In this article, I provide some warning signs that may indicate the presence of fraud risk. In general, examples include:
1. Absence of an anti-fraud culture
2. Failure of management to implement a sound system of internal controls
3. Lack of financial management expertise and professionalism in key accounting principles, the review of management reports and the review of significant cost estimates
4. A history of legal or regulatory violations or claims alleging violations
5. Strained relationships between management and internal or external auditors
6. Lack of supervision of staff
7. Inadequate recruitment processes
8. Redundancies
9. Dissatisfied employees with access to desirable assets
10. Unusual staff behaviour
11. Personal financial pressures on key staff
12. Discrepancy between earnings and lifestyle/expensive lifestyle
13. Low salary levels of key staff
14. Employees working unsocial hours unsupervised
15. Employees not taking annual leave entitlements
16. Lack of job segregation and independent checking of key transactions
17. Lack of identification of assets
18. Poor management accountability and reporting
19. Alteration of documents and records
20. Photocopies of documents replacing originals
21. Missing authorisations
22. Poor physical security of assets
23. Poor access controls to physical assets and IT security systems
24. Inadequacy of internal controls
25. Poor documentation of internal controls
26. Poor documentary support for transactions, especially credit notes
27. Large cash transactions
28. Management compensation highly dependent on meeting aggressive performance targets
29. Significant pressure on management to obtain additional finance
30. Extensive use of tax havens without clear business justification
31. Complex transactions
32. Complex legal ownership and/or organisational structure
33. Rapid changes in profitability
34. Existence of personal or corporate guarantees
35. Highly competitive market conditions and decreasing profitability levels within the organisation
36. The organisation operating in a declining business sector and facing possible business failures
37. Rapid technological change which may increase potential for product obsolescence
38. New accounting or regulatory requirements which could significantly alter reported results.
To be more specific, I will now focus on purchasing and selling process.
Examples of indicators of purchasing/ordering fraud include:
1. Disqualification of suitable tenderer
2. Unchanging list of preferred suppliers
3. Constant use of single source contracts
4. Contracts that include specifications that only one supplier can satisfy
5. Personal relationships between staff and suppliers
6. Withdrawal of lower bid without explanation
7. Acceptance of late bids
8. Changes to specifications after bids have been opened
9. Poor documentation of contract award process
10. Consistent favouring of one firm over another
11. Unexplained changes to contract after its award
12. Contract awarded to supplier with poor performance record
Examples of indicators of fraud in the selling process include:
1. Overcharging from an approved price list
2. Short-changing by not delivering the correct quantity or quality
3. Diversion of orders to a competitor or associate
4. Bribery of a customer by sales representative
5. Bribery of customer by a competitor
6. Insider information by knowing competitor's prices
7. Warranty claims that are false
8. Over-selling of goods or services that are not necessary
9. Free samples that are not necessary
Any of the above happen would mean a possibility of fraud. Internal control system should be set with keeping the above issues in mind.
Sunday, November 7, 2010
Tuesday, October 19, 2010
Fraud - Prevention
Fraud risk arises out of errors or events in transaction processing or other business operations. It is not easy to prevent fraud as the controls installed by people can be overcame by people. Fraud might be prevented through anti-fraud culture, risk awareness, whistle blowing and sound internal control systems.
Anti-fraud culture - Where minor unethical practices are overlooked, for example, expenses or time recording, this may lead to a culture in which larger frauds occur. High ethical standards bring long-term benefits as customers, suppliers, employees and the community realise they are dealing with a trustworthy organisation. Guiding principles could include:
1. Not acting in a way that could bring the organisation into disrepute.
2. Acting with integrity towards colleagues, customers, suppliers and the public.
3. Ensuring that business objectives are clearly stated and communicated.
4. Ensuring that benefits (whether to shareholders, customers or employees) are distributed fairly and impartially.
5. Safeguarding the confidentiality of personal data.
6. Complying with legal requirements.
Risk awareness - Fraud should never be discounted, and there should be awareness among all staff that there is always the possibility that fraud is taking place. It is important to raise awareness through training programmes. Particular attention should be given to training and awareness among those people involved in receiving cash, purchasing and paying suppliers, for example accountant, sales team and so on. Publicity can also be given to fraud that has been exposed. This serves as a reminder to those who may be tempted to commit fraud and a warning to those responsible for the management of controls.
Whistle blowing - Fraud may be suspected by those who are not personally involved. People must be encouraged to raise the alarm about fraud. An anti-fraud culture will be important in reinforcing the need for employees to express their concerns. However, management must realise that loyalties among workers, fear of the consequences and having unsubstantiated suspicions will prevent people from coming forward.
Sound internal control system - Sound systems of internal control should monitor fraud by identifying risks and then putting into place procedures to monitor and report on those risks. Here are some guidance on what is the quality of sound internal control system, the mnemonic SPAM SOAP would be useful:
Segregation of duties - Executive tasks should be separated from control tasks. One of the prime means of control is the separation of those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction. Segregation of duties reduces the risk of intentional manipulation or error and increases the element of checking. Some functions should be separated whenever possible. For example, authorisation, execution and custody. An example of segregation of duties concerns the receipt, recording and banking of cash. It is not a good idea for the person who opens the post to be the person responsible for recording that the cash has arrived. It would be even poorer practice for that person to be responsible for taking that cash to the bank. If these duties are not segregated, there is always the chance that the person misappropriate or steal the cash and no one would know.
Physical controls - These are concerned with the custody of assets and records and are also concerned with ensuring that access to assets and records is only permitted to authorised personnel. Procedures and security measures are needed to ensure that access to assets is limited to authorised personnel. Such controls include locks, safes, CCTV and entry codes.
Authorisation and approval - All transactions should be authorised or approved by an appropriate responsible person. The limits for these authorisations should be specified. For example, in a purchasing system there should be authority limits, where purchases of amounts exceeding those limits require higher authority.
Management controls - Management controls are exercised by management outside the day-to-day routine of the system. These include the following: overall supervisory controls, review of management accounts and comparison with budgets, internal audit function and special review procedures.
Supervisory controls - Any system of internal control should include the supervision by responsible officials of day-to-day transactions and the recording of them. Remember that supervisor acts as an important role in internal control process.
Organisation as a control - Enterprises should have a plan of their organisation, defining and allocating responsibilities and identifying lines of reporting for all aspects of the enterprise's operations, including the controls. There must be a well-defined organisational structure showing how responsibility and authority are delegated. An effective plan would require:
1. separation of a company's operations into appropriate divisions and sub-divisions.
