Finance Peer Responses/Reflection #5

· Choose and respond to 3 posts listed below. Advance the conversation; provide a real-world application and experiential examples;

· Conceptually discuss your key [most significant] learning insight or take-away from the selected forum topic comments.

· Responses should be a minimum of 150-250 words , supported by at least one reference outside of the textbook (use academic journals), either supporting or refuting the position of the author of the forum topic response or peer response.

Topic #1  Dividend Policy

 

     Ming, 2013 defined a dividend policy as the policy that a company uses to decide how much it will pay out to its shareholders in dividends. Even though this sounds simple there are many components to the dividend policy picture. The first component is a company must look at how dividends might influence capital structure. Dividends can often completely adjust capital structure which is not always considered to be a positive aspect. When looking at dividends the act of retaining earnings often increases the common equity relative to debt. On top of this when a company finances with retained earnings it is cheaper for the company than issuing new common equity. Once that is noted the effect of the dividend policy on stock value becomes important.

When looking at dividend policy New Tax Law, 2003 explained that there are four primary policy types which are stable dividend per share which, constant payout ratio, compromise policy and residual dividend policy. The stable dividend per share states that the dividend should always be held constant even in years that the company is reporting a loss, this gives the shareholders the impression that the loss is not permanent which can often be a motivating factor for investors to stay invested in a company. The constant dividend payout means that a constant percentage of the company earnings are paid out in dividends. Problems happen in this policy when the company earnings are down and shareholders receive significantly less in payouts. Shareholders are often ok with this happening one year but tend to want to move away from the company when they do not quickly see a return in profits. The third policy is the compromise policy; in this policy there is a compromise between the policies of a stable dollar and the percentage of the dividends for the year. This policy does tend to create a bit of uncertainty for investors, and can be unattractive for less experienced investors. The final policy is the residual dividend policy, which is often used when investments are not stable. Under this policy the dividends that are received represent the residual earnings after a companies investment need has been satisfied.

There are also three major theories that are often discussed in finance. Ming, 2013 addresses the first theory, which is the dividend irrelevance theory. This theory states that a firms dividend policy has no effect on either the value or the cost of capital everything is dividend equally. The problem though is this; the idea of dividend policy was created in a perfect market. In this perfect market there are no taxes, no bankruptcy and no asymmetry of information. In this perfect market the value of the firm is only determined by the companies cash flows. The problem is that this is not the business world that any company actually exists in.  When these outlying factors are considered the dividend policy no longer produced adequate numbers and in a way becomes irrelevant. Yes it serves as a base line, but that is about it. The ideal of dividing capital gains equally would be great but is a bit idealistic.

The next policy is the optimal dividend policy. In this policy it is believed that there is a dividend policy that strokes a balance between current dividends and future growth that typically maximizes the stock price of the firm. Jean-Paul Decamps, 2007 addressed the use of an optimal dividend policy in a real business environment and its usefulness when trying to make a firm solvent such as in bankruptcy. This policy is often used in firms that have liquidity as it if often harder to use in firms that lack liquidity.

The third and final theory is the dividend relevance theory. Under this theory the firm is affected by its dividend policy. The optimal policy is one that causes maximization of the firms’ value. Ming, 2013 refers to this as the most reasonable option for firms and felt that it had the best reflection on real world value. In order though for any of these polices to work there must be investors into the system.  Garrison, 2014 defined three investor areas that need to be considered when setting up dividend policy. The first to understand is that investors can regard dividend changes as a signal of management’s earnings and forecast. This is referred to as the signaling hypothesis, though it seems reasonable it can often set unrealistic expectations for clients. The next is the clientèle effect. In this effect it is assumed that the firm will attract the type of investor who likes the dividend policy that is uses. Though this seems simple customers can often have un true perceptions of the company, which can lead to a mismatch in investor and dividend policy. The final investor relation is the is free cash flow hypothesis. Garrison, 2014 states this hypothesis states that firms that pay dividends from cash flows that cannot be reinvested in free cash flows often have higher values than firms that retain free cash flows.

    In all dividend policy is an idea that in a perfect market society gives stockholders a firm understanding of what to expect for a return for the year. It is a policy though that in same cases is considered to be irrelevant. It still does have its practical applications but adjustments to the policy often have to be made in order to keep investors happy. There are various types of policy that when used correctly can give a fairly accurate representation of the dividends that are expected for the year. A company often has to take into consideration the make up of its stockholders when choosing the proper policy to use for the year.

