Sample Of Credit Policy,How To Create And Maintain Credit Policy

Today we talk about sample credit policy and how to maintain it,

One of the chief causes of confusion not only within the credit

department but also between the credit and sales departments

is the lack of consistency in dealing with customer credit issues.

This includes who is responsible for credit tasks, what logical

structure is used to evaluate and assign credit, what terms of sale

are used, and what milestones are established for the collection process.

Without consistent application of these items, customers never

know what credit levels they are likely to be assigned, collection

activities tend to jolt from one step to the next in no predetermined

order, and no one knows who is responsible for what activities.

Establishment of a reasonably detailed credit policy goes a

long way toward resolving these issues. The policy should

clearly state the mission and goals of the credit department,

exactly which positions are responsible for the most critical

credit and collection tasks, what formula shall be used for

assigning credit levels, and what steps shall be followed

in the collection process. Further comments are as follows:

Mission. The mission statement should outline the general

concept of how the credit department does business: Does it

provide a loose credit policy to maximize sales, or work toward

high-quality receivables (implying reduced sales), or manage

credit at some point in between? A loose credit policy might

result in this mission: ‘‘The credit department shall offer credit to

all customers except those where the risk of loss is probable.’’

Goals. This can be quite specific, describing the exact performance

measurements against which the credit staff will be judged.

For example, ‘‘The department goals are to operate with no

more than one collections person per 1,000 customers, while

attaining a bad debt percentage no higher than 2 percent of

sales, and annual days sales outstanding of no higher than 42 days.’’

Responsibilities. This is perhaps the most critical part of the policy,

based on the number of quarrels it can avert. It should firmly state

who has final authority over the granting of credit and the assignment

of credit hold status. This is normally the credit manager, but the policy

can also state the order volume level at which someone else, such as

the CFO or treasurer, can be called upon to render final judgment.

Credit level assignment. This section may be of extreme interest to

the sales staff, the size of whose sales (and commissions) is based on it.

The policy should at least state the sources of information to be used

in the calculation of a credit limit, such as credit reports or financial

statements, and can also include the minimum credit level automatically

extended to all customers, as well as the criteria used to grant larger limits.

Collections methodology. The policy can itemize what collection steps shall be

followed, such as initial calls, customer visits, e-mails, notification of the sales

staff, credit holds, and forwarding to a collections agency. This section can be

written in too much detail, itemizing exactly what steps are to be taken after a

certain number of days. This can constrain an active collections staff from

taking unique steps to achieve a collection, so a certain degree of

vagueness is acceptable here.

Terms of sale. If there are few product lines in a single industry, it is useful to

clearly state a standard payment term, such as a 1 percent discount if paid in

10 days; otherwise full payment is expected in 30 days. An override policy can

be included, noting a sign-off by the controller or CFO. By doing so, the

sales staff will be less inclined to attempt to gain better terms on behalf

of customers. However, where there are multiple industries served with

different customary credit terms, it may be too complicated to include this

verbiage in the credit policy.

Company management can experience significant losses if it loosens the

credit policy without a good knowledge of the margins it earns on its products.

For example, if it earns only a 10 percent profit on a product that sells for $10

and extends credit for one unit on that product to a customer who defaults,

it has just incurred a loss of $9 that will require the sale of nine more units

to offset the loss. On the other hand, if the same product had a profit of

50 percent, it would require the sale of only one more unit to offset the loss

on a bad debt. Thus, loosening or tightening the credit policy can have a

dramatic impact on profits when product margins are low. Consequently,

always review product margins before altering the credit policy.

When economic conditions within an industry worsen, a company whose

credit policy has not changed from a more expansive period will likely

find itself granting more credit than it should, resulting in more bad

debts. Similarly, a restrictive credit policy during a boom period will result

in lost sales that go to competitors. This latter approach is particularly

galling over the long term, since customers may permanently convert to

a competitor and not come back, resulting in lost market share. To

prevent these problems, schedule a periodic review of the credit policy

to see when it should be changed to match economic conditions. A

scheduled quarterly review is generally sufficient for this purpose.

