CHAPTER 2 :

THE ROLE OF CREDIT AND

COLLECTION DEPARTMENT IN
A BUSINESS ORGANIZATION
Credit & Collection are 2 different activities but
they are interrelated

▪ Credit – processing, evaluation, extension of

credit

▪ Collection – collection of accounts

Increase in Volume of Sales = Increasing Amount of

Receivables = Increase number of Personnel
Importance of Credit & Collection Unit

▪ Insulate company from being victimized, consciously

or unconsciously, by bad credit risk customers

▪ Determine who would deserve to be “trusted” so

that there is reasonably chance of collection
Basic Function of Credit & Collection Unit

▪ To maximize profits

▪ To minimize bad debts losses

The Primary Objective

To maximize Minimizing bad

Credit & Collection Unit profits debts losses

Sales To maximize Selling more

profits credits
Cooperation with other Departments

▪ The credit departments should work together

to both impart and receive information
Credit Department as Profit Center

X What can credit do for sales?

✓ What can credit do for profits?

Credit has its initial impact on sales but the ultimate

goal should be to increase profits.
Credit Department could contribute in other
areas, namely:

1. Support to Sales Effort

2. Customer Counselling

3. Contribution to Finance

4. Task Force Assignments

 CHAPTER 3:
THE CREDIT AND
COLLECTION UNIT & TYPE
OF ORGANIZATION TO
ADOPT
Credit and Collection
• It may be started with one or two personnel with
adequate background in such work, gradually
increasing the personnel in proportion to the volume
of credit sales and its consequent increase of amount
and number of receivables.

• It is important that collection dates be properly noted

immediately and followed up accordingly, this could be
done only if credit and collection system is in effect.

• Hodge-podge attention will only lead to disaster

Credit and Collection
• Credit and collection are two different
activities but they are closely related.

• Credit - refers to processing, evaluating, and

extension of credit
• Collection - refers to the activities related to
collection of accounts.
Credit and Collection

When credit and collection activities are still small,

this will not pose a problem as this can handled by
one unit or department. The problem starts when
credit business becomes voluminous.

The problem that will inevitably confront top

management is: 'Should a personnel handle
exclusively credit work and another would take care
of collections or should they handle both? ''How
trustworthy are the members of the staff?”
Credit and Collection
• In the Philippines, as a general rule, financial and
lending companies, maintain separate sets of
personnel for credit and collection because they rely
on collateral. However, business and other commercial
establishments generally have merged credit decisions,
all the credit factors are taken into account, collaterals
being only one of them.

• Another big problem that confronts top management

in the matter of organizing the credit and collection
unit is the question of who will make the final credit
decision.
• Its place in Business Organization

• Credit department should be an integral part of

financing branch of a business.
• Credit is temporarily substituted for money in the
sale of merchandise, and the control of this
substitute is logically a function of the financing
branch of a business.
• The company's financial plan and credit policy
are bound to each other.
Relations to Sales Department

• In some business houses, specifically in drug and tobacco

companies involving sales on credit, the credit department
is under the influence of sales managers.

• The credit department is under the control of the sales

department, the claim is made that both the selling od
merchandise and the gathering of credit data are facilitated
and the sales force cooperates to the greatest degree in
following up for accounts and making collection.
The independent credit department

• Credit management appreciating fully the

function of his department, will serve his
organization best if his actions are not
constricted through the dominance, or the
attempt of dominance by any other
department.
Sales Credit Conflict

• The sales and credit departments become antagonistic

toward each other. It depends on the top management
if he is a finance man, he generally favors credit, but if
he is a marketing man, he generally favor sales.

• However, the real remedy is found in the full

realization of the function of each department and a
complete and sympathetic appreciation on the part of
each department of difficulties under which the other
labors.
Attempting and minimizing conflict

• Some companies try to solve the conflicts by placing two

functions in one.

• Another system employed by some companies to remedy

the conflict is a program of continuous dialogue between
salesmen and credit men.