 

 

Reference:

 

Garrison, S. (2014, January 1). StudyFinance: Dividend Policy. Retrieved January 30, 2015, from http://www.studyfinance.com/lessons/dividends/?page=02

 

Jean-Paul Décamps, & Villeneuve, S. (2007). Optimal dividend policy and growth option. Finance and Stochastics, 11(1), 3. doi:http://dx.doi.org/10.1007/s00780-006-0027-z

 

Ming, J., & Xu, M. (2013, Sep 17). Does a dividend policy matter? The Business Times Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/1433025886?accountid=40195

 

New tax law triggers need for fresh analysis of dividend policy. (2003). IOMA's Report on Financial Analysis, Planning & Reporting,03(8), 1-1,12+. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/203152628?accountid=40195

Topic #2: Cost of Going Public

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Going Public

            Companies are responsible for a myriad of decisions daily that ultimately shape the direction of the company.  One such decision is determining whether or not to remain a private company or to go public.  The answer to this decision has many factors that need to be taken into consideration.  There are many advantages to going public which is why companies go through with it although there are also many disadvantages.  One such disadvantage of going public is the cost.  There are many different expenses incurred and these will be explained below.  But first let’s look at the many advantages companies can experience when transitioning from a private company to a public company.

Advantages

            First and foremost, if a company decides to go public it will result in increased capital (Lewis & Kappes, 2015).  The first time a company offers its stock is called an initial public offering (IPO).  This is used to generate funding that does not need to be paid back (JamieD, 2011).  It is sometimes used as an alternative to borrowing money from a bank.  Companies can also generate more money after the IPO by issuing additional stock in a secondary offering (JamieD, 2011).  So, going public helps to generate a large sum of money for the company.  Additionally, by going public the company becomes more well known and gains credibility.  Even just by hearing about a company going public raises awareness of the company and may cause increased sales and profits.  Google went public ten years ago in 2004 and has seen a rise in their stock by 1,294% (Russolillo, 2014).  The benefits can be seen in many other companies such as Apple, which has seen a rise in stock by 4,419.6%, Monster Beverage Corp. with a rise of 6,569.68% and Keurig Green Mountain Inc. with a gain of 7,729.25% (Russolillo, 2014).  Each of these companies have gained great benefits from going public, however there are some disadvantages as every company does not benefit from going public. 

Disadvantages

            The biggest disadvantage of holding an IPO and becoming public is the cost.  It can typically cost a company thousands to millions of dollars to become public however; I will cover each of the costs in detail later on.  Another disadvantage of holding an IPO is that it is very time consuming.  The whole process takes months to put together everything needed from retaining a law firm to finding an investment bank responsible for handling the underwriting.  The underwriters are accountable for setting the price of the stock as well as lining up investors that will help make the IPO successful on Wall Street.  All of the time needed to line everything up for the IPO can potentially distract business leaders from running the company and be detrimental to their growth.  Additionally, once a company becomes public they have less privacy and may have to operate under greater scrutiny.  They have to comply with the reporting requirements under the Exchange Act of 1934 (Lewis & Kappes, 2015).  This alone can add to cost of being a public company.  There is an initial large cost generated by the preparation of the IPO and the IPO itself but then there are maintenance costs as well.  The pressures to succeed are greater because the shareholders want to see increased profits since they have a stake in the company.  So what are the main costs of going public?

The Cost of Going Public

            There are many costs to going public such as the preparation required before hand along with the costs associated with the IPO.  There are six categories of costs including gross spread or underwriting discount, other direct expenses, indirect expenses, abnormal returns, underpricing, and the green shoe option (Ross & Westerfield & Jaffe, 2013).   The gross spread is, “The fraction of the gross proceeds of an underwritten securities offering that is paid as compensation to the underwriter of the offering” (Nasdaq, n.d.).  The mean gross fees underwriters take in the United States is 6.45% (Raghavan, 2010).  At first glance this does not seem like a large percentage but when an IPO is expected to bring in billions of dollars this 6.45% can mean companies are paying millions to the underwriters to be able to go public.  Some of the other direct expenses include filing fees, legal fees and taxes (Ross & Westerfield & Jaffe, 2013).   Even if each of the individual fees do not seem like a lot, they all add up to thousands if not millions.  It must not be forgotten that a large amount of time is required to prepare everything for the IPO.  This takes away from the productivity of the company for a period of time.  Another cost of going public is abnormal returns.  When a company announces its intent to issue securities the price of the stock typically drops 3-4% (Ross & Westerfield & Jaffe, 2013).   However, financial research has shown that about 75% of IPOs increase on their first day of trading with only 16% falling (Jagerson, 2013).  Even though less than the majority of companies see a fall in their stock prices it is still a cost that should be considered.  Underpricing is another concern as a cost to the company.  Once the stocks are issued for the IPO the prices typically rise.  This is at a cost to the company because that means that the stocks are being sold at a price less than it’s worth.  The last category of costs is called the Green Shoe option.  This allows the underwriters to buy additional shares to cover overallotments.  Most recently JP Morgan decided to exercise this option when they purchased 3,333,333 newly issued shares from the Tele Columbus company (telecompaper, 2015). 

