Credit: Assessment, Monitoring and Recovery
Core concepts
Credit management asks whether a customer can and will pay. Candidates must know the 5 Cs of credit (character, capacity, capital, collateral, conditions), the credit assessment process (application, information gathering, scoring, decision, monitoring), credit terms and policy (credit period, discount, collection policy), and monitoring tools (ageing analysis, credit limits, covenants). Recovery involves reminders, negotiation, debt collection agencies and legal action.
Traps that appear in questions
- Confusing capacity (ability to repay from cash flow) with capital (owner’s stake).
- Assuming collateral guarantees repayment - it reduces loss, not default risk.
- Ignoring the cost–benefit of relaxing credit: higher sales vs higher financing and bad debt costs.
- Misreading an ageing schedule: the balance in the 90+ days bucket signals collection failure, not the total receivables.
- Forgetting that credit scoring is statistical and predictive, not a guarantee.
Worked rule of thumb
Evaluate a credit policy change using incremental analysis: Change in contribution = Δ sales × contribution margin. Change in cost = (new receivables × cost of capital) − (old receivables × cost of capital) + Δ bad debts. If contribution gain exceeds cost increase, accept. Example: sales rise Ksh 1,000,000 at 30% margin = Ksh 300,000 contribution. Extra receivables of Ksh 250,000 at 12% = Ksh 30,000 financing cost; extra bad debts Ksh 40,000. Net benefit = Ksh 230,000 → accept.
Monitoring
Set limits by customer, review ageing monthly, and escalate overdue accounts early.