To prepare for the meeting, assemble a list of leading indicators for

the industry, tracked on a trend line, that show where the business

cycle is most likely to be heading. This information is most relevant

for the company’s industry, rather than the economy as a whole,

since the conditions within some industries can vary substantially from

the general economy. If a company has international operations, then

the credit policy can be tailored to suit the business cycles of specific

countries.

If a company’s products are subject to rapid obsolescence, a tight

credit policy can result in limited product sales that leave excess

quantities on hand that will be scrapped. In such cases, loosen the

credit policy on those inventory items most likely to become obsolete

in the near term. The logic is that, even if inventory is sold to

customers with a questionable ability to pay for the goods, this at

least presents higher odds of obtaining payment than if the

company throws away the goods. To implement this approach,

keep the credit department informed of the obsolescence status of

inventory items, usually by having the sales, marketing, and logistics

staffs flag potentially obsolete items in the inventory database

and giving the credit department online access to this information.

When customers send in orders, the credit staff

accesses this information, verifies the obsolescence status

of the items ordered, and modifies the credit policy as needed.

Tags: sample credit policy

Depreciation Accounting Methods

The basic theory of depreciation accounting is unarguable: The amount of capital a business
invests in a fixed asset, less its estimated future residual value when it will be disposed
of, should be allocated in a rational and systematic manner over its estimated useful
life to the business.

A fixed asset’s cost should not be charged entirely to expense in the year the asset’s acquired.
Doing so would heavily penalize the year of acquisition and relieve future years from any
share of the cost. But the opposite approach is equally bad: The business shouldn’t wait
until a fixed asset is eventually disposed of to record the expense of using the asset. Doing so
would heavily penalize the final year and relieve earlier years from any share of the fixed
asset’s cost.

Essentially, cost less residual value should be apportioned to every year of the fixed asset’s
use. (Land has perpetual life, and therefore, its cost isn’t depreciated.) The theory of depreciation is relatively simple, but the devil is in the details. And, I mean details!

Frankly, there’s not much point in discussing the finer points of depreciation accounting. I
could refer you to many books written by accounting scholars on depreciation. But as a practical
matter the federal income tax law dictates the depreciation methods and practices used
by most businesses.

Let me step on the soapbox for a moment. The depreciation provisions in the income tax law
are driven mainly by political and economic incentives, to encourage businesses to upgrade
and modernize their investments in long-term operating assets. By and large, businesses
follow income tax regulations on depreciation. As the result, useful lives for depreciating
fixed assets are too short, salvage value is generally ignored, and depreciation is stacked
higher in the early years. In other words: fixed assets generally last longer than their income
tax depreciation lives; when disposed of fixed assets often have some salvage value; and, a
strong case can be made for allocating an equal amount of depreciation to each year over the
useful life of many fixed assets. In short, actual depreciation practices deviate from depreciation
theory. Okay, I’m off my soapbox now.

No depreciation expense for the year has been recorded yet, but obviously, some amount of
depreciation must be recorded. The business purchased all its fixed assets during the first
week of the year, and the assets were placed in service immediately, so the business is entitled
to record a full year’s depreciation on its fixed assets. (Special partial-year rules apply
when assets are placed in service at other times during the year.)

The company’s plant, property, and equipment account consists of the following components:

Land $150,000
Building $468,000
Machines $532,000
Total $1,150,000

The cost of land is not depreciated. Land stays on the books at original cost as long as the
business owns the land. Ownership of land is a right in perpetuity, which does not come to
an end. Land does not wear out in the physical sense, and generally holds its economic value
over time. Buildings, machines and other fixed assets, on the other hand, wear out with use
over time and generally reach a point where they have no economic value.

Assume the business decides to maximize the amount of depreciation recorded in the year,
according to the provisions of the income tax law.

