Q. Credit Analysis for Formulation of Optimum Credit Policy?
Credit Analysis: - Credit Analysis is made to estimate the credit worthiness of the customers before making credit sales. Decision of sale on credit is taken merely on the basis of credit analysis. The firm require not follow the policy of treating all the customers equal for allowing credit. Every customer may be fully examined previous to offering credit terms to him. Credit estimation involves two steps:
a. Obtaining Credit Information: - Credit Information concerning every customer is gathered from different sources. Meeting credit information involves cost. Cost of collecting information must be less than the expected profit accruing from it. Credit information is able to be obtained from internal as well as external sources.
- Internal Sources: - As internal sources of credit information firm is able to require its customers to fill up forms giving details about their financial activities. They may as well be asked to furnish trade references with which the firm is able to have contact to obtain the required information.
- External Sources :- Credit information is able to as well be obtained externally from:
(i) Financial Statements: - Financial statements specifically Balance Sheet and profit & loss a/c are major source of credit information.
(ii) Bank References: - Bank of the customer is as well a useful source of credit information about the customer. Firms acquire credit information from customer's bank with the help of its own bank. Information such as loan taken by him, usual balance of customer, any default in repaying such loan etc. is able to obtain from the bank of the customer.
(iii)Reports of Credit Rating Agencies: - Credit rating agencies gather information about the financial and managerial aspects of large number of business concerns from a variety of sources such as newspapers, market, private investigation etc.
(iv) Bazaar Reports: - Credit information about the customer can as well be maintained from the business concerns in the same trade or industry.
(v) Other Sources: - Other sources from where credit information can be obtained are journals, trade directories, government revenue records such as income tax returns, sales tax returns etc.