FIN 012: CREDIT AND COLLECTION

STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

Lesson title: The Credit department and its functions Materials:

Lesson Objectives: SAS
At the end of this session, I will be able to: Pen
1. Explain credit department and its function References:
http://web.nacm.org/pdfs/educ_pres
2. Recognize the need for a system which will ensure close entations/Principles_Ch3_v3.pdf
collaboration between the grant of credit and its collection

Productivity Tip:
Challenges come and go just like people, choose who you want to face different challenges with

A. LESSON PREVIEW/REVIEW
Introduction (2 mins)
Hello! Welcome to another session for credit and collection, I hope you are all doing well. We are now
on module 7, see how time flies really fast. Soon you will finish this module and say that you passed
credit and collection! But first, let’s have a recap on what we had discussed in your last module.

In our last 2 sessions, we had our quiz and a performance task in the form of a case study. For today,
we will talk about the credit department and how they function, their duties and responsibilities.

B.MAIN LESSON

Activity 1: Content Notes (13 mins)

LO 1: EXPLAIN CREDIT DEPARTMENT AND ITS FUNCTION

A credit department is one of the first departments which will become needed as revenue grows and credit is
extended to clients new and old. The types of transactions specific to your company will determine how
rigorous your company needs to be in the development of its credit department

The credit department tends to remain fairly consistent in size and scope during changing business conditions,
whether the economic conditions are good or bad, due to an increased support role when sales volumes
increase, as well as increased support needed when delinquencies increase.

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

**Sample credit department structure**

The Function of the credit department include:

o Maximizing sales,
o Accelerating cash inflow,
o Minimizing bad debt losses,
o Reviewing and approving new accounts,
o Developing and updating credit and collection policies,
o Establishing appropriate credit limits and terms of sale for new and active customers,
o Creating new or more appropriate payment terms [terms of sale],
o Placing accounts on credit hold, and releasing orders from credit hold,
o Managing the collection function,
o Maintaining current information in the credit file on each active customer,
o Documenting credit decisions and actions,
o Performing financial analysis on customer financial statements,
o Researching and resolving disputes and deductions that would otherwise delay or prevent payment of
accounts receivable,
o Communicating with other departments within the company including order entry, sales and shipping,
o Management reporting, and
o Safeguarding the company's investment in accounts receivable.

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

LO 2: RECOGNIZE THE NEED FOR A SYSTEM WHICH WILL ENSURE CLOSE COLLABORATION
BETWEEN THE GRANT OF CREDIT AND ITS COLLECTION

Centralization vs. Decentralization

Although there may be variations among companies, the control and administration functions can usually be
classified into two types of operations: centralization and decentralization. The question of whether to
centralize or decentralize the credit function is faced by companies with geographically and culturally diverse
operating units. It remains important as corporations continue to reengineer their business processes to
leverage their technology.

In a centralized structure, the credit function is controlled and administered from a principal or central location.

In a decentralized structure, the credit function may report to a principal location (headquarters) with credit
personnel located at remote offices.

Centralized

A centralized department services credit operations that are based entirely at a company’s main headquarters.
It is the responsibility of the credit manager and staff to approve credit terms on most orders. Credit
professionals may find themselves questioned by sales staff or even upper management if they decline an
application to grant terms on an important or significant order. An increasing number of credit departments are
using automated options that approve credit lines for perceived low-risk customers or low-amount credit
requests as long as they meet certain pre-established criteria. This, in theory, allows credit managers and staff
to focus on the most important customers and situations. A centralized credit system may be modified in
certain respects. In some companies, for example, most of the credit functions are carried on at headquarters,
but collections offices are located in the field to work directly with customers, secure payments and make
adjustments.

Decentralized—Credit Controlled at Headquarters but Administered from Decentralized Location(s)

A mid-management level credit manager reports functionally to an executive-level credit manager at

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

headquarters and also reports to the division head (the principle is the same for subsidiary or branch
operations). While authority in credit and collection is provided by the executive-level credit manager, in all
other respects middle management establishes the procedures to which the credit professional must conform.
Figure 3-2 illustrates a decentralized operation under which the middle-level credit manager has a dual
reporting role requiring close cooperation between the top-level credit executive and the division general
manager.

