Siz Approved Course|Cont'd. Of Lecture 01| Investment Decision/ Credit Policy by @goodybest

It's a new day and I had a peaceful night rest, I'm grateful to see these day in good health. how about you, I trust you all are happy and healthy!

Today's lecture is a continuation of lecture 01 strategic financial management I believe you can still recall what we've learned from our last lecture! Ok let me binge you a bit, we've learned about the important function of the finance sector in an organization, and some of the important decisions they used to make, we particularly took on the FINANCING DECISION. So today we will learn about another important decision Finance management used to make - Investment Decision and Credit Policy.

Obtaining Funds, whether for long-term or short-term investment as discussed before, is one thing, and utilizing the funds wisely is another. To wisely utilize the funds so generated, financial Managers must plan and forecast the financial requirements of their organizations, co-ordinate and control the resources through accounting and budgetary process. The starting point of any genuine attempt at effective utilisation of funds is the preparation of a budget of how the funds will be utilised or invested. A BUDGET by definition is a detailed plan of future receipts and expenditures of successive periods of time. More generally it is any plan pertaining to one or more of the financial aspect of an organisation. There are basically two types of budgets - OPERATING BUDGETS and FINANCIAL BUDGETS, and the components of an OPERATING BUDGETS are Sales, Production, materials, and personnel budgets. FINANCIAL BUDGETS include the cash budget, the capital expenditure budget, and the final projections of the profit and loss statement and balance sheet. Tthe various budget will invariably reflect policy decision made on how much of the funds will be spent or invested in what sphere of activity. The spheres of activity include:

• fixed assets
• working capital
• operational and maintenance costs
• personnel cost
• marketing cost
• social responsibility cost
• external investment.
  We need only say a few words about "external investment." There comes a time in the life of a firm that it has some "excess" or "idle" cash - not needed for immediate operations of the company. It is not prudent financial Management to let the cash lie idle. A decision therefore must be made regarding how best to invest the excess fund. Taking opportunity cost into consideration the fund may be invested in:
• treasury bills
• convertible securities
• stocks and bonds of other companies
• physical projects.

I made it with imarkup app.

We are all too familiar with the sign "No Credit Today Come Tomorrow" in many of our retail outlet this is a credit policy decision which might be all well and good for a marketing tier which survives only on turnover. Even at that the retail outlets do grant credit facilities, Albeit, to "trusted" or "proven" customers. The issue of credit policy is even more vexed for manufacturing outfits. In our previous lecture we acknowledge the importance of credit by suppliers as a veritable source of short-term fund or working capital. If a manufacturing firm expects and receives trade Credit from its supplier(s) The "Golden Rule" demands that it makes policy decision on the extension of credit facilities to its own customers. Actually there is no business that does not extend credit facilities to its customers - even the "Mama Put" by the roadside. What is important however is that serious consideration be given to the issue in order to arrive at a credit policy that the firm can live with.

Any Credit Policy may be broadly defined as being somewhere in the range of tight to close Joy (1983:415) believes that Firms with tights credit policies tend to have a relatively short credit periods and to sell on credit only to those customers who have the highest quality credit-ratings. Firm with loose credit policies tend to have relatively long credit periods and to sell on credit to a broader array of customers including those with relatively low credit ratings.

A Firm Grants credit because it expects the Investment in receivables to be profitable the immediate impact of granting trade Credit shows up in the firm's sales level, and the motivation for investment in receivables may be oriented toward either SALES EXPANSION, or SALES RETENTION. the former refers to granting more trade Credit so as to (1) increase sales to present customers and/or (2) to attract new customers. The latter sales retention refers to granting trade Credit to protect the firm's sales from competition. If, for example, a competitor offers customers a better credit terms, the firm may choose to match these terms in an effort to protect its Sales. Perhaps we might assert that this at this juncture that credit policy is a sales strategy.

That assertion is not diluted by the vagaries associated with "bad debts" losses, which can be greatly minimized if the firm carefully considers the following four factors in the formulation of the credit policy.

Establishment of credit standards will determine what kind of customers the Firm will make Credit Sales to. Credit Standards are frequently depicted in terms of "three C's" of credit:

• character (the willingness of the customer to pay);
• capacity (the ability of the customer to pay); and
• Conditions (the present economic conditions)

involves gathering and synthesizing information about the customer from various sources which include: credit rating agencies, financial statements of the customer-firm, banks, trade association, Chambers of commerce, and even competitors. Ordinarily, credit terms come along with cash discounts. Many firms offer cash discounts to induce customers to pay their bills early. If a discount is offered, their credit terms will reflects the amount of the discount and the discount period Which is the length of time the discount is offered. Customers who forgo the cash discounts are expected to pay by the due date.

Thus, there are three elements in a good credit-term
(a) the amount of discount,
(b) the discount period (or date) and
(c) the credit period (Or date)

The most common terms are 2/10, n30; and 3/15, n60. The 2/10, n30 term is shorthand for saying that the customer can take a 2% cash discount if the bill is paid within 10 days or else the full amount is payable on the 30th day. Also the 3/15, n60 term means that the customer can take 3% cash discount if the bill is paid within 15 days or full amount is payable on the 60th day.

Another feature of credit terms is the imposing of line of credit limit. This means the seller limits the amount of accounts receivable to the customer. When the limit is reached, future credit sales are denied until the customer's accounts receivable are reduced sufficiently to accommodate the new order.

The control function is an important part of the financial Management area. This idea also applies to receivables, and the firm should continually check on how well it manages its investment in receivables. One method of evaluating their account receivable management is to compare the actual collection period with the stated credit terms. If for example, terms are 2/10, n30, and the actual collection period is 50 days, then something seems wrong. Another method, the aging schedule, shows what volume and percentage of accounts receivable have been outstanding for various lengths of time. Other methods include the Accounts Receivable Turnover and Average Collection Period ratios. A certain portion of the firm's customers will be tardy or non-payers. Collection policy is directed towards (1) speeding up collections from tardy payers and (2) limiting bad debt losses. A well-established collection policy you have clear out guidelines as to the sequence of collection activities.

After the credit period is over and the receivable is identified as tardy, the first step in the sequence is usually a letter reminding the customer that the account is overdue. If the receivable remain tardy, other letters are sent that are progressively more stern in tone. Eventually a telephone call or perhaps a personal visit by a representative of the firm's credit department will be made. If payment is still not made, the firm may turn over the account to a collection agency. These agencies aggressively purse collection and typically work for a fixed charge plus a percentage of what they collect. finally, legal actions may be undertaken.

Wonderful people this is the end of our lecture 01 on strategic financial management. We've learned a lot on this topic, the need for Firm to determine their sources of capital, to make good investment decisions when they have excess unused funds because it's not good for cash to remain idle, and lastly the credit policies they should take into consideration. Please the floor is open for any question or suggestion.

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