How to take care of some housekeeping details

I want to point out a few things about income statements that accountants
assume everyone knows but, in fact, are not obvious to many people.
(Accountants do this a lot: They assume that the people using financial statements
know a good deal about the customs and conventions of financial
reporting, so they don’t make things as clear as they could.) For an accountant,
the following facts are second-nature:

Minus signs are missing. Expenses are deductions from sales revenue,
but hardly ever do you see minus signs in front of expense amounts to
indicate that they are deductions. Forget about minus signs in income
statements, and in other financial statements as well. Sometimes parentheses
are put around a deduction to signal that it’s a negative number,
but that’s the most you can expect to see.

Your eye is drawn to the bottom line. Putting a double underline under
the final (bottom-line) profit number for emphasis is common practice
but not universal. Instead, net income may be shown in bold type. You
generally don’t see anything as garish as a fat arrow pointing to the
profit number or a big smiley encircling the profit number — but again,
tastes vary.

Profit isn’t usually called profit.The bottom-line
profit is called net income. Businesses use other terms as well, such as
net earnings or just earnings. (Can’t accountants agree on anything?) In
this book, I use the terms net income and profit interchangeably.

You don’t get details about sales revenue. The sales revenue amount in
an income statement is the combined total of all sales during the year;
you can’t tell how many different sales were made, how many different
customers the company sold products to, or how the sales were distributed
over the 12 months of the year. (Public companies are required to
release quarterly income statements during the year, and they include a
special summary of quarter-by-quarter results in their annual financial
reports; private businesses may or may not release quarterly sales
data.) Sales revenue does not include sales and excise taxes that the
business collects from its customers and remits to the government.
Note: In addition to sales revenue from selling products and/or services,
a business may have income from other sources. For instance, a business
may have earnings from investments in marketable securities. In its
income statement, investment income goes on a separate line and is not
commingled with sales revenue.

Gross margin matters. The cost of goods sold expense is the cost of
products sold to customers, the sales revenue of which is reported
on the sales revenue line. The idea is to match up the sales revenue
of goods sold with the cost of goods sold and show the gross margin
(also called gross profit), which is the profit before other expenses are
deducted. The other expenses could in total be more than gross margin,
in which case the business would have a loss for the period.

Maths Words Problems

Today i write an article about maths words problems....
Mathematicians decided long ago to conserve on words and
explanations and replace them with symbols and single letters.

The only problem is that a completely different language
was created, and you need to know how to translate from
the cryptic language of symbols into the language
of words. The operations have designations such as +, –, ×, and ÷.
Algebraic equations use letters and arrangements of those letters and numbers
to express relationships between different symbols.

Words used in maths are very precise. The words have the same meaning
no matter who’s doing the reading of a problem or when it’s being
done. These precise designations may seem restrictive, but being strict is
necessary — you want to be able to count on a mathematical equation or
expression meaning the same thing each time you use it.

For example, in maths, the word rational refers to a type of number or
function. A person is rational if he acts in a controlled, logical way. A number
is rational if it acts in a controlled, structured way. If you use the word rational
to describe a number, and if the person you’re talking to also knows
what a rational number is, then you don’t have to go into a long, drawn-out
explanation about what you mean. You’re both talking in the same language,
so to speak.

Defining types of words that used for numbers
(maths words problems) Naming numbers

Numbers have names that you speak. For example, when you write down a
phone number that someone is reciting, you hear two, one, six, nine, three,
two, seven, and you write down 216-9327. Some other names associated with
numbers refer to how the numbers are classified.

Natural (counting): The numbers starting with 1 and going up by ones
forever: 1, 2, 3, 4, 5, . . .

Whole: The numbers starting with 0 and going up by ones forever.
Whole numbers are different from the natural numbers by just the
number 0: 0, 1, 2, 3, 4, . . .

Integer: The positive and negative whole numbers and 0: . . . ,–3, –2, –1,
0, 1, 2, 3, 4, . . .

