CAT / FIA FFM Syllabus F. Credit Management - Internal sources - Notes ^{2 / 4}

Customer visits

Visits to the customer's premises can provide useful information.

Such a visit has the following purposes:

1. The credit controller can get a feel for the business and those running it

2. The credit manager should take a look around the business, and can speak to people at a suitable level (e.g. the financial controller)

Credit control information

After analysing the relevant accounting data, visiting the client, and having received assurances from a bank, we are now in a position to use this information.

We should use it effectively to come to a conclusion as to whether to provide credit and on what terms

Trade credit

• A new customer will be offered a set level of credit

• Credit might be granted provisionally subject to a formal review at a later date.

• The level of credit should be increased, only after the customer has established a suitable payments record

The payment record must be monitored continually

1. Invoices must be posted at the right time

2. Receipts should be posted when they arrive, and allocated specifically to the invoices to which they relate

3. A customer history analysis can be prepared

   This is like a statement, but with:

   (i) Total annual sales, on a rolling 12 month basis
   (ii) Outstanding amounts owed
   (iii) Days sales outstanding at each month end

The advantage of this is that trends in the account can be monitored, as can also the ageing of the receivables balance, as illustrated below.

With this information it should be possible to develop in-house credit ratings.

In-house credit ratings

Credit monitoring can be simplified by a system of in-house credit ratings. 

For example, a company could have five credit-risk categories for its customers.

These credit categories could be used to decide either individual credit limits for customers within that category or the frequency of the credit review.