Credit Policy

The success or failure of a business depends primarily on the demand for its products as a rule, the higher its sales, the larger its profits and the higher its stock price. Sales, in turn, depend on a number of factors, some exogenous but others under the firm’s control. The major controllable determinants of demand are sales prices, product quality, advertising and the firm’s credit policy. Credit policy in turn, consists of these four variables.

1.    Credit period, which is the length of time buyers are given to pay for their purchases.

2.    Credit standards, which refer to the required financial strength of acceptable credit customers.

3.    Collection policy, which is measured by its toughness or laxity in attempting to collect on      slow-paying accounts.

4.    Discounts given for early payment, including the discount percentage and how rapidly payment must be made to qualify for the discount.

                  

The credit manager is responsible for administering the firm’s credit policy. However, because of the pervasive importance of credit, the credit policy itself is normally established by the executive committee, which usually consists of the president plus the vice-presidents of finance, marketing and production.