Polytechnic University of the Philippines

San Juan Campus

San Juan City

Policy Review
Case Studies on Collection and Collection
(FIMA 30063)
Midterm Period

Submitted by:
ANTONICO, John Flocerpido R.
MUTAS, Rona
BSBA FM 3-3

Submitted to:
Professor R-Jhai Tagle Balcita

Date Submitted:
November 27, 2020
I.
A. MANUFACTURING BUSINESS

I. Business Name: PROGRESSIVE MATERIALS

Background: Progressive materials is a family-owned and operated business in New
Albany, United States. The business was founded in 2011 and started its operation in
2012. Since then, the business has become the second largest silicone coatings
manufacturer in the United States.1 Silicone coatings are materials used in
commercial roofs that ensures roofing system’s efficiency and durability, and it is
made from ecofriendly chemicals that will last for years. The business now has
international clients and continuously expanding.

II. Needs Analysis

 Requiring a credit report was not mentioned in the credit policy. Customer’s credit
worthiness is based on its ability to pay and history of timely payments of debts
which can be obtain on trade references.
 Credit limit is determined by comparing the customer’s average working capital and
average credit limit granted by trade references.
 The sales department can instruct customers with credit requirements.
 No interest charges were mentioned in case of the customer’s delinquency. To secure
the payment, the company requires irrevocable letter of credit and personal guarantee
from the customer.
 Major issue: No credit collection terms, and procedure was included.
 Payment first as an alternative to credit in closing a deal with customers whose level
of risk is indeterminable.

III. Research
Credit policy should be a tool used to expand the company revenues as well as the
customer relationship. (Smyyth, 2011) Lack of specific terms from credit application to
credit collection may result for business to incur bad debts. This can be mitigated by
implementing effective credit controls and policies to every part of the process.
According to the Credit and Collection handbook of C2C resources, a solid credit and
accounts receivable policy can help a business minimize high level of bad debts. But of
course, business owners and credit departments should be thorough in decision making to
whom credit should be granted and how much should the business agree to grant. Credit
1
Mann D. (2018). “Progressive Materials plans headquarters expansion” accessed November 2020. Retrieved from
https://www.bizjournals.com/louisville/news/2018/10/12/progressive-materials-plans-headquarters-
expansion.html
 terms of agreement should also be clear so that collection procedure policy wouldn’t be
hard to implement. However, after granting a credit approval, bad debts are still
inevitable no matter how good credit report and references the customer might have. To
reduce the risk of incurring too much of a bad debt, the business is also recommended to
enrich its relationship with the customer. This way, it would be easy for the credit
department to recommend collection of timelines that will encourage the customer’s
timeliness of payments. Collection of timelines may include schedule of collection calls
and collection notices as a friendly reminder to a more serious tone to the customer.
Collection timelines can be based on credit and payment scoring model to determine
when collection should commence. The scores should reflect the credit risk, industry
payment data, as well as the business experience with the customer. (Smyyth, 2011) This
is to provide valuable insights to the business in knowing the customer’s behavior over
time which may serve as a reference to whether credit to customer will be extended or
not.

IV. Analysis and Recommendation

1. Requiring a credit report was not mentioned in the policy. Customer’s credit
worthiness is based on its ability to pay and history of timely payments of debts
which can be obtain on trade references.

Analysis: Credit report is more accurate since it covers the debtor’s complete credit
history. Trade references is only used to support a formal credit report and is basically
just a payment history of the debtor to different businesses. The issue in this is that,
not all customers would provide a bad reference when applying for credit. So, there’s
a chance that risky customers will be granted. And since Progressive Materials does
not charge interest to its debtors, there’s a high chance that payment delays would
affect the business cash inflows. This may result for business stakeholders to
withdraw their investment or suppliers to increase the cost due to decrease in the
business production. And as production cost gets higher than profit, employees will
suffer from a salary cut or worst, unemployment.

Recommendation: If credit report will not be required by the business, they should at
least require multiple trade references to further assess the customer’s credit
worthiness. Payment delays is inevitable already, but the risk of incurring a lot of
payment delays would be lessen if the credit department has strict collection policy.

2. Credit limit is determined by comparing the customer’s average working capital and
average credit limit granted by trade references.

Analysis: Basically, customer’s credit limit is based on old information and not on
future business performance. No risk assessment to sources of repayment is
 mentioned in the policy. The issue is, if the customer has been granted a large credit
before, it would likely be the same credit he/she will get from Progressive Materials.
What if at that time, the customer’s business was at its peak when it was granted? It
would be hard for the customer to repay the debt if the same credit limit would be
granted. Investors would not take risks in investing to a company that does not assess
future business risk.
Recommendation: The credit department should also conduct a ratio analysis based
on the customer’s business financial statements. This would help the business decide
how much credit should be granted.

3. The sales department can instruct customers with credit requirements.

Analysis: This may result to conflict in credit collection, a sales representative might
not inform the customer to some requirements needed just to entice him/her to close
the deal. After sale, the customer might be unexpecting certain terms from the credit
department when collection happens. And because of unexpected terms, the customer
might terminate the business relationship between Progressive Materials. If this loss
of customer happens frequently, it would affect potential customers decision on
applying credit to Progressive Materials.

Recommendation: The credit department should take over the customer’s

requirements after the sales representative closed the sale to prevent conflicts of
interest between the sale reps and customer. The sales department can still instruct
credit requirements but must adhere to the credit policies the business has.

4. No interest charges were mentioned in case of the customer’s delinquency. To secure

the payment, the company requires irrevocable letter of credit and personal guarantee
from the customer.