• However, the convivial relations end with seminar and

conferences merely serves as a palliatives not permanent
cures.
Here are some tips to minimize, if not totally eliminate the conflict.

1. Exchange problems
2. Give credit
3. Avoid memos - A harmless phrase, a supposedly benign sentence, a well-meaning
memo can sometimes inflame sensitive people who misinterpret the message.
4. Goodwill bank - The positive collaborator learns that the best way to build trust
is to give help with no strings attached. The goodwill bank must be interest free,
otherwise, your collaborator will become wary of your help because he does not
know what it will cost him in return.
5. Keep your collaborator informed
6. Accept responsibility for failure - When combined efforts lead to success, neither
collaborator will refuse to acknowledge his contribution. But, when things end up in
a mess, no one is willing to accept the blame.
7. Acknowledge suggestions
8. Be humble
9. Recognize the needs - get to know much about him, his wants, his biases and etc.
10. Build a record - Not all managers can collaborate effectively. Therefore, the
manager who is interested in proving the positive collaboration works should select
one or two candidates with whom he has good rapport and build a record for others
to see and appreciate.
 CHAPTER 4 :
CREDIT MANAGER

COLLEGE OF BUSINESS EDUCATION

Credit is viewed as a simple
function of approving credit
transaction.

COLLEGE OF BUSINESS EDUCATION

•Sales and

•Finance policy

•Other top management

strategy

COLLEGE OF BUSINESS EDUCATION

CREDIT MANAGER

The credit manager position is accountable

for the entire credit granting process,
including application of a credit policy, with
the goal of optimizing the mix of company
sales and bad debt losses

COLLEGE OF BUSINESS EDUCATION

DIFFERENT TITLES
•Financial Vice President
•Credit manager
•Assistant treasurer
•General credit management
•Branch credit manager
•Loans manager
•Credit man etc.

COLLEGE OF BUSINESS EDUCATION

The credit manager usually
reports directly to the chief
executive

COLLEGE OF BUSINESS EDUCATION

 A well- known credit management
practitioner , the late Atty. Santos
Migallos, Jr.

“ He must understand business and the

world around him”

COLLEGE OF BUSINESS EDUCATION

QUALIFYING FOR CREDIT
MANAGEMENT
•Personal experience
- patience
- wisdom
- courage
- prophetic
•Educational qualification

COLLEGE OF BUSINESS EDUCATION

COLLEGE OF BUSINESS EDUCATION
OPERATIONAL MANAGEMENT
The employee should also have the knowledge of the
ff:

• rudiments of credits and collection,

• commercial law
• in mercantile
• in the bank credit departments
•Accounting and financial statement analysis

COLLEGE OF BUSINESS EDUCATION

 At this level includes the actual
granting of credit and making of
collections, and familiarity with risk
is beneficial

COLLEGE OF BUSINESS EDUCATION

COLLEGE OF BUSINESS EDUCATION
EXECUTIVE MANAGEMENT
•It is attained by growth out of lower credit
positions and by the encompassment of
broaden business activities

•Work on this level is creative and initiatory,

resourcefulness in the use of credit and in
the use of finance is important.

COLLEGE OF BUSINESS EDUCATION

Departmental Management
•Advancement in the credit profession
usually represents the rising from one
position to another

•Include experience of five or six years in

credit and collection work

COLLEGE OF BUSINESS EDUCATION

On this level additional personal qualification
are required:

•Possess the maturity of outlook and

stability of character

COLLEGE OF BUSINESS EDUCATION

THE CARDINAL C’S OF
CREDIT MEN
The Cardinal C’s of Credit Men
1. Competence and Capability
2. Communication
3. Constructiveness
4. Creativity
5. Conscientiousness
6. Consistency
7. Certitude and Celerity
8. Contact
9. Cost-consciousness
10. Character
11. Confidence
12. Computer Literate
13. Congeniality, etc.
14. Considerateness
15. Common Sense
Competence and Capability
• Man should know his areas of responsibility

• He must be aware of institutional viewpoints

and correspondingly acts in behalf of the
institution as a whole

• He should know and understand the goals,

objectives and policies of the company; of
other departments and his own department
(credit)
Competence and Capability
• Credit men who belong to
management team must be involved

