The Credit Decision
Once the credit analyst has marshaled the necessary evidence and has analyzed a decision must be reached on the disposition of the account. In an initial sale, the first decision to be made is whether or not to ship the goods and extend credit. If repeat sales are likely, the company will probably want to establish procedures so that it does not have to evaluate the extension of credit each time an order is received. One means for streamlining the procedure is to establish a line of credit for an account. A line of credit is a maximum limit on the amount the firm will permit to be owing at any one time. In essence, it represents the maximum risk exposure that the firm will allow itself to undergo for an account. In the sequential investigation method illustrated, single orders were evaluated. With a line of credit, multiple orders are assumed. The principle is the same. Likely profits from present and future sales must be balanced against the likely collection period, collection costs, and probability of bad debt losses over time. Those last three balancing factors depend upon the magnitude of the line of credit offered rather than upon the size of order. As before, probability concepts can be applied in order to analyze the tradeoff between expected benefits and expected costs and to determine an appropriate line of credit for the customer.
The establishment of a credit line streamlines the procedure for shipping
goods. One need only determine whether an order brings the amount owed by a
customer In excess of the line. If not, the order is shipped; if so, an incremental
credit decision must be reached. The line itself must be reevaluated periodically
in order to keep abreast of developments in the account. A satisfactory risk
exposure today may be more or less than satisfactory a year from today. Despite
comprehensive credit procedure, there will always be special cases that must be
dealt with individually. Here, too, the firm can streamline the operation by
defining responsibilities clearly.
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