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What are the consequences of a credit policy that is too strict? Too lenient? How does their...

Question:

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?

Credit Policy:

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.


Learn more about this topic:

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Credit Policy & Receivables

from Finance 101: Principles of Finance

Chapter 19 / Lesson 1
3.4K

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