accounts receivable are equal to sales per day and collection period. these two factors sales per day and collection period are influenced by a set of controllable factors called the firm is credit policy. the four credit policy variables are as follows : credit period , credit standard, cash discount, collection policy.
- credit period : length of time for which credit is granted usually measured in days from the date of the invoice. lengthening the credit period stimulates sales, increases cost of receivables increase of debt losses. tightening the credit period tends to lower sales, decrease investment in receivables, and reduce the include of bed debt loss.
- credit standard: credit standards are criteria that determine which customers will be granted credit and what extent. credit standards often revolve the "five C's of credit"
(1)character- a customer's willingness to pay
(2) collateral- security offered by the firm in the form of mortgages.
(3) capacity- a customer's ability to pay.
(4) capital- the general financial position of firms as indicated by a financial ratio analysis.
(5) condition - current economic or business condition.
loose credit standard increase, sales bad debt losses, investment in receivable and collection cost. tight credit standards have opposite effects.
cash discount: firms generally offer cash discounts to make prompt payment increasing to size of discount will attract customers desiring to take discounts. cash discount terms indicate the rate of discount and the period for which discount is available are reflected in the credit terms. for example, credit terms of 3/10 ,net 30 mean that a discount of 3 percent is offered if the payment is made by the tenth day, other wise the full payment is due by the thirtieth day. liberalizing the cash discount tends to enhance sales, reduce the average collection period, and increase the cost of discount . tightening the cash discount policy has the opposite effects.
collection policy: collecting accounts receivable is usually a routine task because most firms pay their bills on time. objective of a collection is not to minimize bad debt losses, it is to maximize the value of the firm. the firm can attempt to collect post due accounts receivable in several ways. for example, letters, telephone calls collection agencies, personal visit and legal action. a tight collection policy tends to decrease sales, shorten the average collection policy reduce baddebt loss, and increase collection expense. a loose collection policy has the opposite effects.