2. appointment of person to assume responsibility.
3. establishment of clear lines of responsibility between each division and sub-division and the board of directors.
4. Overall coordination of the company's activities.
This will help to prevent friction so that staffs work together well. It also means that no duties go unperformed or unchecked.
Arithmetical and accounting controls - These controls are within the recording function and check that the transactions to be recorded and processed have been authorised, that they are included and that they are correctly recorded and accurately processed. This includes: checking the arithmetical accuracy of the records, the maintenance and checking of totals, reconciliations, control accounts, trial balances and accounting for documents.
Personnel controls - These are procedures to ensure that personnel have capabilities appropriate to their responsibilities, since the proper functioning of any system depends on the competence and integrity of those operating it. The qualifications, selection and training of the personnel involved are important features to be considered in setting up any control system. For example, a company accountant should be suitably qualified.
This article about prevention of fraud ends here, in next article I will write about the indication of fraud.
Anti-fraud culture - Where minor unethical practices are overlooked, for example, expenses or time recording, this may lead to a culture in which larger frauds occur. High ethical standards bring long-term benefits as customers, suppliers, employees and the community realise they are dealing with a trustworthy organisation. Guiding principles could include:
1. Not acting in a way that could bring the organisation into disrepute.
2. Acting with integrity towards colleagues, customers, suppliers and the public.
3. Ensuring that business objectives are clearly stated and communicated.
4. Ensuring that benefits (whether to shareholders, customers or employees) are distributed fairly and impartially.
5. Safeguarding the confidentiality of personal data.
6. Complying with legal requirements.
Risk awareness - Fraud should never be discounted, and there should be awareness among all staff that there is always the possibility that fraud is taking place. It is important to raise awareness through training programmes. Particular attention should be given to training and awareness among those people involved in receiving cash, purchasing and paying suppliers, for example accountant, sales team and so on. Publicity can also be given to fraud that has been exposed. This serves as a reminder to those who may be tempted to commit fraud and a warning to those responsible for the management of controls.
Whistle blowing - Fraud may be suspected by those who are not personally involved. People must be encouraged to raise the alarm about fraud. An anti-fraud culture will be important in reinforcing the need for employees to express their concerns. However, management must realise that loyalties among workers, fear of the consequences and having unsubstantiated suspicions will prevent people from coming forward.
Sound internal control system - Sound systems of internal control should monitor fraud by identifying risks and then putting into place procedures to monitor and report on those risks. Here are some guidance on what is the quality of sound internal control system, the mnemonic SPAM SOAP would be useful:
Segregation of duties - Executive tasks should be separated from control tasks. One of the prime means of control is the separation of those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction. Segregation of duties reduces the risk of intentional manipulation or error and increases the element of checking. Some functions should be separated whenever possible. For example, authorisation, execution and custody. An example of segregation of duties concerns the receipt, recording and banking of cash. It is not a good idea for the person who opens the post to be the person responsible for recording that the cash has arrived. It would be even poorer practice for that person to be responsible for taking that cash to the bank. If these duties are not segregated, there is always the chance that the person misappropriate or steal the cash and no one would know.
Physical controls - These are concerned with the custody of assets and records and are also concerned with ensuring that access to assets and records is only permitted to authorised personnel. Procedures and security measures are needed to ensure that access to assets is limited to authorised personnel. Such controls include locks, safes, CCTV and entry codes.
Authorisation and approval - All transactions should be authorised or approved by an appropriate responsible person. The limits for these authorisations should be specified. For example, in a purchasing system there should be authority limits, where purchases of amounts exceeding those limits require higher authority.
Management controls - Management controls are exercised by management outside the day-to-day routine of the system. These include the following: overall supervisory controls, review of management accounts and comparison with budgets, internal audit function and special review procedures.
Supervisory controls - Any system of internal control should include the supervision by responsible officials of day-to-day transactions and the recording of them. Remember that supervisor acts as an important role in internal control process.
Organisation as a control - Enterprises should have a plan of their organisation, defining and allocating responsibilities and identifying lines of reporting for all aspects of the enterprise's operations, including the controls. There must be a well-defined organisational structure showing how responsibility and authority are delegated. An effective plan would require:
1. separation of a company's operations into appropriate divisions and sub-divisions.
2. appointment of person to assume responsibility.
3. establishment of clear lines of responsibility between each division and sub-division and the board of directors.
4. Overall coordination of the company's activities.
This will help to prevent friction so that staffs work together well. It also means that no duties go unperformed or unchecked.
Arithmetical and accounting controls - These controls are within the recording function and check that the transactions to be recorded and processed have been authorised, that they are included and that they are correctly recorded and accurately processed. This includes: checking the arithmetical accuracy of the records, the maintenance and checking of totals, reconciliations, control accounts, trial balances and accounting for documents.
Personnel controls - These are procedures to ensure that personnel have capabilities appropriate to their responsibilities, since the proper functioning of any system depends on the competence and integrity of those operating it. The qualifications, selection and training of the personnel involved are important features to be considered in setting up any control system. For example, a company accountant should be suitably qualified.
This article about prevention of fraud ends here, in next article I will write about the indication of fraud.
Friday, October 15, 2010
Fraud - Introduction
There are a lot of definitions for fraud. Fraud may be generally defined as "deprivation by deceit". Another better definition would be dishonestly obtaining an advantage, avoiding an obligation or causing a loss to another party. Some of the examples of fraud are as follow:
1. Crime against customers and clients (for example, misrepresenting the quality of goods, pyramid trading schemes).
2. Employee fraud against employers (for example, payroll fraud, falsifying expense claims, theft of cash, theft of stocks, disposal of assets to employees, collusion with customers).
3. Crimes by small business against customers and employees (for example, selling counterfeit goods, not paying over tax and national insurance contributions).
4. Crimes against financial institutions (for example, using lost or stolen credit cards, fraudulent insurance claims).
5. Crimes by individuals against government (for example, social security benefit claims fraud, tax evasion).
6. Crimes by professional criminals against major organisations (for example, counterfeiting, money laundering, advance fee fraud).
