Credit policy in cash management

Published: 2017-09-10 08:54:13
1163 words
4 pages
10 min to read
Wesleyan University
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2.9. Credit Policy

Credit policy may be perceived as a written prospect by a company that guides it on the terms and conditions pertaining to the supply of commodities on credit, stipulated procedures of making collections, customers determination criteria as well as the steps toward recovering from bad debts of customers delinquency (Duffie & Singleton 2012). This term may also imply a collection of procedure meant to determine business-customers dealings particularly where debt incurrence is involved via a collection of policies. In this regard, credit policy guides the business operators into making decisions that clients are sold based on open accounts, exact terms and limits established against outstanding balances as well as the prospective dealings with delinquency on the part of customers.

The main goal of managing a business accounts receivables entails the collection of receivables devoid of losing sales from increased pressure from diverse collection techniques. In order to achieve this objective, a number of measures have to be incorporated into the normal management processes. Some of these mechanisms include: credit selection and the standard that entail applications of methodologies for the determination of the type of clients to be awarded credits. This procedure of assessing clients creditworthiness and the comparison against the firms credit standards, minimum qualifications for the extension of credits to clients and overall credit monitoring prospects also involves the progressive review of a business account receivables in order to measure the customers adherence to the stipulated credit terms. Slow payments are often quite expensive for the investments of firms on the account receivables (Duffie & Singleton 2012).

Debtors management also implies that the process involved in decision making is linked to investing in business debtors. In particular, credit selling contexts, the business has to cater for the cost of acquisition of money from debtors and incur certain risks associated with losses accruing to bad debts. In order to limit losses arising from failed reception of money from business debtors is often the main goal of managing debtors and therefore, managing credit risks of a business entity. Both economic conditions and firms credit policies are the main leverage factors of a business account receivables (Duffie & Singleton 2012).

The exchange between increased market share via credit sales and collectability of account receivables influences the liquidity levels of a company and its long-term profitability. While a firm can report huge profits, it may simultaneously suffer liquidity problem in case majority of its transactions are confined to the accounts receivable alongside an ineffective collection policy. Both credit and collection policies entail a focus on the quality of accounts accepted, cash discount allowed as well as credit period extended among other factors. In both cases, credit decisions entails a choice between extra profitability and costs associated with change in any of such elements. The management of receivables by a firm starts with the determination of whether to give grant credits or not. In any segments that goods are sold on credit, the establishment of a monitoring system is very essential since in its absence, the receivables would cumulate to excessive levels while the cash liquidity is likely to decline (Duffie & Singleton 2012). Similarly, in such instances, bad debts would offset profits realized on sales.

Research Approach

3.0. Research Design

The nature of this study involved descriptive as well as quantitative analysis of the factors that influence cash management with a central focus on the credit risks. The main consideration of the accessible population comprises of a three main companies allied to ABC group. The companies are mainly drawn from the Fast Moving Consumer Goods that of two main divisions of the ABC group. Quantitative analysis is a major element of this study in the sense that the various financial ratios are subjected to evaluations in order to generate a point of inference for the impact of credit risk on cash management. In particular the study covered the financial performances of the three companies for a set of 4 years between 2011 and 2014.

The data obtained from this analysis was subjected to analysis using the various ratios for correlation and regression. The three companies involved in this study include: the ABC Banking Corporation Limited (Banking division), Chue Wing & Co. (Food division) and Oriental Foods Company Limited (Food division). The three companies operate within the context of fast moving consumer goods within the operational framework of the ABC Group of companies.

Yoma Strategic Holdings is a Singapore-listed corporation comprising of business operations across Myanmar. The business has made its prime foray across Myanmars FMCG industry. By virtue of its agreement with Asia Beverages Company Limited (the ABC Group), the company ventured into the first-moving consumer goods market which is the subject of evaluation in this context. Through the data analysis from the financial statements of the companies, the study evaluated reflection of this excellence in external perception and associates it to other inferred variables of cash management cycle. The hypotheses upon which this study was performed were:

           Ho: Credit policy can influence profitability managements in the FMCG sector of ABC Group Companies

H1: Credit policy cannot affect profitability management in the FMCG sector of ABC Group  Companies

Ho: There is a remarkable correlation between debtors turnover of the three FMCG Companies and their liquidity position

H1: There is no remarkable correlation between debtors turnover of the three FMCG Companies and their liquidity position

3.1. Data Analysis

In order to infer the meaning of the trends and various data combination of the companies in this context, this study focused on an extensive review of the three ABC companies whose performance motive is anchored on the Groups main production mission and objectives. The ABC Group of companies aims at producing new classes as well as lines of automobile products that operates in synergetic business alliances within novel markets and imaginative market segments. With these initiatives, the fast moving consumers good in particular have been the main focus of this study based on an understanding of the operational framework of the ABC Group in general and the individual companies in particular.

The data analysis approach to this study involved a tool for analyzing the collected data in order to form the foundation for the hypotheses. In order to test the hypotheses, the ANOVA analysis was used to determine the three companies performance projection. The profitability of the companies variables included: the Returns on Capital Employed (ROCE) and the Net Profit Margins. On the other hand, the Liquidity of the companies variables was: Credit Payment Periods (CPP and the Debtors Collection Period (DCP). In order to analyze and review the latter data, the study organized the data preview in tables that provided an effective platform for the observation and deduction of the actual performance projection of the data in the long-run. The data that was subjected to this analysis was obtained from the four years financial statements of the companies involved, all drawn from the FMCG category of the ABC Group of Companies. 


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