The Elements of a Good Credit Policy and Implications of Increased Receivables - Assignment Example

The paper "Accounts Receivables Management" is a wonderful example of an assignment on finance and accounting. What are the elements of a good credit policy? Evaluate Modern Farm Equipment’s credit policy. A good credit policy should, therefore, have the following elements considered and ingrained: Goal statement that acts as drivers to ensure the improvement of receivable balances.

It also includes industry benchmarking statistics as well as various metrics i.e. days the sales are outstanding, collection effectiveness index, aging performance, bad debt write-offs, etc. iii) A credit evaluation and approval process; iv) Credit continuation procedures to support continuous monitoring of receivables portfolio and overall appropriate risk; v) Collection procedures  Modern Farm Equipment’s credit policy i) The board memo indicates ‘they cannot continue holding their customers as long as they have been’- this indicates that the receivables aging performance has not been done well as there are a great number of customers who have not paid within the stipulated time periods assigned. ii) The firm was hard-pressed to offer terms of net 60 to the clients due to industry competition – This means that there is a weakness in the company’s goal statement as instead of formulating a goal/payment terms in line with their own risk appetite, they have undertaken the industry’s payment period of 60 days which is hurting their business. 2. Why is the increase in accounts receivables of concern to the board of directors?

Are they justified in their demand for a tighter credit policy? Why? An increase in accounts receivables is of concern to the board because it shows that the company is having trouble collecting money from customers, therefore, meaning that the company’s cash flow is affected negatively i.e. there are no funds available to pay for other expenses. The board is justified to demand a tighter credit policy in order to improve the company’s reported net income.