CHA PT ER 3

GENERAL
FUNC TION
S
OF
CREDIT & COLLECTION

CREDIT LAROA, MYCHELL

D. H ING P IT , A IR A
CONTENT INDEX
BENEFIT S OF
CREDIT
ADVANTAGES

&
DISADV ANT AGES

OF CREDIT

THE COST OF CREDIT

 GENERAL FUNCTION OF CREDIT
Credit benefits the entire economy

In what way does credit benefits the entire

M anufac turer Wholesaler Retailer Consumer

PRODUCTION-MARKETING DISTRIBUTION
SYSTEM
 4 ECONOMIC BENEFITS OF
CREDIT TO THE
ECONOMY
1 2 3 4
ECONOMI ECONOMI ECONOMI ECONOMI
C C C C
BENEFIT BENEFIT BENEFIT BENEFIT
The larger the
enterprise, the more
economy of scale
is achieved
1st Economic Benefit

It refers to the cost

ECONOMIE reductions that occur when
an organization is large or
S OF increases production
SCALE
 1st Economic Benefit

FIXED COST
Business expenses that do not vary
in relation to production

VARIABLE COST
Directly varies with production
Thus, production systems with larger capacities
tend to have lower costs of production
 4 ECONOMIC BENEFITS OF
CREDIT TO THE
ECONOMY
1 2 3 4
ECONOMI ECONOMI ECONOMI ECONOMI
C C C C
BENEFIT BENEFIT BENEFIT BENEFIT
The larger the The expansion of
enterprise, the more the purchasing
economy of scale power of the
is achieved consumers
M anufac turer Wholesaler Retailer Consumer

When the purchasing power of the consumers is

expanded, this increases demand and actual
consumption, which in turn will require higher
production
 4 ECONOMIC BENEFITS OF
CREDIT TO THE
ECONOMY
1 2 3 4
ECONOMI ECONOMI ECONOMI ECONOMI
C C C C
BENEFIT BENEFIT BENEFIT BENEFIT
The larger the The expansion of The savings in time
enterprise, the more the purchasing and transactional
economy of scale power of the expenses
is achieved consumers
 4 ECONOMIC BENEFITS OF
CREDIT TO THE
ECONOMY
1 2 3 4
ECONOMI ECONOMI ECONOMI ECONOMI
C C C C
BENEFIT BENEFIT BENEFIT BENEFIT
The larger the The expansion of The savings in time
enterprise, the more the purchasing and transactional The multiplier effect
economy of scale power of the expenses
is achieved consumers
4th Economic Benefit

Large-scale credit that results in the creation of

large enterprises will necessarily empower new, or
enhance old, linkages. A business enterprise is
linked to other enterprises.
ADVANTAGES & DISADVANTAGES OF
CREDIT
Credit is not just a 2-way transaction between 2 parties; it could start
M anufac turer Wholesaler Retailer Consumer

THE INTRODUCTION OF LARGE AMOUNT OF CREDIT

COULD RE-CHARGE A STAGNANT ECONOMY
 ADVANTAGES
1 2 3
Bigger, more Lower costs of Better marketing
complete inventory, production with practices that
offering customers will increase the
more product
better
equipment company's
choices that can
only result in higher obtained overall market
sales levels through credit share
 DISADVANTAGES
1 2 3
The availability Very aggressive
of credit affects Credit increases
users of credit
or distorts the the cost of doing
tend to ignore
way of thinking business
risk
of some
managers
THE COST OF CREDIT
the cost of credit are:
1. . I N T E R E S T
2. . CREDIT AND
C O LLE CT ION EXPENSES
3. . BAD DEBTS
 INTE RE S
T
Is the monetary charge for the privilege of
borrowing money

is the amount of money a lender receives for lending out

money
 CREDIT AND COLLECTION
EXPENSES

1.Cost of credit investigation/

property appraisal/background
Expenses incured in granting the check
credit and collecting the
2.Cost of recording and
receivables.
monitoring accounts receivables

3.Cost of collection
 B A D DEBTS
THE MOST EXPENSIVE OF THE
3 COST OF CREDIT

Sale price of goods sold on credit P 25,000

Cost of good sold 20,000
Expected gross profit on the sale P 5,000

Not only will the company lose the opportunity on the P5,000
potential profit; it will also lose the entire cost of goods sold.
CALCULATING THE TRUE COST OF CREDIT

1.Credit for merchandise sold

2.Cash or bank loans
 CREDIT FOR MERCHANDISE SOLD
2% discount if paid in
10 days from invoice
date
CREDIT
PERIO
D
The number of days until full
payment is required. In this
case, 30 days
Net or N (no discount) if
2/10, N
30
CASH
DISCOUN
T
A percentage deducted from
the purchase price if the
buyer pays within a specified
time shorter than the credit
period. In this example, 2%.
paid in 30 days
CASH DISCOUNT
PERIOD
The number of days after
the beginning of the credit
perod during which the cash
discount is available, in this
case, 10 days.
TO CALCULATE FOR THE COST
OF FORGOING THE DISCOUNT

formula:

Cost of forgoing CD 360

= x
N
the cash discount 100% - CD
HIDDEN COSTS OF CREDIT

1 . V e hic le insuranc e
2 . Registration fees
THE OPPORTUNITY COSTS OF CREDIT

O PP O RT UN IT Y C O ST S
 CHA PT ER 3

TH E
E N D !!!
CREDIT & COLLECTION

LAROA, MYCHELL
D. H ING P IT , A IR A