CCP Foundation Level

Credit Management flashcards

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Complete Flashcard Reference

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What is credit?

An arrangement in which one party (the creditor) supplies money, goods or services to another (the debtor) now, in exchange for a promise of payment later. Interest or a charge is usually added to compensate the creditor for the time value of money and the risk taken.

How does hire purchase differ from an auto loan?

Hire purchase: the customer takes possession and pays in instalments, but ownership passes only once the final instalment is paid. Governed in Kenya by the Hire Purchase Act. Auto loan: a loan to buy a vehicle, which the buyer owns from the start, secured by a chattel mortgage or logbook lien over the vehicle.

What is the difference between a credit note and a debit note?

Credit note: reduces what the buyer owes, issued for returns, overcharges or agreed price adjustments. Debit note: increases what the buyer owes, issued for undercharges or additional amounts due after the original invoice.

Rank the export payment methods from most to least secure for the exporter.

1. Advance payment: the buyer pays before shipment. 2. Letter of credit: the buyer's bank pays against strictly compliant documents. 3. Documentary collection: documents released only against payment or acceptance of a bill of exchange. 4. Open account and consignment: the exporter ships first and waits to be paid.

Why should the credit department not simply defer to sales?

Sales wants credit extended quickly and generously to win business; credit has to weigh that against the risk of loss. The relationship is deliberately a check and balance, so sales does not have the final say on who gets credit.

What are the 5 C's of credit?

Character: willingness and track record of repaying. Capacity: ability to repay from income or cash flow. Capital: the borrower's own stake or net worth. Collateral: the security available. Conditions: the purpose of the credit and the wider economic environment.

What is the Pareto rule in collections, and what does it mean in practice?

Typically around 80% of a debtors book's overdue value sits in around 20% of accounts. So collection effort is prioritised toward that smaller group of large or high-risk overdue accounts rather than spread evenly across every account.

What does a credit reference bureau do, and what does it not do?

It collects, stores and processes credit information submitted by participating lenders, and makes it available as credit reports to lenders (with the borrower's consent) and to borrowers themselves. It does not approve or decline credit: the lender makes that decision, using the report as one input.

How does the open item method of keeping a sales ledger differ from the balance ledger method?

Open item: each invoice is tracked individually until a payment or credit note specifically matches and clears it, showing exactly which invoices are outstanding and how old each is. Balance ledger: payments are applied against the total outstanding balance, giving a simple running total but less visibility of which invoices remain unpaid.

What is the difference between recourse and non-recourse factoring?

Recourse: the business remains liable if the customer fails to pay, so it keeps the bad-debt risk. Non-recourse: the factor bears the credit-loss risk.

What are the seven stages of the credit cycle, in order?