Business Credit and Financial Management
Domain 1 - Business Credit and Financial Management
This domain tests how a credit department converts sales terms into a controlled receivables portfolio: policy, credit limits, terms of sale, and the working-capital cost of granting credit.
Core rules
- Credit policy defines who approves limits, what financial information is required, and how exceptions escalate. A written policy is the control of record; undocumented overrides are audit findings.
- Evaluate the five Cs - character, capacity, capital, collateral, conditions - and set the limit to the weakest link.
- Terms of sale are a pricing decision. 2/10 net 30 carries an implicit finance charge; quantify it before extending terms.
- Monitor DSO, aging buckets, and percent current. Rising DSO with flat sales usually signals collection decay, not growth.
Worked example
A customer buys on 2/10 net 30 and pays on day 30. The seller gives up 2% of the invoice for 20 extra days of financing. Annualized cost = (0.02 / 0.98) × (365 / 20) = 2.041% × 18.25 = 37.2%. Reasoning: the buyer forgoes 2% to keep cash 20 days; compared with a 9% line of credit, the discount is expensive for the seller and attractive to the buyer. Either tighten terms or price the discount into the invoice.
Traps
- Confusing sales growth with credit quality; revenue booked to a deteriorating account still becomes bad debt.
- Setting a limit from one year of statements without trade references or lien searches.
- Ignoring concentration: one customer above 10–15% of receivables needs a named strategy.