Rational: Numbers that can be written as p/q where both p and q are
integers, but q is never 0:3/4,19/8,-5/21,24/6 and so on

Even: Numbers evenly divisible by 2: . . . ,–4, –2, 0, 2, 4, 6, . . .

Odd: Numbers not evenly divisible by 2: . . . ,–3, –1, 1, 3, 5, 7, . . .

Prime Numbers divisible evenly only by 1 and themselves: 2, 3, 5, 7, 11,
13, 17, 19, 23, 29, . . .

Composite: Numbers that are not prime; numbers that are evenly divisible
by some number other than just 1 and themselves: 4, 6, 8, 9, 10, 12,
14, 15, . . .

The Career Of Accounting

Accounting Careers:Types of accountants

Just as there are types of
accounting, there are also
types of accountants.While
there are many ways to
classify accountants, the
most common division is
between public and private
accountants.

Public accountants mainly deal with financial accounting (the preparation of financial statements for external parties such as investors). Private accountants deal with both financial and management accounting.

Career of accounting in which one Public or Private?

According to many college professors and career services counselors, most
college students interested in accounting should try to start their careers in
public accounting. This route carries a number of benefits, including higher
salaries, more interesting and diverse work, exposure to many different
industries and the ability to fulfill a requirement for certification

One senior manager at a Big Four firm captures the general opinion of the
majority of people we spoke with: “For someone just out of college, public
accounting is really the only way to go,” he says. “You gain experience and
get up the learning curve much more quickly. A public accountant will
perform three or four audits of entire companies in a year, whereas a private
accountant could be stuck monitoring cash ledgers – one account – for a year.
Even in the long term, there are benefits. You have more control over your
career progression. In private, you’ll often see highly productive and talented
individuals mired in their jobs or limited to lateral career moves because they
have to wait for the people above them to retire or otherwise leave the
company. Public accounting is much more of a meritocracy – you’ll advance
as fast and as high as you want to.”

However, public accounting life is not for everyone. Private accountants
generally don’t travel nearly as much as public accountants, and their work
schedules are much more stable – they rarely have to pack a briefcase and go
to a client at a moment’s notice. Private accountants also do not have to deal
with the chargeability issue (the pressure on public accountants to work on
billable projects as much of the time as possible). Finally, they are not
required to get their CPA and thus do not have to deal with the rigors of
fulfilling the grueling certification requirements

What Is Cost And Cost Accounting

Cost Accounting: Management accounting is often called cost
accounting and you will find the terms used interchangeably.
Cost accounting is generally considered the major subset of
management accounting. The field of cost accounting has most
of the analytical theories and approaches to cost behavior.
To make a distinction, management accounting looks to the
tasks of decision-making, policy setting, and communicating
information, while cost accounting collects and analyzes costing,
pricing, and performance details for internal management and,
crossing into financial accounting, for external reporting.

Management accounting systems can report information in
any way that is useful to management. The system does not
have to conform to GAAP.Unfortunately, once the
data is in the system, it is often unused or misused.
Managers are usually aware of what is in the externally
reported financials. What happens then is that managers
use only the information in external financial
reports—and so they make poor decisions. Successful managers
need to learn, through study or experience, the tools to
find and analyze the relevant data necessary to make good
business decisions.

Cost accounting varies, depending on whether you manufacture
or retail goods and on whether you provide a product or a
service. In each area, the approach to cost identification varies.
The goal of all approaches is to aid strategic decision-making
and cost management. There are some constants that you need
to understand in order to talk about cost accounting. You will
want to know how much you have to sell to meet expenses. You
will want to know the effect of pricing on sales volume.

In just about all systems, you want to find what it cost to
operate and maintain the business and the amount of profit
made within a specific time period. If you manufacture, you will
want to know the value of the raw materials and the work in
process. How much did you make from finished goods sold and
how many remain to be sold? You take those results and prepare
for the activities of the next time period. You make budgets
and forecasts. You compare with past time periods and look at
any variances that might need corrective action or improvement.
These results help you control, plan, and decide.