- must know customers

- understand their problems
- make room in their timetable for personal
calls and client visits
Competence and Capability
• As a supervisor, the development of
the people is another area of the credit
man’s responsibility

• The credit man must concern himself

with his own self-development
Communication
• The credit man by the very nature of
his function, must be a good
communicator

• He must have the ability to effectively

convey his ideas
Communication
Includes:
- Not only the preparation of reports and
correspondence

- But also the delegation of duties and the

corresponding authority to subordinate
Constructiveness
The credit man must be positive and
constructive in his approach to both credit
and collection management

- Find a way which credit can be granted

- Frees himself of the negative image
Creativity
• The development of broad personal
interest, concerned with both marketing
and finance

• Keeping pace with changing times and

conditions

• Constant pursuit of creative answers to

new questions
Conscientiousness
• The credit man must serve as a
catalyst of the members of the credit
team and with other units of the
company

• Must be a strong proponent of

cooperation and coordination
Consistency
• He must have consistent performance
which is consistent with company
goals and objectives

• Must not deviate nor completely veer

away from policies and guidelines, to
accommodate friendships and
personal considerations
Certitude and Celerity

• In credit checking, analysis, evaluation,

appraisal – in the entire credit approval
process – it is a must that credit man not
only acts with certainty and accuracy but
also with swiftness and speed
Contact
• In connection with the credit approval
process, particularly the gathering and
verification of credit information, another
important C comes to the foreign
contact

• He must have good public relations

both within and outside business
organization
Cost-Consciousness
One principal objective of credit is the
minimization of cost
- Minimum production cost in credit
valuation
- Minimum cost in remedial account
management
- Maximization of profit
Character

• A good credit man must also have

character, honesty, integrity, and reliability
in coping up with clients
Confidence

• The debtor should also have trust and

confidence in his creditor, as personified by
the credit man

• There should be a reciprocity of confidence

Computer Literate

The credit man must have at least some

basic knowledge of computers and the ins
and outs of information technology
Congeniality, etc.
• Personal characteristics such as:
congeniality, charming personality,
cleanliness, and courage

- Grooming
- Keeping cool, calm, and deliberate
- Firm and uncompromising
Considerateness
• He must realize that he is dealing with
human beings and therefore, must have
regard for other’s feelings
• Considerateness is brought to bear in
collection efforts
- Failure of a debtor to pay may be of
legitimate reasons
Common-sense

• In credit and collection management – and in

any field of endeavor for that matter, common
sense is a must
Common-sense
The good credit manager must possess the following essential traits
and characteristics:
1. Poise
2. Good articulations
3. An aggressive attitude capable of maintaining persistent and continuous
follow-up of the credit and collection problems
4. Analytical mind
5. Academic experience and/or indicated interest should be in the
subject areas related to credit
6. Personal ambition necessary to achieve committed goals
Additionally, a Credit Manager must have a professional grasp of the
subject matter pertinent to the activity he supervises
 CHAPTER 5:
CREDIT AND COLLECTION
POLICIES
The Credit Cycle
 BASIC REASON WHY
CREDIT BUSINESS IS GOOD
BUSINESS
Credit Customers:
- Ordinarily do most of their trading with the store where they
have an account
- Are not so-price conscious as cash customers
- Do not shop around much
- Can be sold more than cash customers
- Have more money to spend
- Stay with a store for a longer period of time
- All have an ascertainable credit limit
- Can be induced to pay their bills promptly
- Who fail to pay will be billed a small percentage of the total
good business produced
- Are YOUR customers; Cash customers are ANYBODY’S
customers
FACTORS AFFECTING DECISONS
(Installment selling)

• KINDS OF GOOD SOLD.

