NACM CMC cheat sheet

Credit is the transfer of goods, services, or funds in exchange for a promise to pay later; the credit manager sells the time value of money plus risk assumption.

Four classic C's of credit: Character (willingness and integrity), Capacity (cash flow to repay), Capital (net worth cushion), Collateral (assets pledged); Conditions and Coverage are common modern additions.

Working capital = current assets − current liabilities; it measures the short-term liquidity buffer available to absorb credit losses and slow collections.

Current ratio = current assets ÷ current liabilities; quick (acid-test) ratio = (cash + marketable securities + receivables) ÷ current liabilities.

Cash conversion cycle = days inventory outstanding + days sales outstanding − days payables outstanding; a rising cycle means more financing need.

DSO = (accounts receivable ÷ net credit sales) × days in period; best possible DSO uses only current (undisputed, not past-due) receivables.

Aging buckets (current, 1–30, 31–60, 61–90, 90+) drive the collection effectiveness index and the allowance for doubtful accounts estimate.

Cost of carrying receivables ≈ receivables balance × (cost of funds + servicing/bad-debt cost); offering terms is a capital investment decision, not a sales courtesy.

A written credit policy states credit standards, approval authority limits, required documentation, terms by customer class, and escalation rules for exceptions.

Credit application should capture legal entity name, ownership, bank references, trade references, requested limit, and authorization to obtain credit reports.

Trade reference checks should ask for high credit, current balance, past-due status, days-beyond-terms, and payment pattern over the last 12 months.

Credit bureau reports (business and owner/guarantor consumer files) supply payment trends, public records (liens, judgments, bankruptcies), and collection counts.

Risk scoring models weight payment history, financial leverage, time in business, industry, and size; scores rank relative risk and do not replace judgment on large exposures.

Credit limit setting rule of thumb: limit ≈ expected monthly purchases × terms in months, adjusted for net worth and available bank lines.

Risk mitigation ladder: cash in advance, COD, credit card, letter of credit, personal guaranty, secured interest, then open unsecured terms.

Periodic review triggers: limit increase request, adverse bureau alert, late payments, ownership or entity change, and annual review for large accounts.

Balance sheet equation: assets = liabilities + equity; equity is the residual cushion that absorbs losses before creditors are impaired.

Liquidity: current ratio, quick ratio, and cash ratio (cash + marketable securities ÷ current liabilities); compare to industry norms, not absolute thresholds.

Leverage: debt-to-equity, debt-to-tangible-net-worth, and times interest earned (EBIT ÷ interest expense); rising leverage with flat EBIT signals repayment stress.

Profitability: gross margin, operating margin, net margin, and return on equity; declining gross margin can signal pricing pressure or inventory/cost problems.

Cash flow: operating cash flow should cover capital expenditures and current maturities of long-term debt; persistent negative operating cash flow is a red flag.

Quality of earnings checks: growing receivables or inventory faster than sales, capitalized costs, one-time gains, and related-party revenue.

Trend and comparative analysis: at least three years of statements plus interim statements, common-size percentages, and comparison to industry peers.

Warning signs: qualified auditor opinion, going-concern language, covenant violations, frequent bank or auditor changes, and negative tangible net worth.

Terms notation: net 30 means full payment in 30 days; 2/10 net 30 means a 2% discount if paid within 10 days, otherwise full amount in 30 days.

Cost of forgoing a cash discount = discount % ÷ (100% − discount %) × 365 ÷ (net period − discount period); 2/10 net 30 ≈ 36.7% annualized.

Decision rule: approve, approve with conditions (lower limit, guaranty, security), or decline; document the rationale and the approving authority level.

Collection sequence: invoice and statement accuracy first, then reminder, phone call, dunning letter, escalation to credit hold, agency or attorney, litigation.

Days beyond terms (DBT) = DSO − terms days; it isolates delinquency from sales volume and is the primary early-warning collection metric.

Credit hold rule: stop new shipments when an account exceeds a defined past-due threshold or limit, until payment or a documented payment plan is in place.

Promise-to-pay tracking: record date, amount, and method; a broken promise escalates one collection step automatically.

Bad-debt write-off requires documented collection effort; recoveries are tracked separately and reconciled against prior write-offs.

UCC Article 9 governs secured transactions in personal property; attachment requires value given, debtor rights in collateral, and a security agreement authenticated by the debtor.

Perfection methods: filing a UCC-1 financing statement (most common), possession, control (deposit accounts, investment property), and automatic perfection in limited cases.

Priority generally follows first-to-file or first-to-perfect; purchase-money security interests in inventory require filing before the debtor receives possession and notice to prior inventory filers.

UCC Article 3 covers negotiable instruments; Article 2 covers sales of goods and includes the seller's right to reclaim goods on buyer insolvency under specified conditions.

Fair Debt Collection Practices Act (FDCPA) restricts third-party debt collectors: no calls at prohibited times or places, no harassment, and required validation notice.

Equal Credit Opportunity Act (ECOA) prohibits discrimination on prohibited bases and requires adverse action notices stating reasons for denial.

Fair Credit Reporting Act (FCRA) governs permissible purpose for pulling credit reports, dispute handling, and furnishing accurate data.

Bankruptcy: automatic stay halts collection; a creditor may seek relief from stay, and a preference is a transfer made within 90 days before filing (one year for insiders) that may be avoided.

Ethics rule: confidentiality of customer financial data, no conflicts of interest, accurate reporting to bureaus and trade groups, and truthful documentation of credit decisions.