the following general comments:
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It is unusual to have no significant bad debt
losses over a two-year
period.
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However, it may be that the credit department
is on a lucky streak.
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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.
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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.
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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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