Page 70 - DBP5043

ANALYSIS OF CHANGES IN CREDIT POLICY

From time to time, it is necessary for a firm to change their credit
policy to increase sales or for attracting new customers and retain

existing customers.

Changes in credit policy can be done by either tightening or loosen
it. Any change in credit policy will directly affect the amount of
profit and costs involved.

In general, the effect of changes in credit policy to the amount of

benefits and costs can be seen as follows:

The effect on Relaxed credit policy Tightening credit policy

Sales • level of credit sales will Credit sales decline
increase Profit declined
• Gain increased

Total investment AR will increase to Total AR reduce due to the
in the AR accommodate the increased impact of decline in sales
sales

Investment in Investment in stocks had to Investment in stocks can be
stocks be increased to meet higher reduced because the demand
customer demand for stock is low

The probability Bad debt is high because of Bad debts are low because of

of bad the high level of credit sales the tight credit policy
debt The percentage of possible
clients do not pay within the
prescribed period is also
high

Cost of discount The company had to offer The company offers a low
attractive discount rates to discount rate. Although sales
increase sales. This will declined but the company will
cause companies to incur receive full payment from the
high cost of discounts to customer. Discount cost to be
customers borne by company are low.