Those committing fraud may be managers, employees or third parties (sometimes customers or suppliers). A major reason why people commit fraud is because they are allowed to do so. The likelihood that fraud will be committed will be decreased if the potential fraudster (person who commit fraud) believes that the rewards will be modest, that they will be detected or that the potential punishment will be unacceptably high. Therefore, a comprehensive system of control is needed to reduce the opportunity for fraud and increase the likelihood of detection. (Prevention of fraud in detailed will be discussed in next article)
People commit fraud because of:
1. The perceived suitability of targets for fraud
2. The incapability of potential fraud victims to look after their interests
3. The motivation of potential offenders
As for most property-related crimes, there are three prerequisites for fraud to occur and controls for each of the three prerequisites will be discussed here as well:
1. Dishonesty - Dishonesty is generally defined as an individual's pre-disposition or tendency to act in ways that contravene accepted ethical, social, organisational and legal norms for fair and honest trading. Dishonesty can be dealt with by pre-employment checks on all new staff (especially references), careful srunity of staff by supervision and lifestyles that are not supported by salaries, severe discipline for offenders and effective moral leadership.
2. Motivation - In addition to a general disposition or willingness to act dishonestly, an individual will still need a specific motivation to do so. This is likely to involve a calculation of whether a given action is worthwhile. This will take into account the potential rewards in relation to the potential sanctions or negative consequences of the action, the likelihood of being caught and the likely punishment if caught. The individual's motivation for fraudulent behaviour may be financial need (in case of theft or fraud for monetary gain), a desire to exercise negative power over those in authority or a desire to avoid punishment (for example, in the case of cover up or manipulation). Often, the motivation is simply dissatisfaction, based on being passed over for promotion, poor pay or a feeling of carrying more than a fair workload. So for this prerequisite, it can be dealt by having good employment conditions, instant dismissals where necessary and have a sympathetic complaints procedure.
3. Opportunity - Even if a person is willing to act dishonestly, and has a motive of doing so, he/she must still find an opportunity or an opening to do so. This can be a "loophole" in the law or control system that allows for fraudulent activity to go undetected or makes the risk of detection acceptable, given the rewards potentially available. This prerequisite seems the most important one, for example, when a person is in a room alone with a $1000 cheque of someone being left in the room, the person has the opportunity to earn the $1000, can he forgoes this opportunity or is he honest enough to return the cheque to the person who left it? Some fraud prevention techniques are segregation of duties (separate duties for each employees) where possible, controls over inputs (especially cash), controls over processing, controls over outputs and physical security of assets.
In conclusion, an individual will have high incentive to commit fraud if he/she is predisposed to dishonesty and the rewards for the particular fraud are high (motivation) and there is an opportunity to commit fraudulent action with little chance of detection or with insignificant sanctions if caught.
In the above, I mentioned about pyramid trading schemes and advance fee fraud, here I will explain about it. Pyramid trading schemes are a system of selling goods in which agency rights are sold to an increasing number of distributors at successively lower levels. Distributors pay for these rights which become worthless as the pyramid grows. Advance fee fraud, also known as Nigerian money transfer fraud, is a fraudulent scheme to extract money from investors living in rich countries. Although these confidence trick originated from Nigeria, they have since become a worldwide criminal activity, they are carried out through the mail, fax and increasingly through email spam.
Finally I would like to introduce two more types of fraud: computer fraud and identity theft. Computer fraud may be easier to commit because of the centralisation of large databases and their accessibility by operators; because the segregation of duties possible with manual systems is not always possible with computer systems; and because technology makes access easier. Computer records are not visible and therefore it is more difficult to trace fraud and detect the deletion of files (as computer systems are lack of audit trails). The complexity of modern computer systems places those with expert knowledge in a privileged position if they are susceptible to fraudulent intentions. Increased control also reduces efficiency and increases cost.
Identity theft is the unlawful taking of another person's details without their permission. The information stolen can be used to obtain financial services, goods and other forms of identification, for example, passports and driving licenses. The information stolen can range from a copy of birth certificate to copies of discarded bank or credit card statements and utility bills. Once the criminals have copies of someone's identity, they can embark on criminal activity in their name with the knowledge that any follow-up investigations will not lead to them. This makes it difficult for organisations to know who they really are dealing with.
In this article, types of fraud are introduced. In the next article, I will emphasize on the internal controls to prevent fraud.
1. Crime against customers and clients (for example, misrepresenting the quality of goods, pyramid trading schemes).
2. Employee fraud against employers (for example, payroll fraud, falsifying expense claims, theft of cash, theft of stocks, disposal of assets to employees, collusion with customers).
3. Crimes by small business against customers and employees (for example, selling counterfeit goods, not paying over tax and national insurance contributions).
4. Crimes against financial institutions (for example, using lost or stolen credit cards, fraudulent insurance claims).
5. Crimes by individuals against government (for example, social security benefit claims fraud, tax evasion).
6. Crimes by professional criminals against major organisations (for example, counterfeiting, money laundering, advance fee fraud).
Those committing fraud may be managers, employees or third parties (sometimes customers or suppliers). A major reason why people commit fraud is because they are allowed to do so. The likelihood that fraud will be committed will be decreased if the potential fraudster (person who commit fraud) believes that the rewards will be modest, that they will be detected or that the potential punishment will be unacceptably high. Therefore, a comprehensive system of control is needed to reduce the opportunity for fraud and increase the likelihood of detection. (Prevention of fraud in detailed will be discussed in next article)
People commit fraud because of:
1. The perceived suitability of targets for fraud
2. The incapability of potential fraud victims to look after their interests
3. The motivation of potential offenders
As for most property-related crimes, there are three prerequisites for fraud to occur and controls for each of the three prerequisites will be discussed here as well:
1. Dishonesty - Dishonesty is generally defined as an individual's pre-disposition or tendency to act in ways that contravene accepted ethical, social, organisational and legal norms for fair and honest trading. Dishonesty can be dealt with by pre-employment checks on all new staff (especially references), careful srunity of staff by supervision and lifestyles that are not supported by salaries, severe discipline for offenders and effective moral leadership.
2. Motivation - In addition to a general disposition or willingness to act dishonestly, an individual will still need a specific motivation to do so. This is likely to involve a calculation of whether a given action is worthwhile. This will take into account the potential rewards in relation to the potential sanctions or negative consequences of the action, the likelihood of being caught and the likely punishment if caught. The individual's motivation for fraudulent behaviour may be financial need (in case of theft or fraud for monetary gain), a desire to exercise negative power over those in authority or a desire to avoid punishment (for example, in the case of cover up or manipulation). Often, the motivation is simply dissatisfaction, based on being passed over for promotion, poor pay or a feeling of carrying more than a fair workload. So for this prerequisite, it can be dealt by having good employment conditions, instant dismissals where necessary and have a sympathetic complaints procedure.
