INTRODUCTION TO CREDIT

MANAGEMENT
FM 6 (CREDIT AND COLLECTION)
 MEMBERS OF THE GROUP

• ALMAZAR, NICOLE
• ARMODOVAL, LEX
ALFRED
• ARRAZOLA II,
MIKAELA
• BAUTISTA, VANESSA
CREDIT
MANAGEM
ENT
Effective management of the loan
portfolio and the credit function is
fundamental to a company’s safety and
soundness. Credit management is the
process by which risks that are inherent in
the credit process are managed and
controlled.
RISKS
ASSOCIATED
WITH LENDING
Risk – the potential that events, expected
or unexpected may have an adverse
impact one earnings or capital.
RISKS
ASSOCIATED
WITH LENDING
Credit Risk- The risk of repayment, i.e., the
possibility that an obligor will fail to perform as
agreed. The first defense against excessive credit
risk is the initial credit-granting process – sound
underwriting standards, an efficient, balanced
approval process and a competent lending staff.
RISKS
ASSOCIATED
WITH LENDING
Interest Rate Risk-The level of interest rate
risk attributed to the lending activities
depends on the composition of the loan
portfolio and the degree to which the terms
of the loan expose the revenue stream to
changes in rates.
RISKS
ASSOCIATED
WITH LENDING
Liquidity Risk- As part of liquidity planning, an
overall liquidity strategy should include the
identification of those loans that may be easily
converted to cash. A loan’s liquidity hinges on such
characteristic as its quality, pricing, scheduled
maturities and conformity to market standards for
underwriting.
RISKS
ASSOCIATED
WITH LENDING
Transaction Risk- In the lending area,
transaction risk is present primarily in
the loan disbursements and credit
administration processes.
RISKS
ASSOCIATED
WITH LENDING
Compliance Risk- Lending activities
encompass a broad range of compliance
responsibilities and risks.
RISKS
ASSOCIATED
WITH LENDING
Reputation Risk- When a lender
experiences credit problems, its
reputation with investors, the community
and even individual customers usually
suffers.
CREDIT
DEPARTMENT
AS A PROFIT
CENTER
More and more top managements are treating the credit department not merely as a cost
center, but as a profit center as well. The traditional concept is that the credit management is
for policing of receivables. The emerging view today is that credit management is tasked
with the job of subjecting the investment in receivables to the test of profitability just as we
test every other investment. The old approach to “what can credit do for sales” should be
discarded and ask the broader, more important question” what can credit do for profits.”
When trade credit is extended, you are committing some of the resources of the firm.
THE CREDIT
AND
COLLECTION
UNIT
A credit and collection office does not have to be an elaborate one. In fact, it may be started with one or
two personnel with adequate background in such work, gradually increasing the personnel in
proportion to the volume of credit sales and its consequent increase of amount and number of
receivables. The important thing to remember is that from the very beginning when a first credit, loan
or investment is made, a credit and collection system should be in effect. It is an axiom in credit that
collection is only as good as the credit processing and that the older an account becomes the harder it is
to collect. It is important therefore that collection dates should be properly noted immediately and
followed up accordingly. And this can be done only if a credit and collection system is in effect.
FUNCTIONS OF
THE CREDIT
DEPARTMENT
All matters related to credit sales and
occasionally anything that touches upon
credit are among the functions of the credit
department. The functions enumerated
follow the general aspects of credit
managements. Each particular type of
business usually suits the activities of its
credit department to the nature of its
business.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Gathering credit information – Through the
credit investigators, the credit department
gathers information about the applicant from
direct and indirect sources. Sometimes
information for policy formulation is also
gathered.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Analyzing credit information – All the
information gathered is sent to the credit
analyst who is in charge of applying the
standard tests and measurements for
performance. The non-financial data are
critically subjected to analytical tools to
determine the creditworthiness of the debtor.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Credit checking and authorization– Once the
analysis is undertaken, verification is made of
the applicants’ papers and the proper
authorization for credit is given by the
authorized officer or committees as the case
may be.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Filing and recording – A record of the
transaction is made and the credit folder of
the applicant is prepared and filed. From
time to time, the file or records, or both,
whichever is the case, are updated.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Credits adjustments– Adjustments are made
in accordance with discount or net credit
period, or both. In the case of banks, this
may pertain to increasing or decreasing the
credit lines, or perhaps extensions.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Collection correspondence – Credit granting
does not end with the approval of the
application but with its collection. When the
credit has been granted, collection follow-
up, reminders, and other correspondence are
sent to the debtor.
 FUNCTIONS OF
THE CREDIT
DEPARTMENT
Other functions– Other functions, which
may fall within the jurisdiction of the credit
department, are the exchange of credit
information with other organizations and the
dissemination of credit information to
valued customers in case of banks.
 THE CREDIT
MANAGER
When a business organization sells on credit, the administration of the credit becomes, on some
level, a management function. The type and extent of management required is not the same in
different types of institutions not is it always handled in the same way in comparable organizations.
The level of management required for the administration of credit in a firm is determined, more
than anything else, by the concept of credit prevailing here. In some instances, credit is viewed as a
simple function of approving credit transactions. In other cases, as the concept broadens, the credit
function embraces sales and finance policy and other top management strategy. The management
of credit then becomes a responsibility of a higher order and calls for talent equal to the task. This
task is handled by a credit manager.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Competence and Capability

