CCR Credit cheat sheet
CCR Credit · Keep the key ideas within reach.
Business Credit and Financial Management
Working capital = current assets − current liabilities; it measures the cushion available to fund day-to-day credit operations.
Cash conversion cycle = days inventory outstanding + days sales outstanding − days payable outstanding; a shorter cycle frees cash to support customer credit.
Weighted average cost of capital (WACC) = (E/V × Re) + (D/V × Rd × (1 − tax rate)); the discount rate for evaluating credit-related investment decisions.
Net present value = sum of discounted future cash flows − initial outlay; accept projects with positive NPV when extending credit capacity.
Trade credit terms 2/10 net 30 imply an annualized cost of forgoing the discount = (0.02/0.98) × (365/20) ≈ 37.2%.
Operating leverage = contribution margin / operating income; higher leverage amplifies the effect of sales declines on a borrower's ability to pay.
Financial leverage = total debt / total equity; rising leverage raises fixed obligations and default probability.
The cash budget projects receipts and disbursements by period; a persistent negative balance signals liquidity stress requiring credit-line use.
Credit Law and Legal Environment
Fair Credit Reporting Act (FCRA): governs consumer credit reporting, dispute rights, and permissible purposes; business credit is largely outside its scope.
Equal Credit Opportunity Act (ECOA) prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
Fair Debt Collection Practices Act (FDCPA) restricts third-party debt collectors' conduct; it generally does not govern a creditor collecting its own debt.
Statute of frauds: many jurisdictions require a writing for credit agreements not performable within one year or above a monetary threshold.
UCC Article 9 governs secured transactions; a security interest attaches on value given, debtor rights in collateral, and an authenticated security agreement.
Perfection of a security interest typically requires filing a UCC-1 financing statement; priority generally follows first-to-file or first-to-perfect.
Bankruptcy: Chapter 7 liquidation, Chapter 11 reorganization, Chapter 13 individual repayment; automatic stay halts collection actions on filing.
Truth in Lending Act (TILA) requires disclosure of finance charges and APR for consumer credit; Regulation Z implements it.
Financial Analysis and Risk Assessment
Current ratio = current assets / current liabilities; a ratio below 1.0 signals potential short-term liquidity shortfall.
Quick ratio = (cash + marketable securities + receivables) / current liabilities; excludes inventory to test immediate liquidity.
Debt service coverage ratio (DSCR) = net operating income / total debt service; a DSCR below 1.0 means insufficient cash to cover debt payments.
Altman Z-score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5; a score below 1.81 indicates high bankruptcy risk for manufacturers.
Interest coverage = EBIT / interest expense; lower values reflect reduced ability to service debt from operations.
Aging schedule: classify receivables by days past due; rising proportions in 60+ day buckets signal deteriorating credit quality.
Credit scoring models combine weighted factors (payment history, leverage, liquidity, industry) into a probability-of-default estimate.
Concentration risk: a single customer exceeding a defined share of receivables or revenue warrants additional monitoring and limits.
Credit Management and Leadership
The five Cs of credit: character, capacity, capital, collateral, and conditions; each informs a distinct dimension of creditworthiness.
Credit policy defines standards for approval, limits, terms, and collection; it must balance sales growth against bad-debt exposure.
Days sales outstanding (DSO) = (accounts receivable / credit sales) × days in period; a key performance indicator for collection efficiency.
Aging-based collection strategy: escalate contact frequency as receivables move into 30-, 60-, and 90-day past-due buckets.
Credit limit setting: base limits on assessed repayment capacity, historical payment behavior, and exposure tolerance.
Key credit KPIs: DSO, bad-debt ratio, percentage current, average days delinquent, and collection effectiveness index.
Segregation of duties: approval, disbursement, and reconciliation functions should be separated to reduce fraud risk.
Periodic credit review: reassess limits and terms at defined intervals or on trigger events such as downgrades or adverse payment trends.
Business Credit and Financial Management
Working capital = current assets − current liabilities; it measures the cushion available to fund day-to-day credit operations.
Cash conversion cycle = days inventory outstanding + days sales outstanding − days payable outstanding; a shorter cycle frees cash to support customer credit.
Weighted average cost of capital (WACC) = (E/V × Re) + (D/V × Rd × (1 − tax rate)); the discount rate for evaluating credit-related investment decisions.
Net present value = sum of discounted future cash flows − initial outlay; accept projects with positive NPV when extending credit capacity.
Trade credit terms 2/10 net 30 imply an annualized cost of forgoing the discount = (0.02/0.98) × (365/20) ≈ 37.2%.
Operating leverage = contribution margin / operating income; higher leverage amplifies the effect of sales declines on a borrower's ability to pay.
Financial leverage = total debt / total equity; rising leverage raises fixed obligations and default probability.
The cash budget projects receipts and disbursements by period; a persistent negative balance signals liquidity stress requiring credit-line use.
Credit Law and Legal Environment
Fair Credit Reporting Act (FCRA): governs consumer credit reporting, dispute rights, and permissible purposes; business credit is largely outside its scope.
Equal Credit Opportunity Act (ECOA) prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
Fair Debt Collection Practices Act (FDCPA) restricts third-party debt collectors' conduct; it generally does not govern a creditor collecting its own debt.
Statute of frauds: many jurisdictions require a writing for credit agreements not performable within one year or above a monetary threshold.
UCC Article 9 governs secured transactions; a security interest attaches on value given, debtor rights in collateral, and an authenticated security agreement.
Perfection of a security interest typically requires filing a UCC-1 financing statement; priority generally follows first-to-file or first-to-perfect.
Bankruptcy: Chapter 7 liquidation, Chapter 11 reorganization, Chapter 13 individual repayment; automatic stay halts collection actions on filing.
Truth in Lending Act (TILA) requires disclosure of finance charges and APR for consumer credit; Regulation Z implements it.
Financial Analysis and Risk Assessment
Current ratio = current assets / current liabilities; a ratio below 1.0 signals potential short-term liquidity shortfall.
Quick ratio = (cash + marketable securities + receivables) / current liabilities; excludes inventory to test immediate liquidity.
Debt service coverage ratio (DSCR) = net operating income / total debt service; a DSCR below 1.0 means insufficient cash to cover debt payments.
Altman Z-score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5; a score below 1.81 indicates high bankruptcy risk for manufacturers.
Interest coverage = EBIT / interest expense; lower values reflect reduced ability to service debt from operations.
Aging schedule: classify receivables by days past due; rising proportions in 60+ day buckets signal deteriorating credit quality.
Credit scoring models combine weighted factors (payment history, leverage, liquidity, industry) into a probability-of-default estimate.
Concentration risk: a single customer exceeding a defined share of receivables or revenue warrants additional monitoring and limits.
Credit Management and Leadership
The five Cs of credit: character, capacity, capital, collateral, and conditions; each informs a distinct dimension of creditworthiness.
Credit policy defines standards for approval, limits, terms, and collection; it must balance sales growth against bad-debt exposure.
Days sales outstanding (DSO) = (accounts receivable / credit sales) × days in period; a key performance indicator for collection efficiency.
Aging-based collection strategy: escalate contact frequency as receivables move into 30-, 60-, and 90-day past-due buckets.
Credit limit setting: base limits on assessed repayment capacity, historical payment behavior, and exposure tolerance.
Key credit KPIs: DSO, bad-debt ratio, percentage current, average days delinquent, and collection effectiveness index.
Segregation of duties: approval, disbursement, and reconciliation functions should be separated to reduce fraud risk.
Periodic credit review: reassess limits and terms at defined intervals or on trigger events such as downgrades or adverse payment trends.