            Going public requires a lot of thought and planning by a company.  There are many advantages and disadvantages to having an initial public offering.  Companies can gain a large capital from the IPO but at the expense of a lot of different costs.  Going public can be detrimental to some companies however, if planned correctly companies can reap great benefits by selling stock in an initial public offering.

           

 

References

Jagerson, J. (Aug 2013). In How IPOS Work and What Can Go Wrong.  Retrieved Feb. 2, 2015 from http://research.scottrade.com/public/knowledgecenter/knowhownews/intheknow.asp?nlid=c2b0fa5353fb42b88fe3d6b52b2de7de

JamieD. (10 Feb. 2011). In Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company. Retrieved Feb. 2, 2015 from https://www.sba.gov/blogs/should-your-small-business-go-public-consider-benefits-and-risks-becoming-publicly-traded

Lewis & Kappes. (2015). In The Advantages and Disadvantages of Going Public. Retrieved Feb. 2, 2015 from http://www.lewis-kappes.com/CM/FSDP/PracticeCenter/Securities/Securities--Business-Focus.asp?focus=topic&id=3

Nasdaq. (n.d.). In Gross Spread. Retrieved Feb. 2, 2015 from http://www.nasdaq.com/investing/glossary/g/gross-spread

Raghavan, A. (30 Dec. 2010). In High I.P.O. Fees Weigh on U.S. Firms, Study Finds. Retrieved Feb. 2, 2015 from http://dealbook.nytimes.com/2010/12/30/high-i-p-o-fees-weigh-on-u-s-firms-study-finds/?_r=0

Ross, S. A. and Westerfield, R. W. and Jaffe, J. (2013). Corporate finance. New York, NY: McGraw-Hill/Irwin.

Russolillo, S. (19 Aug. 2014). In Google’s IPO, 10 Years Later: Just 10 Stocks Beat It. Retrieved Feb. 2, 2015 from http://blogs.wsj.com/moneybeat/2014/08/19/googles-ipo-10-years-later-just-10-stocks-beat-it/

Telecom. (2 Feb. 2015). In JP Morgan exercises greenshoe option on Tele Columbus shares from http://www.telecompaper.com/news/jp-morgan-exercises-greenshoe-option-on-tele-columbus-shares--1062714

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Topic #3: Raising Capital

In simple words, raising capital refers to arranging new capital for the business. Whether you've been in business one week or five years, an infusion of funds is always welcome (Entrepreneur, n. d.). There are certain ways of raising capital but a careful analysis is required to choose the most suitable way. Generally, small businessmen like to invest their saved money into their business but then what will happen if businessman does not have sufficient amount of capital to invest in his business? In this paper, we will study about different ways by which capital can be raised or arranged.

Ways to Raise Capital

There are number of ways to raise capital for the business. However, the choice of way depends upon number of factors like growth and profitability of the business, choice of owner, time period, form of business organization and more. Some of the ways are discussed as under:

Past –Savings or Using own Funds: It is often seen that a new businessman does not start his business entirely on the basis of outside capital only. At first he collects his own saving and raises some part from outside. Thus, investing savings is one of the popular ways to raise capital which is adopted by most of the businessman especially small scale. The main benefit using this source is that the businessman will not be liable to pay any interest and he will be free from pressure of repaying the funds.

            Raising loans from Family and Relatives: This is the first option which comes to mind, if a person does not have sufficient funds to invest in a business. In 2010, 5% of U.S. adults polled said they had provided funding to someone starting a business in the past three years, according to a survey by the Global Entrepreneurship Monitor, a research consortium which includes Babson College (Gunn, 2011). Investors and other lenders lend money on the basis of profitability of the business. But the problem arises when the business is not working well. In this case, businessman can convince his family members or relative to lend the money.

