INTRODUCTION TO

CREDIT MANAGEMENT
Group 2 ▪ BSBA FM 3-10S
AT THE END OF THE LESSON STUDENTS ARE
EXPECTED TO:

● Recognize the relevance of an effective and efficient credit

management to the provider and user of credit
● Identify the risks associated with lending
● Discuss the principles for the management of credit risk
● Explain the functions performed by each personnel in the credit and
collection department
● Describe an ideal credit man based on the qualities he must possess
 01 02
RISK ASSOCIATED WITH CREDIT DEPARTMENT AS A
LENDING PROFIT CENTER

03 04
CREDIT MANAGER TESTS OF CREDIT
DEPARTMENT OPERATION
CREDIT MANAGEMENT AND RISKS
ASSOCIATED WITH LENDING

CREDIT MANAGEMENT

Credit management is the process by which risks that

are inherent in the credit process are managed and
controlled. It refers to the activities and action plan of a
company as a security against customers’ late
payments or defaults. It aims to guarantee that
customers pay their invoices within the agreed terms
and conditions.
Importance and Benefits of Credit Management
● Reinforces a company’s liquidity
● Improve cash flow and control/manage finances
effectively
● Lower the rate of late payments and defaults
● Contributes to a positive and professional company
image
RISK - the potential that events, expected or unexpected may have an adverse impact on
earnings or capital.

Credit Risk Interest Rate Risk Liquidity Risk

is the risk that is associated Is the risk associated with the refers to the risk that
with repayment, it is caused fluctuation of interest rates. arises from the inability of
by a borrower’s failure to Interest rate risk happens to banks to meet its debt
repay either their loan or interest-bearing assets (i.e. obligations. As a result,
invoices, or failure to loans and bonds), there is entities might not be able
perform as agreed in terms probability that an asset’s to sell or liquidate their
and contract. value will change due to the assets without forgoing
movement of interest rates. capital or income.
The first line of defense
against excessive credit risk It is necessary to monitor Therefore, having a sound
is through a thorough initial interest rates and make liquidity planning should
credit-granting process, decisions based on how it is involve the determination
institutions should have a regarded to change over or identification of loans
proficient lending staff and time. that can easily be
comprehensive underwriting converted into cash.
standards.
 Transaction Risk
Compliance Risk
which can also be called as
is the risk of legal and operating or operational risk is a
financial penalties that arises risk associated with the failure
from non-conformance or of service or product delivery. It
violation of a broad range of is often present in loan
Reputation Risk
compliance responsibilities, disbursements and credit Is the risk the danger to
such as laws, rules, administration processes. This the image and reputation
regulations, prescribed risk varies depending on the of an entity, it arises from
practices, or ethical function of internal controls, the negative public
standards. Compliance risk information systems, employee opinion regarding the
subjects the bank to the integrity, and operating business or entity. It
possibility of fines, civil processes. exposes the entity to
money penalties, payment of litigation, financial loss, or
damages, and the voiding of Likewise, transaction risk is the damage to its reputation.
contracts. exposure to uncertainty factors
that may impact the expected
return from a deal or
transaction which includes, but
is not limited to, foreign
exchange risk, commodity, and
time risk.
CREDIT DEPARTMENT AS PROFIT CENTER

In the evolving world of business, more and more top management bodies
are changing their ways of viewing the credit department. From the old belief
that the credit department is just all about managing the company’s
receivables and how it can enhance the sales performance of the enterprise
through credit extension, it is now slowly changing to a belief that is more open
to viewing the credit department as something that can generate profit for the
company.

Another thing that is important to keep an eye on is the creation of a credit

policy that will help mitigate the risk that is associated with extending credit to
borrowers. Having the ability to craft the best set of guidelines for credit
extension plays a huge role in setting the direction of the company in the future,
which is dependent oftentimes on credit managers.
The Credit and Collection Unit

Credit and Collection,

although closely interrelated,
are two different activities.
Credit has something to do with
processing, evaluation, and
extension of credit while
collection refers to the activities
related to the collection of
accounts. The main question
that revolves around these two
related terms is: Should credit
function and collection function
be separated from each other?
 Some say that these two should not be lumped together to the same set of
personnel because it can be a great source of temptation (like manipulating the
figures and accounts to favor one party over the other). Others believe that it is
best to have these activities be handled by the same people because they will
be more knowledgeable of the workarounds in both situations, plus the
management will be able to save more on operating costs as these people can
handle both responsibilities. In the Philippines, most firms practice the
separation of these two functions but no explicit studies or explanations have
been made to support this habit. Related to this is deciding on who will make the
final decision with regard to credit. Although technically, credit managers should
be the ones assigned to do the task, their opinions sometimes become
recommendatory as some companies leave the decision-making to the
higher-ups and to the “Credit Committee”. The reason: most firms are
family-owned and higher-ups are usually family members that is why they want
to leave money matters as much as possible to them.
Functions of the Credit Department
• Relevant to credit sales and anything that involves credit.