Benefits of Centralization

• Economies of Scale.

When separate divisions serve common customers, a centralized credit office can mean a reduction in
operating costs and a more efficient income stream, along with enhanced customer service.

• Consistency and Control.

Adherence to standardization of policies, procedures and protocols is more manageable in a

centralized environment. This has the advantage of providing consistent credit decisions across all business
units which minimizes risk of satellite departments having undue influence. When information about a common
customer is centralized, the credit function has more risk control over bad debt exposure and perhaps
increased leverage in collection efforts. Closer proximity tends to encourage communication between staff
members and management. Likewise, updates to policies, procedures and protocols can be disseminated
more quickly.

Benefits of Decentralization

• Internal and External Relationships.

Close proximity to customers can enhance a credit professional’s relationship with marginal customers

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

and lead to developing a better rapport with customers having a sizable dollar exposure. Being on site with
other business functions promotes a better understanding of business goals and fosters the exchange of
information about market and customer needs. It also enhances communication among departments and
reduces the number of interdepartmental conflicts.

• Involvement in Setting Strategic Priorities.

Credit can integrate its objectives with those of sales and marketing into divisional goals. Also,
decisions made at a local level can be implemented immediately without going through additional levels of
review.

Activity 2: Skill-building Activities (with answer key) (18 mins + 2 mins checking)

1. List and discuss the benefits of a centralized credit operation

2. What are the special characteristics and abilities to look for when selecting personnel?

Activity 3: Check for Understanding (5 mins)

1. If you are to organize your own credit department, how will you design it? What will be the
components of your credit department? You may draw or make a flowchart on how you will do it.

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

2. List the benefits of decentralized credit operation

C. LESSON WRAP-UP
Activity 4: Thinking about Learning (5 mins)
In this part of the module, we will track your progress on how well you are doing in this subject module.
You can highlight the number of modules that you have already finished.

1. How do you feel about the learning today?

2. How does this topic help you understand how a credit department works?

3. Do you see yourself working in a credit department?

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

FAQs:
1. What kind of credit operation is more advisable: the centralized or the decentralized credit operation?
- In the Centralized credit, departments are entirely based in the company’s main headquarters
meaning if you want to be granted a credit there is only one office that you need to go to while, Decentralized
credit departments are not housed in the headquarters, but report to the headquarters from a remote office or
offices meaning there are other offices of outlets that you can go to to have your credit application granted. It
is more likely to have a decentralized credit department because you can have more customers because you
can expand to different places.

KEY TO CORRECTIONS

Answer on Activity 2
1. List and discuss the benefits of a centralized credit operation.
*possible answers
• Economies of Scale.

When separate divisions serve common customers, a centralized credit office can mean a reduction in
operating costs and a more efficient income stream, along with enhanced customer service.

• Consistency and Control.

Adherence to the standardization of policies, procedures, and protocols is more manageable in a

centralized environment. This has the advantage of providing consistent credit decisions across all business
units which minimizes the risk of satellite departments having undue influence. When information about a
common customer is centralized, the credit function has more risk control over bad debt exposure and perhaps
increased leverage in collection efforts. Closer proximity tends to encourage communication between staff
members and management. Likewise, updates to policies, procedures, and protocols can be disseminated
more quickly.

2. What are the special characteristics and abilities to look for when selecting personnel?
- Answers will come from the students learning on the topic

Answer on Activity 3

1. If you are to organize your own credit department, how will you design it? What will be the components of
your credit department? You may draw or make a flow chart on how you will do it.
**Answers will depend on how the student portrays their own credit department

2. List the benefits of decentralized credit operation

- answers will depend on the students’ understanding of the topic
Benefits of Decentralization

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

• Internal and External Relationships.

Close proximity to customers can enhance a credit professional’s relationship with marginal customers
and lead to developing a better rapport with customers having a sizable dollar exposure. Being on-site with
other business functions promotes a better understanding of business goals and fosters the exchange of
information about market and customer needs. It also enhances communication among departments and
reduces the number of interdepartmental conflicts.

• Involvement in Setting Strategic Priorities.

Credit can integrate its objectives with those of sales and marketing into divisional goals. Also,
decisions made at a local level can be implemented immediately without going through additional levels of
review.

This document is the property of PHINMA EDUCATION