Credit information, Managerial Accounting

So as to makes sure that the receivables are collected in occupied and on due date by the customers, prior information of their credit worthiness must be obtainable. This information can be gathered by a variety of sources that we are going to discuss shortly. One significant thing that needs to be remembered while gathering credit information is as collecting credit information includes cost, thus the cost of collecting information must be less than the potential profitability of credit sales. The other factor that should be borne in mind is as collecting credit information may occupy a lengthy period of time, on account of such credit granting decision must not be delayed for long. Depending on these two factors any or a combination of the subsequent process may be utilized to collect the information.

- Financial Statements: Profit and loss account and Balance sheet of customers firm offer valuable insight upon the operating financial soundness, sources of funds, application of creditors and funds and debtors. The subsequent ratio computed from financial statements seems particularly useful in this context: acid test ratio and Current ratio, debt equity ratio, Earning before Interest and Taxes (EBIT) to total assets ratio and return on equity.

- Bank References: A customer's bank a/c is also a valuable source of information about the credit worthiness of the customer. A thorough analysis of bank transactions would reveal the financial behaviour and characteristics of the customer. Bank references can be acquired either directly or through requesting the customer to instruct his bank to give similar.

- Trade references: The seller can ask the prospective customer to offer trade references. Trade references are generally of those firms along with whom the customer is having current dealings.

- Other Sources: A firm can also acquire information regarding the prospective customer from credit rating agencies as CRISIL, CARE and ICRA and trade and industry associations.

Posted Date: 4/9/2013 5:19:31 AM | Location : United States

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