CAT / FIA FFM Syllabus F. Credit Management - Credit management - Notes ^{1 / 7}

The credit control department

The credit control department is responsible for:

the offer of credit
the collection of debts

The roles of the credit control department include:

Keeping the receivables ledger up-to-date
Pursuing overdue debts
Dealing with customer queries
Reporting to sales staff about new enquiries
Giving references to third parties (e.g. credit reference agencies)
Checking out customers’ creditworthiness
Advising on payment terms

What is credit control?

Credit control deals with a firm's management of its working capital.

Trade credit is offered to business customers.

Consumer credit is offered to household customers.

Types of credit

Many businesses, however, cannot demand payment on delivery, especially for larger items.

Trade credits
These are credits issued by a business to another business.
For example, many invoices state that payment is expected within thirty days of the date of the invoice.
In effect this is giving the customer 30 days' credit.
The customer is effectively borrowing at the supplier's expense.
Consumer credit
This is credit offered by businesses to the end-consumer.
(i) Many businesses offer hire purchase terms when the consumer takes out a loan to repay when the goods purchased.
Failure to repay will result in the goods being repossessed.
(ii) In practice, much of the growth in consumer credit has been driven not so much by retailers as by banks.
Credit cards are largely responsible for the explosive growth in consumer credit.

Credit control

Credit control issues are closely bound up with a firm's management of liquidity.

Credit is offered to enhance sales and profitability- but this should not be to the extent that a company becomes illiquid and insolvent.

A business will also need to be aware of the normal credit terms offered in their line of business.
In order to attract customers a business will need to be operating within the industrial norm.
For example, if it is normal in an industry to offer 50 days' credit to customers, it would be difficult for a supplier to ask for less generous terms, such as 20 days' credit.