• The activities of the credit department of a specific type of

business are usually based or matched on the nature of that
business.
The Functions of the Credit Department following the
general aspects of credit management.

1. Gathering credit information

Credit Investigators collect information about the applicant using direct and
indirect sources.

• Direct Source - The Buyer/Debtor (Through Direct Correspondence like

personal/telephone interview, email, letter and request of audited financial
statements)
• Indirect Sources – Bank and Other Credit Companies. (Through request of
bank reports about the history of the buyer/debtor which depicts the buyer/debtor’s
credit standing)

The department collects information for policy formulation.

• For example: The usage of the information gathered from buyers to
formulate the credit policies which includes credit terms, credit limits, information
requirements, and collection progression or the process of collection.
2. Analyzing credit information

Credit information that are collected are analyzed by credit analyst who
utilizes standard tests and measurements and uses analytical tools to
identify the debtor’s creditworthiness.
• Information such as statements of income and financial position
can provide details about the character of the debtor, his/her ability to
provide a collateral and his/her ability to pay which enables them to
mitigate risks of lending.

3. Credit checking and authorization

After the analysis of credit information, an authorized officer or

committees makes verification on the debtor’s papers and then renders the
proper authorization for credit.
• Case in point, A debtor is found to have a good credit history and
rating. The loan officer then gives approval for the loan.
4. Filing and recording

Approved loan or credit applications are then recorded and the

preparation and filing of the applicant’s credit folder is made which is
updated from time to time. Updates include records of repayments.

5. Credits adjustments

Credits have a credit period which is the time that the lender grants the
debtor to make repayments. An example of a credit period is 2/10, N/45
which means the debtor is granted 2% discount if payment is made within 10
days from the date of purchase and if discount is not availed, payment must
be made within 45 days. The discount and credit period are adjustments
made on credits.
Adjustments on banks on the other hand involves increasing or
decreasing credit limits
6. Collection correspondence

This includes sending notices on debtors about their loan or credit such as
follow up on collection or a reminder of repayments.
• For example, if a debtor forgot to make payment for the month, the
credit department then sends a reminder to inform the debtor that he/she has
been due for payment.

7. Other functions

Credit information exchange with other entities or with other departments

of the organization is also a function of the credit department which in the case
of banks, credit information is disseminated to valued customers.
• Case in point, A client is applying for a home loan at Bank ABC. The
same client applied for a car loan at Bank XYZ 5 years ago. Bank ABC then may
request credit information from Bank XYZ concerning the client in order to assess
his/her creditworthiness.
 CREDIT MANAGER
● Credit Manager, Assistant Treasurer,
General Credit Manager, Branch Credit
Manager, Loans Manager, Credit Man,
Credit Correspondent

● responsible for overseeing the credit

granting process for a company

● optimizes company sales and reduce bad

debt losses by maintaining the credit
policy
Source:
https://www.betterteam.com/credit-manager-job-description
 Qualities of a Credit Man
(The Cardinal CS of a Credit Man)

Competence and Communication Constructiveness

Capability

A clear understanding on Effective on Positive and

responsibilities, goals, conveying the ideas constructive on
objectives and policies of and duties to the granting or denying
the company subordinates and credit
other departments
 Creativity Conscientiousness Consistency
Adaptive to changing times Devoted, dedicated Consistent
and atmosphere; creative and strong proponent performance and
solutions to new and old to the company consistent with
problems company policies

Certitude and Contact Cost-consciousness

Celerity
One must not only They must have They should know
act with certainty and good contact, good how to minimize cost
accuracy but also public relations both in credit evaluation,
with swiftness. within and outside remedial account
the organization. management and
others.
 Character Confidence Considerateness
They must must have They must be trusted They must have regard
character integrity, by the debtor to have for others’ feelings. It is
reliability and reciprocity of incumbent upon the
sometimes need to be confidence between credit man to extend
a “character” to cope the credit man and assistance to the
with clients who turn the customer customer.
out to be “”characters”.

