Credit Rating Agencies

redit rating agencies obtain their information from a variety of sources such as public information, details of County Court Judgments and bankruptcy information. Trade and Industry bodies such as the Council of Mortgage Lenders, the Credit Industry Fraud Avoidance Scheme and the Gone Away Information Network also provide information for Credit Agencies. These bodies also collect and store information about customers, including details of existing loan agreements and historical information about repayment patterns.

County Court Judgments provides an indication of an applicant's previous financial history. Information supplied by loan and finance companies, provides both positive information about your existing loan commitments and also a brief and fleeting insight into your payment history. Setting and Policing Credit Limits Limit setting for a new customer is important, the amount should be sensible, it will effect the company's reputation if the credit limit is vary from time to time.

To limit the level of bad debt, there should be a set of rules from the customer placing their order, to issuing the County Court Judgment. According to Gummesson (1987) long – term relationships with customers are very important, especially where relationships can be more expensive to establish. It can lead to continuing exchanges, and thereby be profitable for both parties. e. g. customers are being served by the same salesperson, which knows them and their needs, therefore they don't have to waste time explaining themselves to a new person every time.

When it comes to debt collection, it is necessary for the credit control person to have a basic knowledge of the product or service, an up-to-date aged debtor lists, a copy of the invoice and the proof of delivery, otherwise it will look unprofessional if the customer start to query the invoice. Analysing Financial Risk The effect of overdue accounts is a direct erosion of profit. Now a day businesses will try to attract customers from their competitor by establishing long credit terms. However, since the cost of financing a high level of debtors may outweigh the additional profit.

Liquidity can be defined as the ease and speedy with which current assets can be turned into cash sufficient to meet current liabilities. Stock has to be turned into sales before they can generate cash and it is generally unprofitable to hold large cash balance. Debtors therefore hold the key to liquidity. A company depends on cash flowing through the system at a certain pace. If debtors are not being turned into cash fast enough, there can be only two reasons:Problems arise with the last three questions, there are advantages and disadvantages with such decisions: Retention of Title Clause

'Title of goods remains with the seller until they have been paid for in full. ' A Shavick (1998) Realistically retention of title clause cannot guarantee you get your goods back, even if you can, you will need to be able to identify each individual item and match up with the unpaid invoice. When this clause is applied and the customer's business fails, you cannot reclaim the VAT even if you were unable to recover your property. Interest on Overdue Accounts This might seem to be another option to speed up the customer's payment, but the customer might find it off putting.

Most of the customer might pay late and ignore it anyway, and some might think paying interest gives them permission to pay later. Debts Factoring Invoice payments are made quicker, as a third party – the factor or invoice discounter – will pay you most of the invoice immediately. This helps to speed up your cash flow, particularly important at times when your business is growing quickly. A factor company, usually controlled by a bank, takes copies of your invoices and pays you directly, between 80% and 85% of the value.

The other 15%, less fees and interest charges, is paid to you when the factor receives full payment from your client. Debts factoring is a well known method of rising fund in a short period of time, the disadvantage of this decision is your customer might think your company is in liquation. Issues of Credit Control within an Organisation The company I have chosen to analysis is Grampian Country Food Group Limited, I used to work in the accounts department as a purchase ledger clerk. Since I was working closely with the credit control lady, I noticed a lot of problems of how she runs the department.

Grampian Country Food Group is a UK leading independent food business, it has over 20 sites all over UK mainland and Ireland, as well as Germany and Thailand. The site I used to work for is in Wiveliscombe, Somerset. The head office of GCFG is based in Aberdeen, they have total control of all departments within the organisation, from issuing accounts to be put on stop to sending payment. Its customers are from private family run butchers to UK top leading supermarkets, such as Tesco and Morrsion.

The credit terms vary depending on the size of the company, usually 7 days account with family run butchers and net monthly account with the supermarkets. Within the site at Wiveliscombe, the sale ledger/credit control send statements to its customers on a weekly basis, incoming payment is matched up at the end of the day. Customer's account are stopped once the invoice is overdue by 7 days, the customer is not aware of the status of its account and sales department are not informed of customer's account being stopped.

Although the decision is made on site, any action to be taken against the accounts need to go through the head office. The other problem is there is a shortage of staff when people are on holiday or off sick. There are many problems within the credit control department. Firstly statements should be sent monthly, the weekly statements will put customer off and they might not check its account against the statement. Reminders should be sent when the invoice is overdue and the customer should be informed when its account is stopped.

They should also allow another 10 days for customer to pay after the letter is sent. The relationship between the credit controller and the salesmen is not relatively good. Due to the lack of communications, the sales department never informs the credit controller of any dispute of deliveries or returns, and the credit controller never informs the sales department of any customer's account being stopped. There are no meetings between the accounts and sales department, so the information they hold is not kept up-to-date.

It is often the case that the sales department gives longer credit terms than what was set by the head office, so the problem arise when the credit controller start chasing payment from the customer. Paper work within the accounts department is not in good order, proof of delivery is filed separate from the copy invoices, sometime it might be lost or without signature. Customers such as Tesco and Morrison require a signed proof of delivery, it is difficult to obtain and there is a high chance of this debt turning into a bad debt.

Since there is no coverage of staff when an employee has time off, there is a problem in re-instating customer's accounts once it had been stopped, usually it has to wait until the authorised person returns, and sometimes it takes a few weeks. This will delay the time of order processing and the customer might go else where. The credit control department needs to be re-organised, full training needs to be given, the improvement of communication is essential to avoid conflicts and keep the high level of reputation of the company.

The computer system should have a default format for statements and reminders. The incoming payment should be dealt with first thing in the morning so the aged debtor lists are up-to-date when it comes to telephone debt collecting. The authority should be decentralised to certain extent, since decision is made within the site, it will reduce the delay of any action to be taken against the customer's account. The credit management policy should be written down and given to all departments, regular meetings are important for passing information between departments. Conclusion

The development of credit management has been stimulated by the need to find more effective ways of granting and controlling credit, as the nature of credit trading has become more complex. Credit terms now often stand alongside price and delivery as key factors in winning orders. The ever-increasing level of business failures, few with decreasing profit margins, has meant that no company can afford to neglect credit control. Successful credit management requires the operation of tight financial controls with a positive approach to the achievement of profitable sales.