Chapter 8 Discussion 2 Week 5 Receivables Assignment

Chapter 8 Discussion 2 Week 5 Receivables - Assignment Example This would mean that a firm may either have to abandon its plan for a liberal credit policy or it may end up having cash flow crisis if it continues with the plan. Competitors’ actions and reactions of customers to a change in the credit policy are important. It is possible that customers may shift their business in favor of a competitor who offers the best credit terms. Credit controllers in firms should take a competitors and customers analysis to determine possible effects to a change in credit policy. The management should ensure that it adopts a policy that poses minimal risk of lost customer goodwill as well as providing a sustainable competitive advantage (Bartels, 1967). Probability of bad debts and the managements risk appetite are also a major influence of a credit policy. If the management of a company determines that there is a high risk of their credit sales becoming bad, they would probably set up a tight credit policy. Companies whose management is risk averse do not favor loose credit policies. Impact of the credit policy on turnover, profitability and liquidity should also be considered. The management should seek to maintain a balance between increasing sales and profits and maintaining liquidity at appropriate levels (Talekar, 2005). This trade-off dictates the credit policy of a firm. The company may opt to reduce the credit limits of clients who are perceived to pose a high risk. The management should carry out customer due diligence and analyses so as to assess the credit worthiness of their clients. This should be done periodically, and the management should ensure that credit limits are lowered for high risk clients. This should be done carefully so that the customer’s loyalty is not eroded. The amount of $ credit sales should be capped to a certain limit depending on the credit worthiness assessment. The management may seek to use third parties