CREDIT AND COLLECTION

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MiddleBadger2892

Cards (27)

Credit comes from the Latin word credo = to believe or trust
Credit means securing something of value whether tangible or intangible
The basic elements of credit
Ability to obtain something of value
A promise to pay
a definite sum of money
Payable on demand or in the future
Functions of credit
Economic function
Social function
business promotion
Disadvantages of Credit
●     At times, it encourages speculation
●     Also tends to contribute to extravagance and carelessness on the part of people who obtain it
●     Many entrepreneurs resort to over-expansion.
●     Businessmen are not only susceptible but eventually succumb to an air of confidence or pessimism
Advantages of Credit
Facilitates and contributes to the increase in wealth
Saves time and expense by providing a safer and more convenient means of completing transactions
Helps expand the purchasing power of every member of the business community
Enables immediate consumption of goods thereby providing an increase in material well-being
Helps expand economic opportunities through education, job training, and job creation
Spreads progress to various sectors of the economy
Makes possible the birth of new industries
Helps buying become more convenient for customers
Classifications of credit
Charged account - mere signature of the customer/credit
Secured charged account - extra collaterals
Installment accounts - payable in installments
Straight loans - granted by banks or financial institutions
Classifications of credit according to use
consumer credit - personal use
Industrial credit - business
Trade credit - used in relation to business
The 5cs of credit
Character
Capacity
Capital
Collateral
Conditions
In 1932, there was already an association of Credit men Inc.
After WW2 and during the process of rehabilitation business began to pick up
Sample Laws
Usury Law - protect consumers by governing the interest charged on a loan.
Two Installments Default Rule under Civil Law - In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay
Bouncing checks - a check for which there aren't enough funds in the bank customer's account to cover it.
ROLE OF CREDIT AND COLLECTION
Basic function of credit and collection
To maximize profit and minimize bad debt losses
MAXIMIZING SALES
● The credit department must be a business-better, not in the manner of the sales department tactics, but by its fair action and friendly attitude which pave the way for the sales department.
● Chief functions of the credit department - bind more closely the customers to the institution.
COOPERATION WITH OTHER DEPARTMENT
●     Another essential factor in affecting maximum profits and minimum losses is cooperation with other credit departments and other credit men.
●     Credit men are dependent upon other credit men for information and cooperative action.
●     All credit managers are interested in the same goal, namely, to raise the standard of credit and thereby remove as much of the risk from credit as possible.
CREDIT DEPARTMENT AS A PROFIT CENTER
●     Top management is treating the credit department not merely as a cost center but as a profit center as well.
●     The credit management is tasked with the job of subjecting the investment in receivables to the test of profitability.
●     Old approach- “What can credit do for sales.”
●     More important- “What can credit do for profits.”
CONTRIBUTION OF THE CREDIT DEPARTMENT TO OTHER AREAS
Support to Sales Effort- management should encourage the department to provide a balance to the sales effort.
Customer Counseling- wise counseling may lead to saving many customers and preserving profitable sales.
Contribution to Finance- securing prompt conversion of receivables into cash and aid in the preparation of cash budget.
Task Force Assignment- credit men can be at the forefront of new managerial developments.
THE CREDIT AND COLLECTION UNIT
● Credit- processing, evaluation, and extension of credit
● Collection- activities related to the collection of accounts
The problem that will confront top management:
●     Should the credit function be separated from the collection function?
●     Should the same set of personnel handle both credit and collection function as their collective responsibility?
●     Who will make the final credit decision?
The decision will depend on the following:
●     How trustworthy are the staff members?
●     Operating costs
●     The ultimate decision would depend on the top management which should consider all these circumstances.
●     Credit Managers do not make the final credit decision.
●     Theirs are merely recommendatory, the final decision being reserved to a higher official.
●     The investors feel a lot more secure if the final credit decisions are made by higher officials.
Its Place in Business Organization:
●     The owner of the business - is the one who directs the three main activities of a business: Production, Marketing, and Financing.
●     Under what activity should the Credit and Collection Department be? :it is part of the financing branch of the business activity.
●     Credit is temporarily substituted for money in the sale of merchandise.
●     The company’s financial plan and credit polity are bound to each other.
Relations to the Sales Department:
●     The credit department is normally under the control of the finance man, but in other businesses, it is actually under the sales manager.
●     It is claimed that harmony of action is much more certain of attainment where both selling and credit approval are under one department head.
●     But since the main preoccupation of sales is to increase the volume of sales, there is the possibility and reality that the credit function is relegated to the background.
The Independent Credit Department
●     A credit manager must make some delicate credit decisions that command the best efforts of experienced and specially-trained minds.
●     The credit manager should be unhampered by any outside influence on a decision and only subject to review by the chief operating executive.
●     The credit manager still needs to keep in constant and close touch with other departments.
●     Consultations and conferences are essential for the good of a business.
Sales Credit Conflict
Contributory factors of conflict:
●     There is a constant fight for the good graces of top management.
●     The salespeople are usually the pampered ones.
Attempts at minimizing the conflict:
●     Placing the two functions in one.
●     Program of continuous dialogue between salesmen and credit men.
Tips in minimizing the conflict:
Exchange problems
Give credit
Avoid memos
Bank goodwill
Keep your collaborator informed
Accept responsibility for failure
Acknowledge suggestions
Be humble
Recognize needs
Build a record
● The most potent weapon a company can have is a profit-minded sales force working in positive collaboration with credit personnel.
● The credit men should be sales-oriented, financially-oriented, business-oriented, public relations-oriented, inquisitive in nature, a problem solver, one who has the ability to say”no,” and one who can make an unpopular decision and stand behind it.
THE CREDIT MANAGER
Different Titles for Credit Positions:
●     Credit Manager
●     Assistant Treasurer
●     General Credit Manager
●     Branch Credit Manager
●     Loans Manager
●     Credit Man
●     Credit Correspondent
●     Chief Bookkeeper
●     Credit and Adjustment Clerk
Current Status and Functions of Credit Managers
●     Usually reports directly to the chief executive or chief corporate officer
●     Responsible for formulation of credit policies
●     Administration of credit operations