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CHAPTER SIX

FINANCIAL MEASURES USED IN CREDIT AND COLLECTION OPERATIONS

The credit and collection efforts on credit sales. Maximizing sales thru credit must be
taken into account in deciding to grant or refuse credit as well as in enforcing prompt payment
on such accounts. Generally however, this objective focuses attention on the issue of not losing
sales; or, to promote new credit sales in symbiosis with sales operations. In this way the credit
and collection operation is considered as a team member of the sales force working in positive
tandem.

Cost to collect an account is another way to measure credit and collection contribution to
sales. The actual expense of the credit and collection operation is match with the volume of
collection made during a given period. In some instances an average cost to collect is arrived at
and match with volume collection made.

Average costs obscure the collection experience with marginal account, the kind of
account where control, cost and effectiveness of collection efforts are tested. In the credit
extension efforts of the credit and collection operations look lenient in extending credit to
marginal or questionable customers or losing money for the creditor for not accepting more. In
essence this summarizes the matter of measuring the effectiveness of credit granting; and, it
cannot be answered by averages of the method described.

In short, the matter of evaluating the credit and collection effectiveness in credit granting
as well as efficiency is too broad than any of the methods discussed.

Gauges for Sales Maximization

The grant of credit stimulates more sales which results to larger volume of business.

Credit Sales Index

In all business of manufacturing, marketing, lending it is important to know the portion of


total sales represented by credit transactions thus;

(1) Credit sales Total sales = Credit Sales Index

Its advisable to know the percentage of business done on each type of credit such as
C.O.D., installment credit, charge accounts and revolving credit accounts, by company, the
month to month or over a period of years. This gauge affords a good picture of the credit
business one has and the effect of its conduct regarding its credit and collection policies.
Comparison with other business in similar industry and under similar conditions may indicate
something of the relative success or failure of the company seeking credit business.

(2) Number of New Accounts Opened

Indicate the extent of sales being made on credit; company is open to the opportunities
of new credit business.
It also indicates the effectiveness of the promotion and advertising of the companys
credit offer. In sum, this gauge together with the rejection percentage will measure the
restrictiveness of the credit policies. Its practical to show the number of new credit granted as a
percentage in relation with the total number of active credit accounts.

(3) Rejection Index


A measure to determine the proportion of credit applicants refused credit.

Applications Rejected Applications Rejected = Rejection Index

This is a valuable index to ascertain the percentage of credit applications refused and
also to determine how much business is lost by refusing credit applications from old customers/
debtors. By this process it is possible to ascertain the degree of restrictiveness or liberality in
enforcing the credit policies.

(4) Inactive Account Index

Credit sales and total sales volume may be increased by good credit sales campaign
targeting new credit customers or by motivating current accounts more active purchases on
credit or reactivating docile credit accounts to become active. The extent to which this is
undertaken maybe measured by a ratio or percentage of dormant or inactive credit accounts.
The lower the ratio, the more effective the efforts directed in the efforts.

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