OSBORNE BOOKS TUTOR ZONE

Credit Management and Control

Practice assessment 1
answers

Osborne Books Limited, 2011

credit management and control tutor zone

Credit Management and Control Practice Assessment Answers (Part One)

Task 1.1
(a)

A,D and E

(b)

(c)

Task 1.2
(a)

(b)

(c)

(d)

Task 1.3
(a)

(b)

(c)

Task 1.4
(a)

(b)

Task 1.5
(a)

(b)

(c)

(d)

(e)

Task 1.6
(a)

(b)

(c)

(d)

(e)

practice assessment 1 answers

Task 1.7
(a)

(b)

Task 1.8
(a)

(b)

(c)

Credit Management and Control Practice Assessment Answers (Part Two)

Online project

(a)

D Limited and E Limited new prospective customers

D Limited

Indicator

Year

20x2

Operating profit margin

Rating

Indicator

Rating

20x1

2.21%

-3.13%

-5

Interest cover

0.50

-20

No cover

-30

Current ratio

0.97

-20

1.30

54.55%

48.54%

10

Gearing

-40

E Limited

Indicator

Year

20x2

Operating profit margin

Rating

-25

Indicator

Rating

20x1

24.00%

20

20.83%

20

Interest cover

6.72

10

5.00

10

Current ratio

2.27

10

1.80

10

30.56%

10

35.21%

10

Gearing

50

50

credit management and control tutor zone

D Limited achieves a high risk credit score for each year, with the score deteriorating in the more
recent year. The company should therefore be refused credit at this time. A letter / note should be
drafted politely explaining the reasons for refusal of credit, and what the company could do to
improve its chances of getting credit in future. D Limited could be offered the opportunity to trade
on a cash basis in the meantime.
E Limited achieved a very low risk in each of the two years and therefore credit should be offered.
The amount of credit limit requested does not seem excessive for a company of the size of E
Limited and should be agreed.

G Limited existing customer

Indicator

Year
Operating profit margin

Rating

Indicator

20x2

Rating

20x1

13.80%

10

18.50%

10

Interest cover

1.25

-10

2.96

Current ratio

1.19

-10

1.53

10

72.20%

-20

58.48%

Gearing

-30

20

The above table shows that Gs credit rating has deteriorated and has moved from a low risk to a
high risk. There are both favourable and adverse factors shown in the accounts and other
information. These include:

Favourable factors

Adverse factors

A good trading history for many years

Recent late payments

Investment in non-current assets with capacity

for expansion

Receivables and payables have both increased by

more than sales this may point to liquidity issues

Sales increased by 20%, and the anticipation

of further increases

If sales do not increase as anticipated the

company will have unnecessarily high overheads
for the level of turnover

Company remains profitable

The high interest costs are a burden on the

profitability and will increase if interest rates rise

Company maintains a positive bank balance at

the year end

It is worth considering taking some kind of security over the business or personal guarantees from
the directors or to consider retention of title clauses.
There is no one right decision and as long as the credit controller considers all the issues and
makes a reasoned decision, credit will be awarded.

practice assessment 1 answers

(b)

The following action plan shows some suggested actions, but alternative strategies would be
acceptable, provided they are based on reasoned arguments and consistent with the policy.

Action Plan
Aye Limited
The amount is not yet due so no immediate action is required. As a new account it should be
monitored carefully.
BeeCo Limited
The account will have already been placed on stop based on the policy. The query may be genuine,
or a sign of delaying tactics. A proof of delivery for the 15,000 invoice should be sent immediately,
and followed up with a phone call to seek confirmation that payment will now be made. The existing
promise of payment for the later invoice should also be monitored.
Cee Limited
As this is a new customer it should be monitored carefully (it will not be insured). The customer
should be contacted urgently to establish if there is a problem, and obtain a commitment to pay.
Depending on how late the overdue payment is, the current order may be placed on stop until
payment for the overdue amount is received.
Dee Limited
The account will have already been placed on stop based on the policy. As the customer seems to
order regularly this may elicit payment. A visit to the customer to discuss their continual breach of
terms would be appropriate. As Dee Limited buys fairly small quantities it may be that keeping the
customer is not worth it if payment does not improve. If payment is not forthcoming a credit
insurance claim may be made.
HiLo Limited
The amount is not yet due, and there is no reason for concern.
Eye Limited
The short payment needs to be resolved. If there is a valid reason why the amount is not owed, a
credit note should be issued to clear the account. The account will have been placed on stop and
this may harm trading relations if the amount shown as outstanding is due to an error. If the amount
shown as outstanding is due to an error by Beta, an apology should be issued.
Jay and Partners
The unallocated payment probably relates to the amount outstanding for over 60 days, but would
not account for the whole amount. Contact needs to be made urgently to establish what has been
paid and why the remainder is still outstanding. The account will have been placed on stop in line
with the policy.
Kay Limited
As the company is in administration normal chasing is not appropriate. The administrator should be
contacted and a claim made. The terms of sale should be checked to see if there is reservation of
title, and if so this should be communicated to the administrator. The 25,000 should be provided
for as a bad debt.
Elle Limited
The amount is not yet due, and there is no reason for concern.

credit management and control tutor zone

Emme Limited
The account should already be on stop. Either a meeting with the company should be arranged, or
alternatively debt collectors could be used.
Owe plc
Although there is little apparent risk, the company seems to be using its size to impose its own
terms. How profitable the sales are should be considered when deciding on the best course of
action. A prompt payment discount could possibly be offered in future.
Are Limited
The account should be placed on stop if it is overdue 28 days or more. Contact should be made to
obtain a commitment for payment.
Aspirations
An attempt should be made to trace the sole trader, possibly using a debt collection company.
The 11,000 should be provided for as a bad debt.
Esse Limited
As the company has been liquidated normal chasing is not appropriate. The liquidator should be
contacted and a claim made in case there are any surplus assets after the liquidation. The terms of
sale should be checked to see if there is reservation of title, and if so this should be communicated
to the liquidator. Provided the customer is covered by credit insurance, there is no need to make a
provision as a bad debt. The credit insurance company should be contacted to commence a claim.