The majority of goods sold on installment
terms are durable items, of high value, and
often have a repossession value.
Goods bought for immediate or temporary
use should not be sold on long-term credit.
FACTORS AFFECTING DECISONS
(Installment selling)

• CUSTOMER'S DESIRE.
Consider your customer's need of installment
credit. If you are running a small variety store
or pastry shop, chances are your customer
doesn't want installment credit.
FACTORS AFFECTING DECISONS
(Installment selling)

• FINANCIAL RESOURCES AVAILABLE.

Installment credit means longer credit
transactions and longer repayment periods
than if you are selling on 30-day charge
account. So unless you can get additional
money, you may run short of cash.
FACTORS AFFECTING DECISONS
(Installment selling)

• ACTION OF COMPETITORS.
Selling on installment is one way to
attract customers. Competitors may be
offering this service already. Make your
plan more attractive than theirs.
FACTORS AFFECTING DECISONS
(Installment selling)

• ACTION OF COMPETITORS
Selling on installment is one way to attract
customers. Competitors may be offering this
service already. Make your plan more
attractive than theirs.
FACTORS AFFECTING DECISONS
(Installment selling)
• REGULATORY LAWS.

The Philippine government has statutes,

special or regular, directly related to
installment selling. You should examine our
regulations before you decide to take on
installment selling.
POLICIES OF INSTALLMENT CREDIT

• GOODS TO SELL.
Confine your installment sales to high value
lines. Be sure it is major purchase for the
customer. A major purchase means different
things to various customers (can be through
cash purchase or installment credit).
POLICIES OF INSTALLMENT CREDIT
• DOWN PAYMENT.
The down payment should be big enough to give the customer a
sense of ownership. Without this feeling, he may become
discouraged and stop making payments.
Usually, your collection expenses, repossessions, and losses are
greater with lower down payments.
Down payments should be low enough to allow customers to buy but
bug enough to give customers the sense of ownership.
Vary the down payment according to the risk involved in the
individual credit purchase.
Set your required down payment through percentage or in exact peso
value.
POLICIES OF INSTALLMENT CREDIT
• AMOUNT AND SCHEDULE.
The amount and time of payments should
be related to your customer's income and
to his other debt.
Find out when your customer receives his
pay check and adjust the time of his
payment accordingly.
POLICIES OF INSTALLMENT CREDIT
• INSTALLMENT TERMS.
The terms of your contract should be as
short as possible. Adjust them to the useful
life of the article you are selling.
For instance, terms on clothes will be over
shorter period than terms on an
automobile.
POLICIES OF INSTALLMENT CREDIT
• CARRYING CHARGES.
Installment customers expect to pay carrying charge
(sometimes called finance charge or service charge). Explain
this charge to customers so that there will be no
misunderstanding later.

Truth in Lending Act and Usury Laws. Some firms state their
carrying charges in peso and cents or in percentages. It is
also good business to tell your customers about prepayment
privileges and about refund rates if he pays the balance
before maturity date.
POLICIES OF INSTALLMENT CREDIT
Carrying charges should be reasonable but adequate to
defray the cost of the transaction.

People should feel that the installment is "paving its own

way". Otherwise, cash customers may think they are carrying
an undue burden. On the other hand, excessive carrying
charges may drive away installment buyers.

The best policy: Beware of charges that border on being

unethical.
POLICIES OF INSTALLMENT CREDIT
• CREDIT INVESTIGATION.

Investigation of installment customers is more important than

the credit check-out you do for open charge accounts. Your
installment credit accounts usually represent a high average sale
figure and are extended over a fairly long time.

Profits from installment sales come as the customer finishes his

payments. One way to increase this possibility is to make you
credit investigation through your local bureau and other sources.
Such checking allows you to refuse undesirable credit risks before
the sale is made.
POLICIES OF INSTALLMENT CREDIT
• FORM OF CONTRACT.

Sales are made on a conditional sales contract or on a chat gel

mortgage basis because such risks are fairly large and financing
is extended over a long period. Such contract allows you to
repossess the item if the customer fails to pay.

You should check the laws for:

– 1. Filing and recording requirements

– 2. Conditions to repossess
– 3. Costs
– 4. Other provisions
– Then, you can decide which type of contract to use.
POLICIES OF INSTALLMENT CREDIT
• EXPENSES AND PROFITS IN INSTALLMENT
SELLING.

