Managing Trade Receivables

Question 1

When offering to sell its goods or services on credit, a business must have clear policies concerning:

Answer 1

Which customers should have credit]
How much credit should be offered]
What length of credit is it prepared to offer]
Whether discounts will be offered for prompt payment]
What collection policies should be adopted]
How the risk of non-payment can be reduced]

Question 2

What are the 5 C’s that must be considered to approve credit?

Answer 2

Capital, Capacity, Collateral, Conditions, Character

Question 3

Capital (5 C’s)

Answer 3

The customer must appear to be financially sound (e.g. future profitability and liquidity).

Question 4

Capacity (5 C’s)

Answer 4

The customer’s payment record, the type of business, and the amount of credit required in relation to the customer’s total financial resources.

Question 5

Collateral (5 C’s)

Answer 5

On occasions, it may be necessary to ask for some kind of security for goods supplied on credit.

Question 6

List some factors which could influence the length of credit offered to customers.

Answer 6

The degree of competition within the industry, the risk of non-payment, the capacity of the business to offer credit.

Question 7

How can a business ensure that receivables are collected as quickly as possible?

Answer 7

Develop customer relationships, issue invoices promptly, produce an aging schedule of trade receivables, identify the pattern of receipts.

Question 8

How can businesses make a decision regarding whether or not to offer cash discounts?

Answer 8

The cost of offering discounts must be weighed against the likely benefits in the form of a reduction both in the cost of financing trade receivables (collecting the money) and in the amount of bad debts.