This chapter has covered the basics of credit and inventory policy. The major topics we discussed include:
The components of credit policy. We discussed the terms of sale, credit analysis, and collection policy. Under the general subject of terms of sale, the credit period, the cash discount and discount period, and the credit instrument were described.
Credit policy analysis. We developed the cash flows from the decision to grant credit and showed how the credit decision can be analyzed in an NPV setting. The NPV of granting credit depends on five factors: revenue effects, cost effects, the cost of debt, the probability of nonpayment, and the cash discount.
Optimal credit policy. The optimal amount of credit the firm should offer depends on the competitive conditions under which the firm operates. These conditions will determine the carrying costs associated with granting credit and the opportunity costs of the lost sales resulting from refusing to offer credit. The optimal credit policy minimizes the sum of these two costs.
Credit analysis. We looked at the decision to grant credit to a particular customer. We saw that two considerations are very important: the cost relative to the selling price and the possibility of repeat business.
Collection policy. Collection policy determines the method of monitoring the age of accounts receivable and dealing with past-due accounts. We described how an aging schedule can be prepared and the procedures a firm might use to collect on past-due accounts.
Inventory types. We described the different inventory types and how they differ in terms of liquidity and demand.
Inventory costs. The two basic inventory costs are carrying and restocking costs; we discussed how inventory management involves a trade-off between these two costs.
Inventory management techniques. We described the ABC approach and the EOQ model approach to inventory management. We also briefly touched on materials requirements planning, MRP, and just-in-time, or JIT, inventory management.
