Optimum credit policy is the policy which maximizes the firm’s value by minimizing total cost for a given level of revenue. 2 Optimum credit policy does not mean the policy that maximizes the expected operating profit. The cost of investment should also be considered.
What is credit standard in credit policy?
Credit Standards: Credit standards are the basic criteria for extension of credit to customers. They are influenced by three C’s of credit viz.. 1. Character: The willingness of the customer to pay.
What is the credit policy?
A credit policy contains guidelines that structure the amount of credit granted to customers, as well as how collections are to be conducted for delinquent accounts. It covers the normal payment terms that the company will allow to its customers, and the circumstances under which alternative terms are allowed.
How to define an optimum credit policy for your company?
One of the major issues in the company is the controlling of the collection period and developing optimum credit policy that minimizing the company loses, i.e how to trade off and balance between two costs, the first is carrying costs and the second is the opportunity costs of a particular credit policy.
What should be the goal of a credit policy?
To achieve this basic goal, the firm should manage its credit policy in an effective manner to expand its sales, regulate and control the credit and its management costs, and maintain debtors at an optimum level. Optimum credit policy is the policy which maximizes the firm’s value by minimizing total cost for a given level of revenue.
How is the optimal amount of credit determined?
These events are the cash flows associated with granted credit Optimal Credit Policy: The optimal amount of credit is determined by the point at which the incremental cash flows from increased sales are exactly equal to the incremental costs of carrying the increase in investment in accounts receivable.
What makes a good credit policy for a small business?
An effective policy is directly tied to the goals of your business and the amount of risk your business is comfortable incurring. A small business may be able to function with a “credit policy” kept solely in the head of a few people, or even one person.
