What are the consequences of a credit policy that is too strict? Too lenient? How does their credit policy impact the amount of uncollectible accounts that need to be written off?
The credit policy of a company is how the company decides on when the customers they offered finance will pay back the company,how much they will pay and the discount they will get, if any for early settlement.
Answer and Explanation:
What are the consequences of a credit policy that is too strict
A credit policy that is too strict is one where the customers have a shorter period to pay their debt. The consequences of this credit policy are listed below:
-Customers will opt to buy at another supplier as the reason they are seeking financial assistance is to get financial freedom.They will look for a supplier that will be able meet their needs.
-Sales will drop as customers may want to buy the product,but not be able afford to pay the amount in the short amount of time as per the credit policy of the company
What are the consequences of a credit policy that is too lenient
The consequences of a credit policy that is too lenient are listed below:
-May result in growth in sales but an increase in bad debts as the company struggles to get their money from customers
-It may result in cash-flow problems for the company as the company fulfills their end of the contract by delivering goods and incurring costs while it collects their money over long periods of time
How does their credit policy impact the amount of noncollectable accounts that need to be written off
As can be seen from explanations above,a credit policy that is too lenient will increase the amount of bad debts written off while a credit policy that is too strict will reduce this amount while also decreasing sales.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Finance 101: Principles of FinanceChapter 19 / Lesson 1