In this time of recession and down market it’s question for all about their credit and their credit points. I like to talk on credit analysis today. I like to talk with reference to business community as we all notice that banks and financial institutes giving credit even to people with bad credit report. People are having debt and credit card debt. No Company does blindly sell on credit to every customer approaching it.
The company has to evaluate the capability of the customer and his strengths to fulfill the promise of paying the bills in time. The companies ignoring adequate analysis of their customer would soon find themselves in a situation not generating sufficient resources for day to day operation of the business. The company must analyze the risk of paying late or risk of default before extending credit. The credit analysis would broadly involve the following three steps.
Getting financial and non financial information about the customer.
Analyzing the credit worthiness of the customer and assessing the risk involved.
Deciding to grant the credit.
The analysis of credit worthiness begins with the assessment of the customer’s willingness to pay the bills of the company. Capacity is the ability of the customer to meet the obligations whenever they are due. Debt negotiation and debt settlement helps company to finalize capacity of customers. In this regard it would be important for the company to see that the obligations are met through the funds generated from the operations of the customer.
In additional to setting the credit standards, credit period, and cash discount policy, it is also important for the company to design the collection policy and procedures so as to speed up the collections as and when become due. What would the company do if the customers do not pay within the set credit period? In this regard the company has to assess the chances of collecting the accounts receivable by putting some effort. If by putting small effort the chance are that the customer will pay his bill are high then the company should go ahead with that much of effort.