NACM CMC flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Four C's of Credit

Character, Capacity, Capital, and Collateral: the traditional framework for judging willingness to pay, cash flow to repay, net worth cushion, and assets available to secure the obligation.

Working Capital

Current assets minus current liabilities. It measures the short-term liquidity cushion a business holds to fund operations and absorb credit losses.

Quick Ratio

Cash plus marketable securities plus receivables, divided by current liabilities. It excludes inventory and prepaid items, so it tests liquidity under stress more strictly than the current ratio.

Cash Conversion Cycle

Days inventory outstanding plus days sales outstanding minus days payables outstanding. A lengthening cycle means more external financing is needed to support the same sales volume.

Days Sales Outstanding

Accounts receivable divided by net credit sales, multiplied by days in the period. It expresses average collection time and is the core measure of receivables performance.

Aging Schedule

A report grouping open receivables by days past due, typically current, 1-30, 31-60, 61-90, and over 90. It drives collection priorities and bad-debt reserves.

Cost of Carrying Receivables

Receivables balance multiplied by the combined cost of funds and servicing, collection, and bad-debt expense. It quantifies the real cost of extending terms to customers.

Written Credit Policy

A documented statement of credit standards, approval authority limits, required investigation, terms by customer class, and exception escalation. It makes credit decisions consistent and defensible.

Trade Reference Check

Contacting other suppliers to ask about high credit extended, current balance, past-due status, days beyond terms, and payment pattern over the past year.

Credit Bureau Report

A commercial report containing payment trends, trade experiences, public records such as liens and judgments, collection counts, and often owner or guarantor consumer data.

Credit Scoring Model

A statistical model weighting factors such as payment history, leverage, time in business, industry, and size to rank relative risk. Scores support but do not replace judgment on large exposures.

Credit Limit Rule of Thumb

Set the limit near expected monthly purchases multiplied by terms in months, then adjust for net worth, bank lines, and risk grade. It ties exposure to demonstrated buying behavior.

Risk Mitigation Ladder

A sequence of protective structures from strongest to weakest: cash in advance, COD, credit card, letter of credit, personal guaranty, secured interest, and finally open unsecured terms.

Credit Review Triggers

Events that require re-underwriting an account: limit increase request, adverse bureau alert, late payments, ownership or entity change, and scheduled annual review of large accounts.

Balance Sheet Equation

Assets equal liabilities plus equity. Equity is the residual cushion that absorbs losses before creditors are impaired, which is why net worth matters to credit analysis.

Times Interest Earned

Earnings before interest and taxes divided by interest expense. It shows how many times operating earnings cover interest and signals repayment stress when it trends down.

Debt-to-Equity Ratio

Total liabilities divided by total equity. Rising leverage combined with flat operating earnings indicates increasing repayment risk for trade creditors.

Operating Cash Flow Test

Operating cash flow should cover capital expenditures and current maturities of long-term debt. Persistent negative operating cash flow is a serious warning sign regardless of reported profit.

Quality of Earnings

Assessment of whether reported profit is sustainable and cash-backed. Watch receivables or inventory growing faster than sales, capitalized costs, one-time gains, and related-party revenue.

Common-Size Statements

Financial statements restated as percentages of a base, such as total assets or net sales. They allow comparison across years and against industry peers of different size.

Going-Concern Warning

Auditor language expressing doubt about the entity's ability to continue operating. It is a major red flag prompting tightened terms, security, or guaranty requirements.

Net 30 Terms

Payment in full is due 30 days from the invoice date. The customer receives no discount for early payment and bears no finance charge for paying on day 30.

2/10 Net 30 Terms

A 2 percent discount applies if paid within 10 days; otherwise the full amount is due in 30 days. The customer chooses between early-payment savings and extended use of funds.

Cost of Forgoing Discount

Discount percent divided by 100 minus discount percent, times 365 divided by the difference between net and discount periods. For 2/10 net 30 the annualized cost is about 36.7 percent.

Days Beyond Terms

DSO minus the stated terms in days. It isolates delinquency from sales volume changes and is a primary early-warning metric for deteriorating collections.

Credit Hold Rule

Stop new shipments once an account exceeds a defined past-due threshold or its credit limit, until payment or a documented payment plan is received.

Promise to Pay

A customer commitment to pay a specific amount on a specific date by a specific method. Record it, and escalate one collection step automatically if it is broken.

UCC Article 9 Attachment

A security interest attaches when value is given, the debtor has rights in the collateral, and a security agreement authenticated by the debtor exists. Attachment makes it enforceable against the debtor.

UCC-1 Financing Statement

The filed record that perfects a security interest in personal property, giving the secured party priority against later creditors and a trustee in bankruptcy.

Purchase-Money Security Interest

A security interest securing the price of specific goods. In inventory it requires filing before the debtor receives possession and notice to prior inventory filers to gain priority.

ECOA Adverse Action Notice

A notice required when credit is denied or terms changed adversely, stating the reasons. The Equal Credit Opportunity Act also prohibits discrimination on specified prohibited bases.

Bankruptcy Preference

A transfer made within 90 days before a bankruptcy filing, or one year for insiders, that favors one creditor and may be recovered by the trustee.