3. Opportunity - Even if a person is willing to act dishonestly, and has a motive of doing so, he/she must still find an opportunity or an opening to do so. This can be a "loophole" in the law or control system that allows for fraudulent activity to go undetected or makes the risk of detection acceptable, given the rewards potentially available. This prerequisite seems the most important one, for example, when a person is in a room alone with a $1000 cheque of someone being left in the room, the person has the opportunity to earn the $1000, can he forgoes this opportunity or is he honest enough to return the cheque to the person who left it? Some fraud prevention techniques are segregation of duties (separate duties for each employees) where possible, controls over inputs (especially cash), controls over processing, controls over outputs and physical security of assets.
In conclusion, an individual will have high incentive to commit fraud if he/she is predisposed to dishonesty and the rewards for the particular fraud are high (motivation) and there is an opportunity to commit fraudulent action with little chance of detection or with insignificant sanctions if caught.
In the above, I mentioned about pyramid trading schemes and advance fee fraud, here I will explain about it. Pyramid trading schemes are a system of selling goods in which agency rights are sold to an increasing number of distributors at successively lower levels. Distributors pay for these rights which become worthless as the pyramid grows. Advance fee fraud, also known as Nigerian money transfer fraud, is a fraudulent scheme to extract money from investors living in rich countries. Although these confidence trick originated from Nigeria, they have since become a worldwide criminal activity, they are carried out through the mail, fax and increasingly through email spam.
Finally I would like to introduce two more types of fraud: computer fraud and identity theft. Computer fraud may be easier to commit because of the centralisation of large databases and their accessibility by operators; because the segregation of duties possible with manual systems is not always possible with computer systems; and because technology makes access easier. Computer records are not visible and therefore it is more difficult to trace fraud and detect the deletion of files (as computer systems are lack of audit trails). The complexity of modern computer systems places those with expert knowledge in a privileged position if they are susceptible to fraudulent intentions. Increased control also reduces efficiency and increases cost.
Identity theft is the unlawful taking of another person's details without their permission. The information stolen can be used to obtain financial services, goods and other forms of identification, for example, passports and driving licenses. The information stolen can range from a copy of birth certificate to copies of discarded bank or credit card statements and utility bills. Once the criminals have copies of someone's identity, they can embark on criminal activity in their name with the knowledge that any follow-up investigations will not lead to them. This makes it difficult for organisations to know who they really are dealing with.
In this article, types of fraud are introduced. In the next article, I will emphasize on the internal controls to prevent fraud.
Wednesday, September 15, 2010
CAT T10-Managing Receivables
This time, I will summarise some of the managing receivables issues and also introduce a bit of law issues related to contract. Offering credit can increase greatly the amount of sales a business makes. If a significant percentage of sales are credit sales, then receivables may represent a significant asset of the business. However if these customers are slow to pay (or do not pay at all), a business can lose a significant amount of money through assets being in the form of debt rather than cash balances which are earning interest. Because of the importance of receivables as an asset, many businesses operate a credit control function to assess whether to grant credit, to monitor credit and to take the necessary action against slow payers.
Just as there is a relationship between offering credit and securing sales, there also has to be a suitable working relationship between credit control personnel and sales and marketing staff. They will have a credit control policy for guidance in credit issues. Inside the credit control policy, they would set up the things to do before, during and after the credit period. During and after the credit period, the things that will be done are typically monitoring the receivables and also collecting debts which had discussed in the earlier articles. I am concern with the issues before the credit period.
Before the credit period, credit controller needs to make decision whether or not to grant credit and how much credit to offer to a certain customer, this will include assessing creditworthiness (also discussed in earlier article), devise suitable credit terms and also offering early settlement discount. Credit terms that will be offer depend on many factors such as profit required, nature of the business, competitors' credit terms offered, relation with customers, credit terms obtained from own suppliers and more. The terms must be simple to understand and easily enforceable. The credit controller may also wish to offer early settlement discount as it has benefits such as reduce cost of providing credit and chasing late payers, improve liquidity position, customers attracted to make larger orders and fewer bad debts. But the early settlement discount will only offer if the cost of offering the discount is less than company's cost of capital.
Just as there is a relationship between offering credit and securing sales, there also has to be a suitable working relationship between credit control personnel and sales and marketing staff. They will have a credit control policy for guidance in credit issues. Inside the credit control policy, they would set up the things to do before, during and after the credit period. During and after the credit period, the things that will be done are typically monitoring the receivables and also collecting debts which had discussed in the earlier articles. I am concern with the issues before the credit period.
Before the credit period, credit controller needs to make decision whether or not to grant credit and how much credit to offer to a certain customer, this will include assessing creditworthiness (also discussed in earlier article), devise suitable credit terms and also offering early settlement discount. Credit terms that will be offer depend on many factors such as profit required, nature of the business, competitors' credit terms offered, relation with customers, credit terms obtained from own suppliers and more. The terms must be simple to understand and easily enforceable. The credit controller may also wish to offer early settlement discount as it has benefits such as reduce cost of providing credit and chasing late payers, improve liquidity position, customers attracted to make larger orders and fewer bad debts. But the early settlement discount will only offer if the cost of offering the discount is less than company's cost of capital.
Percentage cost of early settlement discount=[(100/100 - d)^(365/t) - 1]%
d=the discount offered
t=reduction in the payment period necessary to obtain the early settlement discount
For example, Joblot Co has annual sales of $12000000 and a receivables' collection period of two months (sixty days). Management are considering the introduction of an early settlement discunt of 2%, which if introduced, is expected to reduce the receivables' collection period to one month (thirty days). Joblot Co can invest surplus funds to achieve a return of 30% (the company's cost of capital). Advise the management of Joblot Co as to whether or not they should introduce the settlement discount.
Answer:
Cost of early settlement discount= (100/100 - 2)^(365/30) - 1 = 27.86%
This cost is less than the company's cost of capital (30%) and therefore the settlement discount should be offered.
The credit controller's job often involves the law, especially when enforcing collection. The sale of goods and/or services for cash is a type of contract, and the credit controller's job is to ensure that the customer keeps his or her side of the contract. A contract is an agreement which legally binds the parties (ie those entering into the agreement). The key elements of contract are as follow:
Form - Agreement in writing. Most contracts do not need to be in any strict form except sale or purchase of land must be in writing under UK law. Consumer credit agreements must also be in writing.