HE SHOULD KNOW HIS AREAS OF RESPONSIBILITIES. HE MUST BE AWARE OF
INSTITUTIONAL VIEW POINTS AND CORRESPONDINGLY ACTS IN BEHALF OF THE
INSTITUTION AS A WHOLE. HE SHOULD KNOW AND UNDERSTAND THE GOALS,
OBJECTIVES AND POLICIES OF THE COMPANY, OF THE OTHER DEPARTMENTS IN THE
ORGANIZATION; OF HIS OWN DEPARTMENT WHICH IS CREDIT. HE MUST HAVE A
CLEAR UNDERSTANDING OF WHAT THE END POINTS OF HIS EFFORTS ARE AND
SHOULD BE.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Communication
HE MUST HAVE THE ABILITY TO EFFECTIVELY CONVEY HIS IDEAS. THIS INCLUDES
THE PREPARATION OF REPORTS AND CORRESPONDENCE AND ALSO THE DELEGATION
OF DUTIES AND THE CORRESPONDING AUTHORITY TO SUBORDINATE.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Constructiveness
HE MUST BE POSITIVE AND CONSTRUCTIVE IN HIS APPROACH TO BOTH CREDIT AND
COLLECTION MANAGEMENT. HE MUST FIND A WAY BY WHICH CREDIT CAN BE
GRANTED AND IN THE PROCESS FREE HIMSELF OF THE NEGATIVE IMAGE OF ONE
CONCERNED WITH FINDING A WAY BY WHICH CREDIT SHOULD BE DENIED.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Creativity
HE MUST KEEP PACE WITH CHANGING TIMES AND CHANGING CONDITIONS. HE
SHOULD CONSTANTLY PURSUE CREATIVE ANSWERS TO NEW QUESTIONS. HE MUST BE
ABLE TO PUT OLD IDEAS TOGETHER TO SOLVE ANEW PROBLEM.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Conscientiousness
HE MUST BE DEVOTED AND DEDICATED TO HIS JOB. HE MUST BE A STRONG
PROPONENT OF COOPERATION AND COORDINATION IN THE ENTIRE ORGANIZATION.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Consistency
HE MUST BE CONSISTENT IN MAKING CREDIT DECISIONS. HE MUST HAVE A
CONSISTENT PERFORMANCE WHICH IS CONSISTENT WITH COMPANY GOALS AND
OBJECTIVES. HE MUST NOT UNNECESSARILY DEVIATE, NOR COMPLETELY VEER AWAY
FROM POLICIES AND GUIDELINES TO ACCOMMODATE FRIENDSHIPS AND OTHER
PERSONAL CONSIDERATION.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Certitude and Celerity