Analysis: The payment is secured but delays in payment may be tolerated. The effect
to stakeholders would be the same to analysis number 1.

Recommendation: To prevent payment delays even without interest charges when

payment is past due, it is recommended for the business to learn the customer
business practices that impact prompt payments and eliminate the barriers. Partner
with the customer toward developing best business practices toward effecting timely
payments.2

5. No credit collection terms, and procedure was included.

2
Smyyth LLC. (2011) “13 Credit Management Best Practices” accessed November 2020. Retrieved from
https://www.smyyth.com/wp-content/uploads/2016/03/13-Credit-Best-Practices.pdf
 Analysis: Progressive Materials might be hiring a collection agency for a more
quality collection. If ever there are issues with the collection, the personal guarantee
and letter of credit is the business secured way of getting paid. In case that a customer
was unable to pay and was forced to liquidate its assets to repay the credit, it would
take much time for the conversion of properties to happen. So, this as almost as the
same with incurring payment delays that may cause cash flows interruptions.

Recommendation: The business should have its own credit collection procedure to
be implemented with local customers to reduce the business collection cost. Hiring a
local collection agency would not be necessary if the customer is within the local area
of the business.

6. Payment first as an alternative to credit. This a secure way to close a deal with
customers whose level of risk is indeterminable.

Analysis: This process may result to business incurring additional shipping cost when
the products are returned due to shipment errors. But it would guarantee suppliers that
the product will be sold without payment problems. This quick business transaction
will encourage the suppliers of Progressive Materials to increase the quantity of
supply because of an efficient production.

Recommendation: To prevent shipping errors, the business should be thorough in

checking the customer’s personal information. Shipping address and contact details of
the customer should be validated, and specification of products should be clarified
prior to shipment.

B. SERVICE BUSINESS

I. Business Name: MORGAN CARGO

Background:

II. Needs Analysis

Morgan Cargo is detailed with its credit policy and procedure. The contents of its
policy cover the general policies of the business down to its collection routine.
However, the issues we found that may trigger potential problem with the policy they
have are the following:
 1. There’s a collection routine but the collection goals and objective are not stated in
the policy.
2. Steps to be taken in case of the customer delinquency has only 3 steps. First, if the
account is 30 days past due, the collection department will send two payment
requests to the customer. Second, when the account is 60 days past due, final
demand will be sent. If after 10 working days the payment is not received by the
credit department, the customer will be handed over for a legal action without any
further notifications.

III. Research

Objectives are necessary for business to convert its vision into a measurable
target. It gives a clear instruction to its employees to what the business wants to
happen.
According to James Woodruff3, there are five important reasons why an objective
must be set. First, it creates direction and guidelines for the business to achieves its
goals. It serves a clear pathway or instruction to what the business should do. Second,
it motivates employees as they are expecting rewards after meeting the objectives or
exceeding beyond it. This makes the employees more productive and efficient in
performing their jobs. Third, it establishes standards to evaluate performance.
Objectives becomes the basis to identify the success and failures of an organization or
employees. It gives level of percentage to the target attainment and answers to
questions such like, “Out of 100%, what did the organization has attained? What
changes is needed for improvement?”. Fourth, it forms the basis to set budgets. After
having a clear pathway of what the business wants, how much would it cost for the
business to attain their target? Lastly, objectives develop structure of project plans.
The business will then have its timeline of work and strategies to how they will plan
to achieve their objectives.
Relating to the credit policy of Morgan Cargo, the business does have one
objective, and that is to make sure they are getting paid. However, there are no clear
goals and specific objectives to what the business targets as a whole organization with
their collection policy.

IV. Analysis and Recommendation

3
James Woodruff is a senior management consultant and a technical expert in conducting an analysis of a
company's operational, financial, and business management issues. He graduated from Georgia Tech with a
Bachelor of Mechanical Engineering and received MBA from Columbia University.
 1. There’s a collection routine but the collection goals and objective are not stated in
the policy.

Analysis: Lack of goals and objectives might bring confusion to the employees
itself. Since collection routine is what they do in a daily basis, there is no room for
improvement for quick conversion of accounts receivable to cash.

Recommendation: The collection agency should at least have a Collection

Effectiveness Index (CEI). It compares what was collected out of what was
available to collect.4 This is to assess the business performance with its accounts
collection over period of time.

2. Steps to be taken in case of the customer delinquency has only 3 steps. First, if the
account is 30 days past due, the collection department will send two payment
requests to the customer. Second, when the account is 60 days past due, final
demand will be sent. If after 10 working days the payment is not received by the
credit department, the customer will be handed over for a legal action without any
further notifications.
Analysis: The legal proceedings could affect the reputation of the customer since
there is no notifications will be sent. This might affect other potential customer’s
perspective to the business. They might think that the business is unreasonably
strict with its policy that they don’t have the right to defend their side knowing
that it’s only a “delinquency case”. As to what we have read in other businesses
collection policy, they still give notices or payment demands to the customer even
if the payment is 90 days past due. With Morgan Cargo’s collection policy, it is
still considerate since they give 2 warnings. However, the part where no
notification will be sent to the customer in filing a legal action against them seems
too hard.
Recommendation: The credit department or the credit manager should at least
explain this legal proceeding to its customer after the credit approval so that no
issues will occur since the customer will probably sign the papers for the
agreement.

C. MERCHANDISING BUSINESS

4
Credit Guru Inc. “Ratio – Collection Effectiveness Index” accessed November 2020. Retrieved from
https://www.creditguru.com/index.php/collection-management/collection-metrics/collection-effectiveness-index-
cei