            Generally, both these options-using own funds and raising loans from family and relatives are used by sole proprietors and partnership firms because they have limited opportunities of raising capital.

            Loan from Angel Investors or Private Lenders: There are many lenders in the market which lend their money at some specified rate of interest. Taking loan from these people does not require much legal formalities. The people who are in urgent need of cash often visit these lenders. Further, generally they charge higher rate of interest.

Raising Loans from Banks and Financial Institutions: A businessman can also raise capital by taking loan from banks and financial institutions. Of course, this depends on your credit profile and the type of collateral you can offer up (Hendricks, 2014).  In other words, it is the time when credit scores can be utilized. To take loan from bank, one needs to have a good business proposal which a bank likes and can offer a loan. Such loans are also offered by governments of many countries to businessmen who want to start something on their own. Many banks also offer such business loans to forthcoming business entrepreneurs. Another way is to take a personal loan from a bank which will have comparatively lower interest rates than a bank loan. While raising money from bank, one has to mortgage his property.  In case non-recovery of loan, the property is ceased by the bank and taken by the banks.

Raising Capital through Joint Ventures: If a business can demonstrate that it has a strong reputation and a potential quantifiable profit, then it will be easier to arrange capital through joint venture. It is necessary to analyze whether the venture capital firm shares the same goals or not. Generally, ventures do not invest in new business, along with the companies they also invest in individuals too. Further, a decent place to search for while searching for approaches to raise capital is your office – your own representatives. In the event that you have a dedicated workforce that truly has confidence in the organizational objectives, then you may even find a representative who would help you financing and turn into a potential investor.

Issue of Shares: It is widely used option for raising funds for companies. In this, companies sell shares to obtain money. “Selling securities means that all purchasers become part owners of the company and have equity in the company. They, like the founder are interested in the survival and profitability of the company” (Caribbean Community Secretariat, 2011). For instance, if a person purchased 100 shares of $100 each ($10,000), then he will be owner of that part in the company. It means his liability will be limited for that amount only.  Further, these shares are transferable from one person to another. There are two types of shares; they are equity and preference. Equity shareholders are the owners of the company and can participate in the operations of the business where preference shareholders do not have right to participate in the operations of the business and get dividend at some fixed percentage. “Capital equity is more risky than any other type of funding. There are tons of legal points that surround this project, especially if it’s for budding business enterprises “(Venture Giant, 2011).

Apart from these, companies do have opportunity to raise capital by issuing debentures, bonds and more. All in all, it can be said that raising capital is one of the very important aspect of the business. Further it is equally important for the businessman to invest the raised capital in a best manner so that business can get maximum returns. So before you act, deliberate on the ways to raise capital best suited for your business, make sure you budget right, adhere to the timelines, analyze the method of investment, formulate a backup plan, buffer for contingencies and garner more value from your investment (Venture Giant, 2011).

References:

Caribbean Community (CARICOM) Secretariat (2011). How does a company raise capital? Retrieved from

http://www.caricom.org/jsp/community/regional_issues/company_raise_v2.jsp?menu=community

Entrepreneur (n. d.). How to raise money for your business. Retrieved from

            http://www.entrepreneur.com/howto/raisemoney/

Gunn, E. P. (2011, May 24). Five Tips for Asking Friends and Family for Funding. Retrieved from Entrepreneur

 http://www.entrepreneur.com/article/219693

Hendricks, D. (2014, July 16). The 5 best ways to raise capital. Forbes Magazine. Retrieved from

            http://www.forbes.com/sites/drewhendricks/2014/07/16/the-5-best-ways-to-raise-capital/

Venture Giant (2011). Different ways to raise capital. Retrieved from

            http://www.raise-capital.co.uk/ways-to-raise-capital.php

Topic 4: Inventory Management

Inventory management is a process by which companies manage their inflow and outflow of materials and products. There are numerous inventory management systems that are available, and depending on the type of business, one or more system may be utilized. These systems create a method of communication with suppliers, allow for the creation of invoices, purchase orders, receipts, and related accounting (Guillen, 2007). 