Legal intention - Both parties must have intention to create legal relations.
Offer - A firm proposal to give or do something. An offer can be made expressly or by implication, and it does not need to be in writing.
Acceptance - Unconditional agreement to all the terms of the offer.
Consideration - It is what a person (the promisee) must give in exchange for what has been promised to him. For example, X agrees to buy goods from Y for an agreed consideration (price). If X fails to deliver the supply and Y is forced to buy these elsewhere at a higher price, then Y can sue X for the difference in price provided all the elements of a valid contract are present.
In order to minisie losses and manage customers more effectively, specific terms and conditions that can be included in the contracts are as follow:
Length of free credit - Each invoice should also clearly state this credit period. If the customer then breaks this agreement, they are in breach of contract and the relevant remedies can be pursued.
Interest charged on late payments - As with the credit period, the amount of interest to be charged should also be printed on each invoice, as a reminder to the customer that you mean business.
Retention of title clause - This clause states that the buyer does not obtain ownership of the goods unless and until payment is made. Thus if the buyer goes out of business before paying for the goods, the supplier can retrieve them.
In conclusion, managing receivables is about placing enough control on the credit period which is before, during and after the credit period. You need to know about the contract because it is an important document before and after the credit period. Once again, summarise as before credit period (assess creditworthiness, devise credit terms, offer early settlement discount, make contract), during credit period (monitor receivables) and after credit period (pursue due debts, chase late payers and sue if there is breach of contract). These are the knowledge that you have to know about managing receivables.
Tuesday, September 14, 2010
CAT T10-Monitoring and collecting debts part 2/2
This article is continued with the last article which had discussed about monitoring and collecting debts. In this article, I will discuss two more methods of collecting debts which are factoring and invoice discounting. First let me talk about factoring.
Factoring is an arrangement to have debts collected by a factor company which advances a proportion of the money it is due to collect. Well the definition may not be clear, let me make it simplier, the organisation providing the factor service is "factor" and the company which requests for this service is "company". Factors are most of the time financial institutions and they provide factoring service to company. Factoring provides a form of advance against a company's trade receivables. Instead of the company having to wait for cash from its credit customers, the factor agrees to pay for a proportion of the debt in advance to the company. Typically a factor will pay up to 85% of approved invoices. Factor will also take the administration of sales ledger of the company which the company does not have to employ credit controllers. The main aspects of factoring are:
(i) administration of the company's invoicing, sales accounting and debt collection service
(ii) credit protection for company's debts, whereby the factor takes over the risk of loss from bad debts and so "insures" the company against such losses. The factor usually purchases these debts 'without recourse' to the company, which means that if the company's customers do not pay what they owe, the factor will not ask for his money back from the company.
(iii) Making payments to the client in advance of collecting the debts.
The steps involve in factoring would be:
1. company sells goods to the customer on credit payable in 30 days
2. company sells the debt to the factor, the factor administers the sales ledger
3. up to 85% of the debt is paid to the company in advance
4. the customer pays the factor after 30 days
5.factor pays the company the balance less administration fees and financing fees
Advantages of factoring are:
(i)The business can pay its suppliers promtly, and so be able to take advantage of any early payment discounts that are available
(ii)Optimum inventory levels can be maintained, because the business will have enough cash to pay for the inventories it needs
(iii)Growth can be financed through sales rather than by injecting fresh external capital
(iv)The business gets finance linked to its volume of sales. In contrast, overdraft limits tend to be determined by historical statements of financial position
(v)The managers of the business do not have to spend their time on the problems of slow paying customers
(vi)The business does not incur the costs of running its own receivables ledger department
An important disadvantage of factoring is that customers will be making payments direct to the factor, which is likely to present a negative picture of the company as they might think that the business may not be running well that it needs to employ factoring service.
Invoice discounting does not mean offerring discounts to customers. Invoice discounting is the purchase (by the invoice discounter) of trade debts at a discount. Invoice discounting is related to factoring and many factors will provide an invoice discounting service. It is entirely different thing from the provision of early settlement discounts. It is almost the same as factoring, but the invoice discounter does not take over the administration of the company's receivables ledger, the arrangement is purely for the advance of cash. But the main advantage compare with factoring is that customer does not know that the company is using invoice discounting service, customer is still paying back to the company. Therefore it enables the company to raise working capital. But the disadvantage is the company will still need to have a receivable ledger or credit control department for collecting the debts, these collections will be given back to invoice discounter.
Both methods of collecting debts are useful especially when the company is in short of money. We also need to consider whether the company is financially viable to factor its debts or not before employing the service. You need to check the cost of factoring and also the cost of not factoring, if the cost of factoring is lower, then the company might prefer to factor its debts. Normally when the company does not factor the debts, the cost that will be incurred will include the salary for credit control staff, sales ledger administration cost and also overdraft interest charge. If the company chooses to factor the debts, the cost that will be incurred might be the redundancy package for making the credit control staff redundant (as the company does not need much credit control staff), factor administration fees, factor's interest charge on the advance pay to company, overdraft interest charge for financing the rest of the debtors balance and also credit protection charge for "without recourse" agreement. I think one example might be useful to understand more.
Eg. Mr Sykes expects sales for next year to be $75000, with customers paying within 30-day limit set. It would cost him $2000 per annum to employ someone one day a week to invoice customers and collect debts for him. Alternatively, his local bank has offered to provide a factoring service for him, including the advance of 80% of his sales invoices. They would charge 2% of turnover for the administration and charge interest of 8% per annum on advances. However, the bank would not invoice Mr Sykes' customers. He would need to employ somebody for half a day a week to do this, at a cost of $1000 per annum. My Sykes pays interest at the rate of $10% per annum on his overdrawn bank account. Mr Sykes thinks that customers will pay within 30 days regardless of which option is selected.
Calculate and recommend whether or not Mr Sykes should factor his debts.
Answer: Average receivables=30/365 x $75000=$6164
Cost of not factoring:
-$6164 x 10% financed by overdraft=$616
-Administration cost=$2000
=$2616
Cost of factoring:
-80% advanced by factor at 8% (80% x $6164 x 8%)=$394
-20% still financed by overdraft (20% x $6164 x 10%)=$123
-Factor administration charge (2% x $75000)=$1500
-Invoicer cost = $1000
=$3017
Mr Sykes should not factor his debts because the cost of factoring is more than the cost of not factoring.
