FINANCIAL MANAGEMENT

Financial Management Assignment

Executive Summary

Credit risk is the potential loss of cash (profits) by a company. In today's environment of intense competitive pressures, volatile economic conditions, rising bankruptcies and defaults, and increasing levels of consumer debt, an organization's inability to effectively monitor and manage its credit risk could mean a difference between success and survival. This often results in huge financial problems with far-reaching financial consequences for both the consumer and the credit grantor. This is where credit risk emerges (Richard, 2005, Pp. 45). In credit management long-term objectives are often overlooked by focusing on short-term objectives in pursuit of achieving short-term, immediate, month-end cash collection targets. Customers are pressured into making immediate payments, instead of prudently negotiating payment terms, thereby fostering goodwill and a long-term relationship.. Deep organizational change can be characterized when the process that was implemented for the first time in the history of the company took place.

Financial Management

Article 1

This article has been taken from the newspaper 'WA Today'. The title of this article is 'Payment defaults a risky business'. This article focuses on the growing trend of credit extension to the customers by the companies, although it carries risks but has managed to increase sales.

Credit Risk

Credit risk is the potential loss of cash (profits) by a company. The importance of cash is illustrated in the paradox that a company showing good profits on its balance sheet may still end up in liquidation. In today's environment of intense competitive pressures, volatile economic conditions, rising bankruptcies and defaults, and increasing levels of consumer debt, an organization's inability to effectively monitor and manage its credit risk could mean a difference between success and survival. Many people desire far more credit than their basic needs and for this they require more credit than they are able to handle. This often results in huge financial problems with far-reaching financial consequences for both the consumer and the credit grantor. This is where credit risk emerges (Richard, 2005, Pp. 45).

Credit Policy

The credit policy of an organisation is a living document aligned with the company's mission statement as it embodies the organisation's primary objectives. Successful credit risk management is based on the firm foundation of a formal credit policy. A well structured formal credit policy needs to be realistic, practical, achievable and accepted by the people who have to work within the framework of the policy (Gitman, 2000, Pp. 35).

Credit selection

A firm's credit selection involves deciding whether to extend credit to a customer and how much credit to extend. Often the five C's of credit to focus the analysis on the key dimensions of an applicant's creditworthiness - character, capacity, capital, collateral and conditions.

Character

The applicant's record of meeting past obligations-financial, contractual, and moral. Past payment history as well as any pending or resolved legal judgements against the individual would be used.

Capacity

The applicant's ability to repay the required credit. Financial statement analysis, with particular emphasis on liquidity and debt ratios, is typically used to assess the applicant's ...