CCP Foundation Level

Credit Management cheat sheet

Every chapter's key points, formulas and definitions on one page, for the last week before the exam. Each heading links to the chapter that explains it.

Introduction to credit management

Credit is an arrangement in which a creditor supplies money, goods or services to a debtor now, against a promise of payment later, usually with interest or a charge for the time value of money and the risk taken.
The credit cycle runs through seven stages in order: application, assessment, approval or decline, disbursement or supply, monitoring, collection and closure.
Credit reaches customers through three channels: consumer credit to individuals, trade credit between businesses, and export credit across international borders.
Credit is not free to the creditor: it ties up working capital and costs money to assess, administer and collect.
Overdue accounts hurt profit through bad debts and provisioning, and hurt liquidity and cash flow because money owed cannot pay the business's own suppliers, wages or loan instalments.

Key terms

Ancient origins: Credit predates money itself: early Mesopotamian and Egyptian records show grain and livestock advanced against a future harvest, and Babylon's Code of Hammurabi (c. 1750 BC) already regulated interest and debt.
The Greek experience: Ancient Greek trade extended credit between merchants across city-states and, through maritime loans that funded a voyage against repayment (plus a premium) only if the ship returned safely, an early form of risk-priced lending.
The Reformation: Medieval Christian doctrine treated charging interest (usury) as sinful, which restricted formal lending. The Reformation's more permissive view of interest, alongside the growth of European trade, helped commercial credit and banking develop into recognisably modern forms from the 16th century onward.
A modern philosophy of credit: Today credit is treated as a legitimate, professionally managed function: not simply 'trust', but a disciplined process of assessing risk, setting terms, and monitoring performance, run by a dedicated credit department (see the chapter on the credit department) using structured analysis (see the chapter on credit assessment).
Consumer credit: Credit extended to individuals for personal, household or consumption purposes, covered in full in the chapter on consumer credit.
Trade credit: Credit extended between businesses in the course of trade, typically supplier to buyer, covered in full in the chapter on trade credit.
Export credit: Credit extended in connection with the sale of goods or services across international borders, covered in full in the chapter on export credit.
Cost of credit: Extending credit is not free to the creditor: it ties up working capital that could otherwise be invested or used elsewhere, and carries the direct cost of assessing, administering and collecting the facility.
Overdue accounts and profit: An overdue account that is never collected becomes a bad debt, a direct charge against profit; even one that is eventually collected late has already cost the business through the provisioning it required in the meantime (see provisioning in the chapter on debt collection).
Overdue accounts and liquidity: Money owed but not yet received cannot be used to pay the business's own suppliers, wages or loan instalments, so a build-up of overdue debtors is a direct threat to a business's ability to meet its own obligations as they fall due.
Overdue accounts and cash flow: Extending credit converts a cash sale into a receivable, delaying the cash inflow; the longer accounts run overdue beyond agreed terms, the more a business's actual cash flow diverges from its reported sales, which is why cash flow, not just profit, is watched closely wherever credit is a large part of the business.

The rest of the sheet covers

Consumer credit
Trade credit
Export credit
The credit department
Credit assessment and analysis
Debt collection
Information sharing
Technology in credit management
Outsourcing credit functions
Worked examples
Exam technique and revision
Glossary