Computer literate Congeniality, charming

Common Sense
personality, courage
They must at least know
some basic knowledge of They should be cool and
computers and the ins calm and deliberate, but
and outs of information certainly firm and
technology uncompromising when he
encounters pressures.
 TESTS OF CREDIT
DEPARTMENT OPERATIONS
● The tools or indexes are intended to offer credit
management with a way to measure the efficiency of its
credit operations. These tools assist credit managers in
determining if their departments are generating
maximum sales and minimizing losses.
These tests are useful in a variety of ways:
1. It is required to calculate ratios, percentages, and other data on a regular
basis in order to assess credit and collection results.

2. Keeping these data information allows you to define standards or targets for
each stage of the credit and collections process.

3. The accumulation of records preserved on the same basis from year to year
allows you to compare current credit and collection performance to past periods
and measure progress.
4. If the firm's credit business is significant enough to necessitate the
attention of more than one person, comparisons between different
individuals are frequently done.

5. It is possible to compare the results shown in the firm's data to

those published by other firms.

6. The information can be utilized to estimate future patterns in credit

sales volume, collections, and other business issues.
 After recognizing credit management's obligation to
the firm, the debtor, and society, and clearly stating the
objectives of credit department operations, the next step
should be to monitor the attainment of these objectives -
to test how the credit department is achieving its
responsibility.
Bad-Debt Loss Index

The bad-debt loss index was one of the earliest tests devised, and it
is currently one of the most commonly utilized by credit managers. In
general, the link is demonstrated by dividing bad debts incurred over a
period by total credit sales during the same period (bad debt loss/total
credit sales).

Credit Sales Index

It is critical for all businesses to understand what percentage of total

sales is represented by credit transactions. Credit sales are divided by
total net sales to calculate this percentage or index. (credit sales/total
net sales)
Collection Percentages, Days to Collect and Turnover of Receivables

One of the most often used credit control indices is the collection percentage,
which is calculated by dividing the total sums collected during a period by the total
receivables outstanding at the start of that period.

These numbers, like the others, should be compared to those from previous
months as well as those from the same month in as many previous years as
possible. This accumulation of data over time aids the credit manager in recognizing
seasonal tendencies that should be taken into account in any study. Similarly,
comparisons with similar firms provide some insight into the subject firm's position.
This information is useful when broken down into the sorts of credit accepted, just as
the other indices.

The rate of receivables turnover is calculated by dividing total sales by the

average outstanding receivables. The activity of receivables investment can be
expressed as a rate or in terms of the number of days necessary to complete one
account turn. The latter can be calculated by multiplying 360 days by the turnover
rate of receivables.
Number of Accounts Opened

The number of new accounts opened by the credit department over the time period in
question reflects its activity. This statistic shows how much emphasis the company places on
credit service and whether or not it is on the lookout for new business prospects. The number of
new accounts opened can also be used to gauge the success of credit advertising. This value,
along with the acceptance rate, indicates how lenient or stringent the company's credit policy is.

Acceptance Index

Depending on the company's area of business, the leniency or strictness of its

credit-granting practices, and the period of the business cycle, this score changes significantly.
This is measured by dividing the applications accepted over applications submitted.

Past Due Index

This credit management exam determines the proportion of all past due accounts in terms
of both amount and number. Because computing both formulas could produce a completely
different picture if one major account is substantially past due versus multiple minor accounts
that are past due, this ratio should be calculated in both numbers and amounts. It's calculated by
dividing the entire amount owed by the total amount owed (total past due/total outstanding).
Aging of Accounts

This test examines accounts that are not due, 30 days past due, 60 days past due, or more than a
year past due. It derives from the fact that the length of time an account has been outstanding, the
pace of collection, and the likely net loss from bad debts all have a direct and significant relationship.

A detailed itemized list of overdue accounts, displaying both the name and current status of such
accounts, can be included to the aging of accounts. This type of list is useful for authorizing extra
requests.

Cost Analysis

Cost figures should be included in any final summation of credit department actions. If credit
management gets accurate information regarding the costs of operating a credit business and
carrying receivables, it can make better policy decisions.

Bad debts provide one such indicator, although bad debt losses represent only one aspect of the
credit department's operations. The cost of running a credit department frequently outweighs all bad
debt losses. The most important single category of credit expense is the wages and salaries of persons
involved in credit and collection activities.
PRESENTATION BY:

Acoba, Ma. Robelyn E.

Dela Cruz, Tricia Rose H.
Gavino, Kiana Aliyah D.
Mongoc, John Martin
Navarro, Angela Marie I.
Ramos, Paul Kevin S.
Ramos, Francis Albert
Unggayan, Joanarhel F.

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