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Lawrence Sports Discussion Questions - Credit Policy

A. In principle how would should we decide the optimal credit policy? How should Lawrence Sports decide their optimal credit policy?

b. What information is commonly used to assess the creditworthiness of a client? How can LS assess the creditworthiness of their clients?

c. What are the components of a credit policy? Describe the components of credit policy as it applies to LS?

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a. In principle how would we decide the optimal credit policy? How should Lawrence Sports decide their optimal credit policy?

A company's optimal credit policy should be decided based on the needs of the company. First, the kinds of goods being sold by the company needs to be taken into consideration. For example, an organization selling custom-designed product might benefit from asking for payment up front. Those selling perishable goods might give their customers a short period of time to pay their bills. The overall needs of the company, their working capital and the strength of their finances will help determine the types of credit policy to be instituted. In principle, terms of sale need to be determined and a contract needs to be put in place. Overall, the company has to use their judgment and make credit decisions that will in turn maximize profit for the organization. "As credit manager, you should not focus on minimizing the number of bad accounts; your job is to maximize expected profit" (Brealey et al, 2005). If the margin of profit is high, then a credit manager might be justified in making a more liberal decision concerning credit. If it is low, then there is a tendency for too many bad debts. The most important factor in a successful business is the maintenance of free cash flow. The optimal decision should be reliant on the availability of free cash flow. If a current credit policy is holding up working capital and cash flow, then the organization will need to revise that policy.

For Lawrence Sports, their current credit policy is too ...

Solution Summary

This is a response to 3 discussion questions relating to the Lawrence Sports scenario. The questions are:
a. In principle how would should we decide the optimal credit policy? How should Lawrence Sports decide their optimal credit policy?
b. What information is commonly used to assess the creditworthiness of a client? How can LS assess the creditworthiness of their clients?
c. What are the components of a credit policy? Describe the components of credit policy as it applies to LS?

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