You will have certain expenses to pay before you can

make a profit from your installment operations

Some are:

– 1. Salaries for people to run your credit operations.

– 2. Expenses of office space, supplies, and utilites.
– 3. Collection and repossession expenses.
– 4. Interest on money borrowed to carry on your
business.
POLICIES OF INSTALLMENT CREDIT
• The longer the contract, the larger amount of money
you will have to tie up in receivables to do a given
amount of installment business.

• You will also have advertising bills of announcing and

promoting the plan.

• If you are selling on cash and on open charge and add

installment credit, you will have the problem of dividing
expenses connected with installment selling from those
resulting from open charge accounts.
POLICIES OF INSTALLMENT CREDIT
• Offset such expenses by selling more. Gross
profit on installment sales should pay for the
program and leave more "net" profit than
you could have had with only cash sales.

• Customers help cut expenses by paying

service charge for the privilege of buying on
installment. Accurate cost study is needed to
find out the sufficient charges.
How many pesos?
• Installment payments for any given
month are equal to the total of the
new installment business in previous
months (not including given month)
divided by contract period.
How many pesos?
• Installment receivables for a given
month are equal to installment
receivables of the previous month,
plus the new installment business
written during the given month.
How many pesos?
• Suppose you hope to sell P100,000 of
merchandise a month, or P1,200,000 annually,
on installment terms. Your contract calls for 10%
down payment, 6 months to pay, and a service
charge of 1% per month.

• With smaller down payment, your maximum

pesos tied up in receivables would increase.
However, if you use a 3-month instead of 6-
month contract, your number of pesos tied up
in receivables would decrease.
How many pesos?
Of course, this is a highly simplified case. It assumes that:

– 1. All contracts have the same term

– 2. No customer is past due in his payments
– 3. No one pays more than he agrees to each month.
– 4. No one pays in a shorter length of time than agreed; and
– 5. No one adds additional purchases on his installment
contract prior to completion of payments.

All of these factors can change the maximum number of pesos

you would have to plan to have tied up in installment
receivables.
How many pesos?
How many pesos?
• Equals installment sales of P10,000
minus down payment of P1,000 plus
the service charge of P5,400 based
upon the unpaid beginning balance.
THE CREDIT PLAN
– The implementation of credit selling, just like any area of
management, should begin with a credit plan. The credit plan
should include:
– 1. A forecast of the credit and collection picture in the
coming year or several years.
– 2. A well thought-out statement of the credit objectives- the
"grand design" for the credit function of the firm and the
"specific designs" for each unit or individual involved credit
work. This statement of major and minor objectives is the
key to the whole credit plan. It should include how many
peso of sales you are willing to allocate for credit and
collection expenses including salaries and bad debts.
THE CREDIT PLAN
– 3. A statement of credit policies and procedures
designed to coordinate and accomplish the stated
objectives by means of standardized and regularized
methods of meeting problems and doing specific jobs.
– 4. A program of activities, indicating priorities of action
steps in achieving the stated objectives. This program
should identify, qualify, and quantify credit and
collection targets.
– 5. A budget allocating facilities, materials, and men in
order to achieve the same stated objectives.
THE CREDIT PLAN
• The credit plan should take into account
the capabilities and needs of the enterprise
and how the credit arm could best serve
the overall interests of the business.
• It must be well understood and appreciated
by the credit people involved so that it will
be implemented as fully as possible.
THE CREDIT PLAN

• The forecast of credit and collections in specific peso

figures should be tied in closely with the production and
sales forecasts. It should shape, form or influence and
perhaps tone down the over-optimistic projections of the
sales team.
• The statement of objectives can be as simple as
possible, but plans and objectives should be reasoned
out and written down to be able to sort out and exclude
those objectives that do not promote the business or
are not desirable for the company.
• The rest of the credit plan outlined can be worked out
according to the needs and capabilities of each firm.
 THANK YOU!

ANY QUESTIONS?