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Credit Policy Key Factors

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1. What are the four key factors in a firm's credit policy?How would an easy policy differ from a tight policy? Give examples how the four factors might differ between the two policies? How would the easy versus the tight policy affect sales? Profits?

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The solution discusses the key factors driving a firm's credit policy.

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These are the questions involving the issue of credit management. Four factors of credit policy:

1. The collection costs
2. Investments in account receivable
3. Level of Bad debts
4. Level of Sales

This is decision relating to terms of sale. Here one has to establish sensible credit limits. The job of the credit manager is not to minimize the number of bad debts but to maximize the profit. This means that one should increase the customer's credit limit as long as the probability of payment times the expected profit is greater than the ...

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