Important Factors for Credit Policy

Important Factors for Credit Policy

Credit policy drafting is critical and complex issue for the organization, and there are number of factor to be considered, while deciding the policy.

1.    Administrative Cost of Collection

Debt collection is not free, and there are some costs associated with debt collection i.e. Debt collection staff cost, Travelling costs of Debt collecting staff, discount offered.

2.    Finance Arrangement

A debt extension policy will require financing, an extension in debt will lower the liquidity within organization, and organization must plan this shortage of liquidity.

3.    Cost of Finance

Financing are not free, and therefore cost of arranging finance to fill the liquidity gap shall also be considered, while drafting credit policy.

4.    Risk of non payment

Risk of nonpayment or bad debt should also be considered in drafting of accounting policy. Nonpayment will affect profitability & liquidity of the organization.

5.    Market Practice

Market or industry practice is also important factor for credit policy drafting. We have to follow the norms of market to exist.

6.    Sales Targets

Sales targets are another important factor for credit policy. It is important to remember that sales have direct relationship with profitability of the organization.

7.    Aggressive Chasing

Aggressive chasing for credit collection may reduce debtor, but customer relationship would be at stake.

8.    Discount offer

Discount offer can reduce the debtor; however discount is a costly practice. Therefore discount should be offered carefully (well calculated).