·HE MUST NOT ONLY ACT WITH CERTAINTY AND ACCURACY BUT ALSO WITH
SWIFTNESS AND SPEED.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Contact
·HE MUST HAVE GOOD CONTACT, GOOD PUBLIC RELATIONS BOTH WITHIN AND
OUTSIDE THE ORGANIZATION. IT IS PARTICULARLY NEEDED IN GATHERING AND
VERIFYING CREDIT INFORMATION.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Cost-consciousness
HE KNOWS HOW TO MINIMIZE COST IN CREDIT EVALUATION, REMEDIAL ACCOUNT
MANAGEMENT AND OTHERS.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Character
·HE MUST HAVE CHARACTER INTEGRITY, RELIABILITY AND SOMETIMES NEED TO BE
A “CHARACTER” TO COPE WITH CLIENTS WHO TURN OUT TO BE “CHARACTERS”.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Confidence
HE MUST BE TRUSTED BY THE DEBTOR TO HAVE RECIPROCITY OF CONFIDENCE
BETWEEN THE CREDIT MAN AND THE CUSTOMER
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Considerateness
·HE MUST HAVE REGARD FOR OTHER’S FEELINGS. IT IS INCUMBENT UPON THE
CREDIT MAN TO EXTEND ASSISTANCE TO THE CUSTOMER.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Computer literate
·HE MUST HAVE AT LEAST SOME BASIC KNOWLEDGE OF COMPUTERS AND THE INS
AND OUTS OF INFORMATION TECHNOLOGY.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Congeniality, charming personality, courage

HE SHOULD BE COOL AND CALM AND DELIBERATE, BUT CERTAINLY FIRM AND
UNCOMPROMISING WHEN HE ENCOUNTERS PRESSURES.
QUALITIES OF A CREDIT MAN
(THE CARDINAL CS OF A CREDIT MAN)

• Common Sense
TESTS OF CREDIT DEPARTMENT
OPERATIONS
IMPORTANCE:

1. It is necessary to measure credit and collection results.

Keeping these statistical records makes it possible to set up

2.
standards or goals.

Records can be a basis for comparison to determine the

3.
progress made.
TESTS OF CREDIT DEPARTMENT
OPERATIONS

If the firm’s credit business is large enough comparisons often

4.
may be made between different individuals.

May compare results shown in the firm’s figures with those

5.
reported by other firms.

The records may be used in forecasting future trends in credit

6.
sales volume, collections and other aspects of the business.
BAD-DEBT LOSS
INDEX
• The bad-debt loss index was one of
the first tests to be developed and
still is one of the tests most generally
used by credit managers.
• (Computation Formula: bad debt
loss/total credit sales)
CREDIT SALES
INDEX
• In all business enterprises it is
important to know what percentage
of total sales is represented by credit
transactions.
• (Computation Formula: credit
sales/total net sales)
CREDIT SALES
INDEX
• Collection Percentage
(Formula: total amount of collections
made during period / receivables
outstanding at beginning of period)
• Days to Collect
(Formula: 360 days / receivables
turnover rate)
CREDIT SALES
INDEX
• Turnover of Receivables
(Formula: total credit sales / average
receivables outstanding)
 NUMBER OF
ACCOUNTS OPENED
• The credit department’s activity is reflected
by the number of new accounts it opens
during the period in question. This figure
indicates the extent to which the business
emphasizes credit service and whether or not
it is alert to opportunities for attracting new
trade.
ACCEPTANCE
INDEX
• It is the index or percentage showing
the proportion of applicants for
credit that are accepted.
PAST DUE INDEX
• It measures the proportion of all past due
accounts, in amount or in number. This
ratio should be figured in both number
and amount because computing both
formulas could give a very different
picture if one large account is severely
past due versus several small accounts
past due.
• (Computation Formula: total past
due/total outstanding)
AGING OF
ACCOUNTS
• This test is a detailed analysis of
accounts – such as not due, 30 days
past due, 60 days past due, and over
one year past due.
COST
ANALYSIS
• Any final summation of the result of
credit department activities should
include cost figures.