I had discussed assessing creditworthiness and monitoring and collecting debts, in next article I will discuss managing receivables which is the main thing in working capital management and the articles that I discussed before is part of the managing receivables. I hope this article is clear enough to understand.
Factoring is an arrangement to have debts collected by a factor company which advances a proportion of the money it is due to collect. Well the definition may not be clear, let me make it simplier, the organisation providing the factor service is "factor" and the company which requests for this service is "company". Factors are most of the time financial institutions and they provide factoring service to company. Factoring provides a form of advance against a company's trade receivables. Instead of the company having to wait for cash from its credit customers, the factor agrees to pay for a proportion of the debt in advance to the company. Typically a factor will pay up to 85% of approved invoices. Factor will also take the administration of sales ledger of the company which the company does not have to employ credit controllers. The main aspects of factoring are:
(i) administration of the company's invoicing, sales accounting and debt collection service
(ii) credit protection for company's debts, whereby the factor takes over the risk of loss from bad debts and so "insures" the company against such losses. The factor usually purchases these debts 'without recourse' to the company, which means that if the company's customers do not pay what they owe, the factor will not ask for his money back from the company.
(iii) Making payments to the client in advance of collecting the debts.
The steps involve in factoring would be:
1. company sells goods to the customer on credit payable in 30 days
2. company sells the debt to the factor, the factor administers the sales ledger
3. up to 85% of the debt is paid to the company in advance
4. the customer pays the factor after 30 days
5.factor pays the company the balance less administration fees and financing fees
Advantages of factoring are:
(i)The business can pay its suppliers promtly, and so be able to take advantage of any early payment discounts that are available
(ii)Optimum inventory levels can be maintained, because the business will have enough cash to pay for the inventories it needs
(iii)Growth can be financed through sales rather than by injecting fresh external capital
(iv)The business gets finance linked to its volume of sales. In contrast, overdraft limits tend to be determined by historical statements of financial position
(v)The managers of the business do not have to spend their time on the problems of slow paying customers
(vi)The business does not incur the costs of running its own receivables ledger department
An important disadvantage of factoring is that customers will be making payments direct to the factor, which is likely to present a negative picture of the company as they might think that the business may not be running well that it needs to employ factoring service.
Invoice discounting does not mean offerring discounts to customers. Invoice discounting is the purchase (by the invoice discounter) of trade debts at a discount. Invoice discounting is related to factoring and many factors will provide an invoice discounting service. It is entirely different thing from the provision of early settlement discounts. It is almost the same as factoring, but the invoice discounter does not take over the administration of the company's receivables ledger, the arrangement is purely for the advance of cash. But the main advantage compare with factoring is that customer does not know that the company is using invoice discounting service, customer is still paying back to the company. Therefore it enables the company to raise working capital. But the disadvantage is the company will still need to have a receivable ledger or credit control department for collecting the debts, these collections will be given back to invoice discounter.
Both methods of collecting debts are useful especially when the company is in short of money. We also need to consider whether the company is financially viable to factor its debts or not before employing the service. You need to check the cost of factoring and also the cost of not factoring, if the cost of factoring is lower, then the company might prefer to factor its debts. Normally when the company does not factor the debts, the cost that will be incurred will include the salary for credit control staff, sales ledger administration cost and also overdraft interest charge. If the company chooses to factor the debts, the cost that will be incurred might be the redundancy package for making the credit control staff redundant (as the company does not need much credit control staff), factor administration fees, factor's interest charge on the advance pay to company, overdraft interest charge for financing the rest of the debtors balance and also credit protection charge for "without recourse" agreement. I think one example might be useful to understand more.
Eg. Mr Sykes expects sales for next year to be $75000, with customers paying within 30-day limit set. It would cost him $2000 per annum to employ someone one day a week to invoice customers and collect debts for him. Alternatively, his local bank has offered to provide a factoring service for him, including the advance of 80% of his sales invoices. They would charge 2% of turnover for the administration and charge interest of 8% per annum on advances. However, the bank would not invoice Mr Sykes' customers. He would need to employ somebody for half a day a week to do this, at a cost of $1000 per annum. My Sykes pays interest at the rate of $10% per annum on his overdrawn bank account. Mr Sykes thinks that customers will pay within 30 days regardless of which option is selected.
Calculate and recommend whether or not Mr Sykes should factor his debts.
Answer: Average receivables=30/365 x $75000=$6164
Cost of not factoring:
-$6164 x 10% financed by overdraft=$616
-Administration cost=$2000
=$2616
Cost of factoring:
-80% advanced by factor at 8% (80% x $6164 x 8%)=$394
-20% still financed by overdraft (20% x $6164 x 10%)=$123
-Factor administration charge (2% x $75000)=$1500
-Invoicer cost = $1000
=$3017
Mr Sykes should not factor his debts because the cost of factoring is more than the cost of not factoring.
I had discussed assessing creditworthiness and monitoring and collecting debts, in next article I will discuss managing receivables which is the main thing in working capital management and the articles that I discussed before is part of the managing receivables. I hope this article is clear enough to understand.
Sunday, September 12, 2010
CAT T10-Monitoring and collecting debts part 1/2
Following the last article "Assessing Creditworthiness", this article aims to talk about the issues after granted credit to customers. We are still in the point of view of a credit controller. So what is the role of the credit control department? Credit control department is responsible for those stages in the collection cycle dealing with the offer of credit and collection of debts. The roles will include checking customers' creditworthiness, advising on payment terms, reporting to sales staff about new enquiries, dealing with customer queries, keeping the receivables ledger up-to-date, pursuing due debts and giving references to third parties. After assessing the customers' creditworthiness and granting of credit, we are going to have control action which is to monitor the receivables.
In monitoring the receivables, our main useful internal source is the aged receivables analysis which will show us each customers' total debts in different period, for example within 30 days, 31-60 days, 61-90 days and so on. This is important as we can easily track down which customer is taking more time to pay, next time we may not give that customer more credit. Other method of monitoring the receivables is to check the customers' financial reports. With this, we can find out the financial position of the customer and also the cash flow position by looking at the statement of cash flows. We can even do a ratio analysis on different customers' financial reports and those with problems must be taken into account.
