现代企业财务信用管理讲义.pptx

McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-0Chapter Outline29.1 Terms of the Sale29.2 The Decision to Grant Credit:Risk and Information 29.3 Optimal Credit Policy29.4 Credit Analysis29.5 Collection Policy29.6 How to Finance Trade Credit29.7 Summary&ConclusionsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-1IntroductionA firms credit policy is composed of:Terms of the saleCredit analysisCollection policyThis chapter discusses each of the components of credit policy that makes up the decision to grant credit.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-2The Cash Flows of Granting CreditCredit sale is madeCustomer mails checkFirm deposits checkBank credits firms accountAccounts receivableCash collectionTimeMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-329.1 Terms of the SaleThe terms of sale of composed ofCredit PeriodCash DiscountsCredit InstrumentsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-4Credit PeriodCredit periods vary across industries.Generally a firm must consider three factors in setting a credit period:The probability that the customer will not pay.The size of the account.The extent to which goods are perishable.Lengthening the credit period generally increases salesMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-5Cash DiscountsOften part of the terms of sale.Tradeoff between the size of the discount and the increased speed and rate of collection of receivables.An example would be“3/10 net 30”The customer can take a 3%discount if he pays within 10 days.In any event,he must pay within 30 days.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-6The Interest Rate Implicit in 3/10 net 30A firm offering credit terms of 3/10 net 30 is essentially offering their customers a 20-day loan.To see this,consider a firm that makes a$1,000 sale on day 0Some customers will pay on day 10 and take the discount.Other customers will pay on day 30 and forgo the discount.01030$97001030$1,000McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-701030+$970-$1,000A customer that forgoes the 3%discount to pay on day 30 is borrowing$970 for 20 days and paying$30 interest:The Interest Rate Implicit in 3/10 net 30McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-8Credit InstrumentsMost credit is offered on open accountthe invoice is the only credit instrument.Promissory notes are IOUs that are signed after the delivery of goodsCommercial drafts call for a customer to pay a specific amount by a specific date.The draft is sent to the customers bank,when the customer signs the draft,the goods are sent.Bankers acceptances allow a bank to substitute its creditworthiness for the customer,for a fee.Conditional sales contracts let the seller retain legal ownership of the goods until the customer has completed payment.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-929.2 The Decision to Grant Credit:Risk and Information Consider a firm that is choosing between two alternative credit policies:“In God we trusteverybody else pays cash.”Offering their customers credit.The only cash flow of the first strategy is The expected cash flows of the credit strategy are:01We incur costs up frontand get paid in 1 period by h%of our customers.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-1029.2 The Decision to Grant Credit:Risk and Information The NPV of the cash only strategy isThe NPV of the credit strategy isThe decision to grant credit depends on four factors:1.The delayed revenues from granting credit,2.The immediate costs of granting credit,3.The probability of repayment,h4.The discount rate,rBMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-11Example of the Decision to Grant CreditA firm currently sells 1,000 items per month on a cash basis for$500 each.If they offered terms net 30,the marketing department believes that they could sell 1,300 items per month.The collections department estimates that 5%of credit customers will default.The cost of capital is 10%per annum.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-12Example of the Decision to Grant CreditThe NPV of cash only:The NPV of Net 30:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-13Example of the Decision to Grant CreditHow high must the credit price be to make it worthwhile for the firm to extend credit?The NPV of Net 30 must be at least as big as the NPV of cash only:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-14The Value of New Information about Credit RiskThe most that we should be willing to pay for new information about credit risk is the present value of the expected cost of defaults:In our earlier example,with a credit price of$500,we would be willing to pay$26,000 for a perfect credit screen.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-15Future Sales and the Credit DecisionDo not give creditGive creditCustomer pays h=100%Customer pays(Probability=h)Customer defaults(Probability=1 h)Give creditDo not give creditOur first decision:We refuse further sales to deadbeats.We face a more certain credit decision with our paying customers:Information is revealed at the end of the first period:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-1629.3 Optimal Credit PolicyCarrying CostsTotal costsC*Costs in dollarsLevel of credit extended At the optimal amount of credit,the incremental cash flows from increased sales are exactly equal to the carrying costs from the increase in accounts receivable.Opportunity costsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-1729.3 Optimal Credit PolicyTrade Credit is more likely to be granted if:1.The selling firm has a cost advantage over other lenders.2.The selling firm can engage in price discrimination.3.The selling firm can obtain favorable tax treatment.4.The selling firm has no established reputation for quality products or services.5.The selling firm perceives a long-term strategic relationship.The optimal credit policy depends on the characteristics of particular firms.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-1829.4 Credit AnalysisCredit InformationFinancial StatementsCredit Reports on Customers Payment History with Other FirmsBanksCustomers Payment History with the FirmCredit Scoring:The traditional 5 Cs of creditCharacterCapacityCapital CollateralConditionsSome firms employ sophisticated statistical modelsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-1929.5 Collection PolicyCollection refers to obtaining payment on past-due accounts.Collection Policy is composed ofThe firms willingness to extend credit as reflected in the firms investment in receivables.Collection EffortMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-20Average Collection PeriodMeasures the average amount of time required to collect an account receivable.For example,a firm with average daily sales of$20,000 and an investment in accounts receivable of$150,000 has an average collection period ofMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-21Accounts Receivable Aging ScheduleShows receivables by age of account.The longer an account has been unpaid,the less likely it is to be paid.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-22Collection EffortMost firms follow a protocol for customers that are past due:1.Send a delinquency letter.2.Make a telephone call to the customer.3.Employ a collection agency.4.Take legal action against the customer.There is a potential for a conflict of interest between the collections department and the sales department.You need to strike a balance between antagonizing a customer and being taken advantage of by a deadbeat.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-23FactoringThe sale of a firms accounts receivable to a financial institution(known as a factor).The firm and the factor agree on the basic credit terms for each customer.FirmFactorCustomerCustomers send payment to the factorThe factor pays an agreed-upon percentage of the accounts receivable to the firm.The factor bears the risk of nonpaying customersGoodsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-2429.6 How to Finance Trade CreditThere are three general ways of financing accounting receivables:1.Secured DebtReferred to as asset-based receivables financing.The predominant form of receivables financing.2.Captive Finance CompanyLarge companies with good credit ratings often form a finance company as a subsidiary of the firm.3.SecuritizationOccurs when the selling firm sells its accounts receivable to a financial institution,which then pools the receivables and sells securities backed by these assets.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.29-2529.7 Summary&Conclusions1.The components of a firms credit policy are the terms of sale,the credit analysis,and the collection policy.2.The decision to grant credit is a straightforward NPV problem.3.Additional information about the probability of customer default has value,but must be weighed against the cost of the information.4.The optimal amount of credit is a function of the conditions in which a firm finds itself.5.The collection policy is the firms method for dealing with past-due accountsit is an integral part of the decision to extend credit.