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Credit in the Company
NACM 1
Learning Objectives
� Why credit is a function of business
� The strategic role of credit
� Where credit typically fits within the business organization
� The role of credit in financial management
� The role of credit in the operating cycle
� The goals and core activities of a credit department
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Credit in the Company� Credit as a Business Function
� The Strategic Role of Credit
� Credit Within the Business Organization
� The Role of Credit in Financial Management
� Credit and the Operating Cycle
� The Core Activities of the Credit Department
� The Credit Department’s Goals
� The Credit Department’s Multi-Functional Role
� The Credit/Sales Relationship3
Credit in the Company (continued)
� The Credit/Purchasing Relationship� The Credit/Manufacturing Relationship� The Credit/Information Systems Relationship� Credit Department Relationships with Other
Departments� Organizing the Credit Department� Day-to-Day Administration� Lockbox Operations� Collecting Accounts Receivable� Control and Follow-Up
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Credit as a Business Function
�Business
�Business organization
�Strategy
�Strategic planning
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The Strategic Role of Credit
�Amassing Information
�Credit Analysis
�Collection
�Cash Application
�Deduction Resolution
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Credit Within the Business Organization
� Management of Accounts Receivable
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The Worth of Credit & A/R
A/R is 2nd largest asset of most companies
Credit Within the Business Organization
� Management of Accounts Receivable
� Net Working CapitalCurrent Assets – Current Liabilities = Working Capital
� Finance-Related Functions
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Cash Management
Cash Flow
Purchase Materials
Convert Inventory
Product Sold
Receivable Generated
Cash Collected
The efficient management and use of cash in a manner that is consistent with the strategic objectives of the business.
Credit and the Operating Cycle
Sale Recorded – Invoice/Receivable Created Payment Received Cash Application
Credit Department Review & Investigation
Credit Decision – Order Approval
Customer Credit ApplicationInitial Order
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The Core Activities of the Credit Department
� Customer credit analysis
� Develop credit policy
� Manage collection function
� Set credit availability thresholds
� Management reporting
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Clean up the crime scene!
Knowledge & Skills for Credit
� Accounting, Financial Analysis
� Business and Credit Law
� Communication
� Management & Negotiation
� Customer Service
� Analytical
� Computer
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The Credit Department’s Goals
Increase sales and profit.
The ultimate goal of credit decisions is to assess businessrisk to maximize reward.
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Marginal Accounts
� Marginal accounts - accounts with poor payment history, inadequate working capital or deteriorating financial condition are taken on for strategic reasons . . .
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The Credit/Sales Relationship
The credit-sales relationship is one of the most important tasks of the credit manager.
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Credit Department
The Credit Department’s Multi-Functional Role
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Credit Relationships
� Purchasing
� Information Systems
� Personnel
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Organizing the Credit Department
�Two essential functions:�Defining responsibility
�Staffing
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Day-to-Day Administration
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The major functions performed daily by the credit department:
� Credit approval process
� Establishment of accounts
� Order processing
� Accounts receivable administration
� Collection & adjustments
� Control & follow-through
Lockbox Operations
A lockbox is a check collection system operated by a bank.
� Economic benefits
�Mail time
�Processing time
�Availability time
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Collecting Accounts Receivable
Collection effort when payment is not received when due.� Letters
� Phone calls
� E-mail - text
� Visits
� Third-party collections
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Thank you!
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