CAT / FIA FFM Syllabus F. Credit Management - Rejecting or extending credit - Notes ^{5 / 7}

The level of trade credit can have a significant effect on profitability

Extending credit can increase profitability. 

If offering credit generates extra sales, then you should consider:

1. The amount of inventory maintained in the warehouse, to ensure that the extra demand must be satisfied

2. The amount of money the company owes to its suppliers (as it will be increasing its supply of raw materials)

If you want to extend the level of trade credit, assess the following:

• The additional sales volume which might result

• The profitability of the extra sales

• The extra length of the average debt collection period

• The required rate of return on the investment in additional receivables