There are many ways in practice for credit controller to monitor their debtors, but now let's talk about collecting the debts. We all know giving credit is easy, but collecting back the money is not always easy. Sometimes companies obtain default insurance (bad debt insurance) against certain approved debts going bad. But to minimise the cost to buy default insurance, we should try our best to encourage customers to pay promptly and chase payments from overdue debts. The ways that we can implement to ensure prompt payment from debtors include giving early settlement discount, deal with queries and complaints promptly, send out invoices immediately after the delivery of goods, issue credit notes as soon as queries have been resolved, issue monthly statements so that any problems can be highlighted early and provide customers with a list of company's terms of credits and their attention should be drawn to these terms. Apart from that, employing debt collection agency to help us collect debts may be one of the ways to collect debts earlier as debt collection agency collects debt for commission, they will try to make debtors pay promptly.
If the debtors have became overdue debts, ways to chase the payments from overdue debtors might include sending out reminder letters, make telephone calls to the debtor, charge interest for late settlement, employ the services of a debt collection agency, take legal action (discuss below) and send an authorised person from your credit control department to visit the customer and request payment. In larger companies, it is the role of the sales ledger staff to issue invoices and receive payments, but it is the responsibility of credit control staff to chase late payers. So methods to encourage promptly payments from debtors are referring to sales ledger procedures and chasing payments from overdue debtors are referring to credit control procedures.
If, having sent a final reminder, the customer has still not paid, legal action will need to be taken. A solicitor should be contacted, and they will send out a "letter before action", giving the customer one final chance to pay before a court summons is issued. But legal proceedings can be expensive, so we will try to find out whether the customer is likely to have funds to pay us before we take proceedings. If we know that they are in such financial difficulties that there is no chance of payment, we might wait until they have settle their problems as they may be willing to pay back us the debts. With this we can improving our relationship and they may pay back us promptly next time, we also ignored the legal costs.
Other ways to collect the debts include factoring and invoice discounting which I will discuss again in the next article as these need some understanding and sometimes people often confused invoice discounting with offering early settlement discount. With both of these methods, we are able to get advance pay for the debts.
Collection of debts are one of the most challenging job for credit controller which you can't avoid it if you are employed as a credit controller. You should know your role well that you are not the one to issue invoices, you are the one that make decision about giving credit, monitor the debtors and collecting debts from the debtors (in larger companies). Methods above are some guides for you about the work of credit controller (and you should note that it is a quite difficult job), for students of CAT T10, these information is useful to understand more about the function of credit controller. This article will be continued with part 2/2.
In monitoring the receivables, our main useful internal source is the aged receivables analysis which will show us each customers' total debts in different period, for example within 30 days, 31-60 days, 61-90 days and so on. This is important as we can easily track down which customer is taking more time to pay, next time we may not give that customer more credit. Other method of monitoring the receivables is to check the customers' financial reports. With this, we can find out the financial position of the customer and also the cash flow position by looking at the statement of cash flows. We can even do a ratio analysis on different customers' financial reports and those with problems must be taken into account.
There are many ways in practice for credit controller to monitor their debtors, but now let's talk about collecting the debts. We all know giving credit is easy, but collecting back the money is not always easy. Sometimes companies obtain default insurance (bad debt insurance) against certain approved debts going bad. But to minimise the cost to buy default insurance, we should try our best to encourage customers to pay promptly and chase payments from overdue debts. The ways that we can implement to ensure prompt payment from debtors include giving early settlement discount, deal with queries and complaints promptly, send out invoices immediately after the delivery of goods, issue credit notes as soon as queries have been resolved, issue monthly statements so that any problems can be highlighted early and provide customers with a list of company's terms of credits and their attention should be drawn to these terms. Apart from that, employing debt collection agency to help us collect debts may be one of the ways to collect debts earlier as debt collection agency collects debt for commission, they will try to make debtors pay promptly.
If the debtors have became overdue debts, ways to chase the payments from overdue debtors might include sending out reminder letters, make telephone calls to the debtor, charge interest for late settlement, employ the services of a debt collection agency, take legal action (discuss below) and send an authorised person from your credit control department to visit the customer and request payment. In larger companies, it is the role of the sales ledger staff to issue invoices and receive payments, but it is the responsibility of credit control staff to chase late payers. So methods to encourage promptly payments from debtors are referring to sales ledger procedures and chasing payments from overdue debtors are referring to credit control procedures.
If, having sent a final reminder, the customer has still not paid, legal action will need to be taken. A solicitor should be contacted, and they will send out a "letter before action", giving the customer one final chance to pay before a court summons is issued. But legal proceedings can be expensive, so we will try to find out whether the customer is likely to have funds to pay us before we take proceedings. If we know that they are in such financial difficulties that there is no chance of payment, we might wait until they have settle their problems as they may be willing to pay back us the debts. With this we can improving our relationship and they may pay back us promptly next time, we also ignored the legal costs.
Other ways to collect the debts include factoring and invoice discounting which I will discuss again in the next article as these need some understanding and sometimes people often confused invoice discounting with offering early settlement discount. With both of these methods, we are able to get advance pay for the debts.
Collection of debts are one of the most challenging job for credit controller which you can't avoid it if you are employed as a credit controller. You should know your role well that you are not the one to issue invoices, you are the one that make decision about giving credit, monitor the debtors and collecting debts from the debtors (in larger companies). Methods above are some guides for you about the work of credit controller (and you should note that it is a quite difficult job), for students of CAT T10, these information is useful to understand more about the function of credit controller. This article will be continued with part 2/2.
Friday, September 10, 2010
CAT T10 Assessing creditworthiness
This article is in the point of view of a credit controller. Bad debt is the one that we need to avoid of, but the problem is how to avoid the bad debt risk? The very starting point is the time the customers want to be our receivable,i.e purchase from us by credit. We need to make decision whether or not to give credit and how much credit period we can give to the customers. Credit will only be given to particular classes of customer. Therefore we are concerned in assessing the customer's creditworthiness so that we can decide to act on three questions in our mind, who is eligible for credit, why offer credit to that customer and how much credit to offer. The purpose of this article is to give some guidances on how a credit control department assesses the creditworthiness of customer, the methods will be clearly stated in the credit control policies.
