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Covering Credit Digest

By Michael Dennis and Steven Kozack

1) The Limitations of Customer Financial Statement Analysis
2) Using Objective and Subjective Data to Establish Credit Limits
3) Ideas for Using Email More Effectively as a Debt Collection Tool

1) The Limitations of Customer Financial Statement Analysis

By: Steven Kozack

These are some of the limitations of financial analysis that credit managers must be aware of when they are reviewing a customers financial statements:

2) Using Objective and Subjective Data to Establish Appropriate Credit Limits and Terms for Customers.

By: Michael Dennis

After studying a customer's financial statements, it is important for the credit manager to develop a "feel" for the customer's overall financial health. To be comprehensive, the financial review should include both objective data analysis and a more subjective review of the information gathered. Objective analysis involves traditional methods of number crunching and data analysis. The subjective evaluation ends when the credit manager can answer these questions:

Overall, how is this customer doing financially?
Does extending credit to this customer in the dollar amount requested pose an acceptable or an unacceptable risk?

The objective analysis would include a review of all of the following items:

Each item listed above is important in the subjective interpretation of the customer's overall financial health. In particular, it is key to interrelate and correlate the financial strengths and weaknesses of the company under review.

This analysis, combined with information about the customer's payment history, trends in the customer's industry, changes in the overall economy, and changes in demand for the customer's products and services can and should be used to develop a holistic understanding of the customer's prospects, as well as the opportunities and challenges facing the customer.

Only after both objective subjective data have been reviewed and evaluated can the credit manager make a reasonably well-informed decision about whether to extend credit [or continue to extend credit] to the customer or applicant.

3) A Few Comments about the Bankruptcy Filed by The Wherehouse

By: Steven Kozack

One of my consulting clients had a large [low six figure] A/R balance outstanding with The Wherehouse when this company filed for Chapter 11 bankruptcy protection earlier this month. I looked at my notes to see what advice or comments I had offered to this client about The Wherehouse and I found a memo that contained these points…

I take comfort in the fact that senior management was made aware of the risks associated with selling to this company, and chose to continue to sell to this company. I have no argument with this decision because senior management, aware of the risks, made an informed business decision about continuing to supply this important customer.

One final comment: The risks associated with selling to The Wherehouse were such that it would have been inappropriate for the credit department to have made this critical decision unilaterally. Specifically, the account was too important to simply cut off, and the risk was too significant for the credit department to ignore. I believe this is an excellent example of a scenario in which the credit department MUST involve senior management in the decision making process.

Created on 19-Mar, 2011 by HKCCMA.

Last Edited on 09-Apr, 2011 by HKCCMA.