Articals

 

FACTORS AFFECTING THE CREDIT POLICY

 

a)            COMPETITION

 

Consideration should be given to the terms of credit your competitors are offering.

 

b)           FINANCIAL POSITION

 

The cost of granting credit is an important factor in determining the degree to which you are prepared to extend payment terms. Credit terms and period should always be compared with the cost of running an overdraft or any other loans obtained to finance credit.

 

c)            ATTITUDE TO RISK & BAD DEBTS

 

Each and every organization should be able to measure the risk involved in comparison to the profits made. A number of organizations tend to ignore this area in the name of business and each year you get the company’s profits declining due to the provision of bad debts.

 

d)           THE NATURE OF THE PRODUCT.

 

The nature of the business dictates the credit periods offered e.g. in the food industry the credit period is shorter while in heavy industries the credit period is longer.

 

e.g. – Supermarkets and plant industries.

 

e)            SIZE OF THE ORDER

 

The bigger the order the more the profits and this would warrant a longer credit as the cost of credit is supported by the profits.

 

f)             ECONOMIC CLIMATE

 

Credit periods are also dictated by the position of the underlying domestic economy.

 

E.g. – Is the country in a boom or suffering a recession

 

–          the level of the interest rates.

 

NB      This is an area that need to be reviewed regularly to enable the company make appropriate changes to the credit policy.