We are actually able to get information of customers from external and internal sources. First, I will talk about internally generated information. One of the way is through our favourite ratio analysis. In ratio analysis, we are looking for how much credit we are able to offer to our customers by taking into account our financial position. Therefore, ratios such as profit margin, asset turnover, return on capital employed(ROCE), earnings per share(EPS), price earning ratio(P/E ratio), working capital ratio, gearing ratios, interest cover and debt ratio will help us to analyse our financial position to measure how much funds we can invest into debtors. So for example, debt ratio tells us about our total receivables to total assets, this shows us that whether or not we are efficient in getting the money back from receivables, if the receivables % are a lot lesser than our total assets, this shows that we might be capable of investing more money into receivables to reduce our opportunity cost of holding the cash in hand. Furthermore, we can actually assess the customer's creditworthiness by visiting their premises. Through this, we can find out the capability of customer in returning debt and also check whether the customer is trying to cheat us or not. In addition to this, we might also employ a credit scorer to rate the credit of customers in their premises. The higher the credit score, the more reliable and capable the customers are able to return us the debt. We shall also check our aged receivables analysis which shows the customer's payment in different period and those who always exceed the credit limit we provided shall be taken into account, we might not give them more credit and chase them for their money unless they are in the position of growth, then we might consider again. Finally, we should review the credit record of the customers in the past period, those who can return us money faster are the one we are going to serve first.
Internally generated information is reliable, but we might also concern about getting information about a customer through external sources of information. One of the common way is to get references from bank. Bank can tell us about the customer in less detail, for example, how often the customer lends money from bank or did they always pay back in time, we cannot ask for the bank balance of the customers, that's for sure, but these little information could help us to identify the ability of the customers, if they often lend money from bank, this may show that giving more credit to the customers may have risk of default. We can also get some information from suppliers of the customers. But there is a problem with this, there is a risk of collusion between customers and their suppliers to cheat our money, so we have to be careful about this. We can also get information about the customers from the credit rating agencies. Credit rating agencies are basically research companies who research and rate the creditworthiness of the customers, the best is rated as AAA. From here, we can decide how much credit we can give to a certain customer. But there are also problems in the agency report, it may not up-to-date, too old and no track record, so we also need to take into account about it.
Although sometime the external information may have problems, but we still need to consider about it since the internal information is not enough to judge the creditworthiness of customer because most are past records except customer visits. One thing to note here is that we can't get every information that we want about the customers from external references because of data protection act. Some countries, such as UK's Data Protection Act 1998 makes certain restrictions about the use of data about individual customers and the use of their personal data. This act attempts to protect individual, not corporate bodies. Therefore we cannot just ask the bank for customer's bank balance, these are protected.
In my opinion, credit controller should make good use of both internal and external source of information about customers. Sometimes customers can't pay us because their business is growing and they need more money to do investment and therefore may not pay us in time, we can allow them more credit in this situation as this does not show they are not creditworthiness. Sometimes, we might consider to allow for early settlement discount for the customers whose creditworthiness is not good to encourage them to pay earlier and also building up our relationship so that they will pay back us in time in future. So although the creditworthiness is not too good, we should not just ignore the customer, there may be of some reason they cannot pay us in time. Taking into account all the above issues, you are then only ready to be in assessing creditworthiness which is part of the credit management which is done by credit controller. For those who are taking exam for CAT T10, the above information are the one that you need to understand but not really need to be so detail.
We are actually able to get information of customers from external and internal sources. First, I will talk about internally generated information. One of the way is through our favourite ratio analysis. In ratio analysis, we are looking for how much credit we are able to offer to our customers by taking into account our financial position. Therefore, ratios such as profit margin, asset turnover, return on capital employed(ROCE), earnings per share(EPS), price earning ratio(P/E ratio), working capital ratio, gearing ratios, interest cover and debt ratio will help us to analyse our financial position to measure how much funds we can invest into debtors. So for example, debt ratio tells us about our total receivables to total assets, this shows us that whether or not we are efficient in getting the money back from receivables, if the receivables % are a lot lesser than our total assets, this shows that we might be capable of investing more money into receivables to reduce our opportunity cost of holding the cash in hand. Furthermore, we can actually assess the customer's creditworthiness by visiting their premises. Through this, we can find out the capability of customer in returning debt and also check whether the customer is trying to cheat us or not. In addition to this, we might also employ a credit scorer to rate the credit of customers in their premises. The higher the credit score, the more reliable and capable the customers are able to return us the debt. We shall also check our aged receivables analysis which shows the customer's payment in different period and those who always exceed the credit limit we provided shall be taken into account, we might not give them more credit and chase them for their money unless they are in the position of growth, then we might consider again. Finally, we should review the credit record of the customers in the past period, those who can return us money faster are the one we are going to serve first.
Internally generated information is reliable, but we might also concern about getting information about a customer through external sources of information. One of the common way is to get references from bank. Bank can tell us about the customer in less detail, for example, how often the customer lends money from bank or did they always pay back in time, we cannot ask for the bank balance of the customers, that's for sure, but these little information could help us to identify the ability of the customers, if they often lend money from bank, this may show that giving more credit to the customers may have risk of default. We can also get some information from suppliers of the customers. But there is a problem with this, there is a risk of collusion between customers and their suppliers to cheat our money, so we have to be careful about this. We can also get information about the customers from the credit rating agencies. Credit rating agencies are basically research companies who research and rate the creditworthiness of the customers, the best is rated as AAA. From here, we can decide how much credit we can give to a certain customer. But there are also problems in the agency report, it may not up-to-date, too old and no track record, so we also need to take into account about it.
Although sometime the external information may have problems, but we still need to consider about it since the internal information is not enough to judge the creditworthiness of customer because most are past records except customer visits. One thing to note here is that we can't get every information that we want about the customers from external references because of data protection act. Some countries, such as UK's Data Protection Act 1998 makes certain restrictions about the use of data about individual customers and the use of their personal data. This act attempts to protect individual, not corporate bodies. Therefore we cannot just ask the bank for customer's bank balance, these are protected.
In my opinion, credit controller should make good use of both internal and external source of information about customers. Sometimes customers can't pay us because their business is growing and they need more money to do investment and therefore may not pay us in time, we can allow them more credit in this situation as this does not show they are not creditworthiness. Sometimes, we might consider to allow for early settlement discount for the customers whose creditworthiness is not good to encourage them to pay earlier and also building up our relationship so that they will pay back us in time in future. So although the creditworthiness is not too good, we should not just ignore the customer, there may be of some reason they cannot pay us in time. Taking into account all the above issues, you are then only ready to be in assessing creditworthiness which is part of the credit management which is done by credit controller. For those who are taking exam for CAT T10, the above information are the one that you need to understand but not really need to be so detail.
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