collection policy

Examples of collection policy in the following topics:

• Setting a Credit Policy

  • To establish a credit policy, a company must establish credit standards, credit terms, and a collection policy.
  • There are three steps a company must undergo when developing a credit policy:
  • Potential losses not only include the selling price, but can also include disruption to cash flows and increased collection costs.
  • The last step is to establish a collection policy.
  • Collection policies vary widely among industries.

• Collecting Receivables

  • Companies use different methods to collect their outstanding receivables, like sending out reminders or employing a collection agency.
  • In dealing with collections, it is important for a firm to start by monitoring its accounts receivable in order to determine whether its policy is working to the best advantage of the company.
  • By comparing this number to the number in the credit policy, a business can determine whether its policy is effective or not.
  • Another way to evaluate a credit policy is to look at the receivable turnover ratio.
  • There are many types of collection agencies.

• Defining the Cash Flow Cycle

  • However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not always sustainable.
  • The cash conversion cycle refers to the time frame between a firm's cash disbursement and cash collection.
  • Collecting cash to satisfy the accounts receivable generated by that sale.
  • For a cash-only firm, the equation would only need data from sales operations (e.g., changes in inventory), because disbursing cash would be directly measurable as purchase of inventory, and collecting cash would be directly measurable as sale of inventory.

• Short-Term Approach

  • While a firm could even achieve a negative cash conversion by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not typically sustainable.
  • The aim of the study and calculation of the cash conversion cycle is to change the policies relating to credit purchase and credit sales.
  • If the firm is in an effective cash liquidity position, it can maintain its past credit policies.

• Days Sales Outstanding

  • Days sales outstanding (also called DSO or days receivables) is a calculation used by a company to estimate their average collection period.
  • In accountancy, days sales outstanding (also called DSO or days receivables) is a calculation used by a company to estimate their average collection period.
  • Generally speaking, though, higher DSO ratio can indicate a customer base with credit problems and/or a company that is deficient in its collections activity.
  • A low ratio may indicate the firm's credit policy is too rigorous, which may be hampering sales.
  • A better way to measure the performance of credit and collection function is by looking at the total overdue balance in proportion of the total accounts receivable balance (total AR = Current + Overdue), which is sometimes calculated using the days' delinquent sales outstanding (DDSO) formula.

• Monetary Policy Goal

  • Goal of monetary policy is to increase the well-being of society.
  • The Fed has six monetary policy goals, which are:
  • When businesses and households have higher incomes, the local, state, and federal governments collect more tax revenues.
  • Thus, the Fed uses monetary policy to spur strong economic growth.
  • However, expansionary monetary policy can trigger inflation.

• Market Actors

  • Other classes of intermediaries include: credit unions, financial advisers or brokers, collective investment schemes, and pension funds.
  • The largest 300 pension funds collectively hold about $6 trillion in assets.
  • Mutual companies are owned by the policyholders, while shareholders (who may or may not own policies) own proprietary insurance companies.
  • A mutual fund is a type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities.
  • While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment vehicles that are regulated, available to the general public, and open-ended in nature.

• Relationship Between Financial Policy and the Cost of Capital

  • Financial policy, not cost of capital, must be utilized to determine which investments to pursue, given that resources are limited.
  • Financial policy is used by companies or investors in order to determine the best way to allocate their resources.
  • The use of financial policy in decision making does not only involve valuation.
  • It attempts to maximize the expected return of a portfolio, or a collection of investments, for a given amount of risk by carefully choosing the proportions of various assets.
  • Explain the relationship between a company's financial policy and its cost of capital

• Time Lags and Targets

  • The Fed cannot influence the monetary policy goals directly.
  • Unfortunately, three time lags hinder monetary policy.
  • Finally, a monetary policy does not impact the economy immediately.
  • Unfortunately, the government takes three months to collect quarterly GDP data.
  • Monetary policy can become ineffective in some cases.

• Calculating the Cash Flow Cycle

  • CCC=# days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations.
  • The Cash Conversion Cycle emerges as interval C→D (i.e., disbursing cash→collecting cash).
  • The operating cycle emerges as interval A→D (i.e., owing cash→collecting cash)
  • Our aim of studying cash conversion cycle and its calculation is to change the policies relating to credit purchase and credit sales.
  • If it tells good cash liquidity position, we can maintain our past credit policies.