• Global Frameworks: US CMA Part 1 (Cost Management), Credit Management Institution Guidelines.

1. The Structural Components of Corporate Credit Policy
A firm’s credit policy balances driving sales volume with minimizing credit default risks. A standard credit policy consists of four main parts:
  1. Terms of Sale: Specifies the credit period and any early payment discounts (e.g., “2/10, net 30” means the customer receives a 2% discount if they pay within 10 days; otherwise, the full balance is due in 30 days).
  2. Credit Standards: The baseline financial strength required for a customer to qualify for credit purchases.
  3. Credit Analysis: The process of evaluating an applicant’s creditworthiness using risk frameworks.
  4. Collection Policy: The procedures followed to collect overdue accounts receivable (e.g., dunning letters, phone calls, or legal action).

2. Credit Assessment: The 5 C’s of Credit Framework
Treasury analysts evaluate commercial borrowers using five core criteria:
  • Character: The applicant’s historical willingness to meet financial obligations, verified through credit reports and payment track records.
  • Capacity: The customer’s ability to generate cash flow to service debt obligations, evaluated using financial liquidity and cash flow coverage ratios.
  • Capital: The client’s financial net worth, measured by their total equity base and asset size.
  • Collateral: Specific assets pledged by the borrower as backup security to cover defaults.
  • Conditions: General macroeconomic and industry-specific trends that could impact the borrower’s ability to pay.

3. Monitoring Accounts Receivable Health
Firms identify payment delays and credit risks early using monitoring tools:
  • Accounts Receivable Aging Schedule: Categorizes outstanding customer balances into specific time intervals (e.g., 0–30 days, 31–60 days, 61–90 days, and Over 90 days). An increasing proportion of balances in older brackets indicates a deterioration in credit quality.
  • The Collection Efficiency Matrix: Compares DSO performance against the firm’s stated credit terms to identify operational leaks or credit policy flaws.

 
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