The most important aspect of inventory management is the relationship with suppliers. Having reliable suppliers that have good communication and are willing to adjust when necessary to the needs of the business is important. Many suppliers can also provide assistance in managing inventory if they have access to a company’s inventory information. Often times, the supplier can adjust purchases based upon trends and the needs of the company which prevents the company from situations where there is too little or too much product. When a company produces products or services that require several suppliers, it is necessary that the inventory management system that is in place coordinates all the materials on hand and in transit so that all the materials required for operation is balanced (Guillen, 2007). Since suppliers are likely to deliver at different times, it is necessary to create “lead time reports” so that orders are placed in a proper time frame where deliveries are in sync. 

In addition to ensuring that there is sufficient inventory for operation, the company must also adjust for times when inventory is too high. Holding too much inventory increases overhead costs and decreases available cash the company may need to pay their obligations. Therefore, managing inventory effectively helps companies keep their budgets on track and enables them to efficiently manage their operating capital (Buzacott, 2004). In order to do so, companies must have a good measure of how often their products sell. This gives the company and the suppliers estimations of inventory needs and can adjust based upon trends. Monitoring turnaround times from production to customer delivery and payment can provide information on how long cash will be tied up and when new product will be required. 

Strong inventory management is a key characteristic of successful businesses who's operations require continuous supply of product. Keeping just the minimum inventories necessary allows companies to free up cash for other opportunities like purchasing equipment or making new investments (Rein, 2010). The lower the inventory on hand at any given time, the lower the carrying costs a company absorbs (Rein, 2010). Carrying costs include things like storing materials, insurance, interest costs associated with purchasing the product. Striking a balance between keeping inventory costs low and efficiently meeting demands for your customers is key. Cooperation between financial managers, inventory managers, and sales force is beneficial to monitoring how well this lean practice is being observed (Guillen, 2007). Ideal inventory management software is one that can track trends in movement of product as well as bridge the gap between inventory budgets and the overall financial picture of the business (Buzacott, 2004). 

When implementing an inventory management system, a company should consider a method that takes into account the financial state of the business as well as the operational needs. There are models that incorporate “asset-based financing” into production decisions (Buzacott, 2004). Instead of setting pre-determined budgets for inventory, like traditional systems, there are models now that function to monitor “available cash in each period as a function of assets and liabilities” that can be continually updated in accordance with trends in production (Buzacott, 2004). Some of these newer systems also adjust for different interest rates on cash and loans, which provides a more accurate financial picture since the cost of cash financed may be significantly higher than using cash on hand. Management systems like these that consider both production and financing as a coordinated decision making process are particularly valuable to new businesses where growth is restricted by limited capital and hindered by loan financing (Rein, 2010). Companies requiring financing for purchase of inventory will benefit from a model that factors in their fluctuations in cash flow to their inventory management practices since lenders may evaluate their practices when determining financing (Rein, 2010). When companies use inventory as collateral for financing, this adds another layer of difficulty to combining financial position to inventory accounting. Balance sheets are often not a true reflection of available cash in these cases. Therefore, it is very easy to get into trouble with lenders. A company’s inventory management system is only reliable if its underlying data reporting is reliable (Rein, 2010). 

Businesses can end up with their operating decisions limited by their lack of ability to access enough loans. For example, a bookstore chain had to return a large number of books - approximately $25M in inventory in addition to it’s regular returns in an attempt to improve inventory levels and liquidity. The bookstore was having liquidity issues because of a stipulation from it’s lender that restricted borrowing to $25M if the company’s net worth were under $70M. The liquidity issues and the poor performance of it’s newer stores had forced the company to halt expansion plans (Buzacott, 2004). This example illustrates just how the amount of money a company can access to purchase inventory (asset-based financing) is linked to inventory decisions, and these decisions are limited by available funds. Therefore, there are direct financial constraints that factor into making inventory management decisions. Though there has been a long history of models that address business finance and operational management independently, there has been suggestions of new models that focus on the relationship between business finance and production through systems that control inventory flows and cash flows together (Buzacott, 2004). This seems to be a model that should be further explored to enhance company’s ability to utilize cash flow more successfully. 

References:

Buzacott, J. A., & Zhang, R. Q. (2004). Inventory management with asset-based financing. Management Science, 50(9), 1274-1292.

Guillen, G., Badell, M., & Puigjaner, L. (2007). A holistic framework for short-term supply chain management integrating production and corporate financial planning. International Journal of Production Economics, 106(1), 288-306.

Rein, Howard,C.P.A., C.F.E., & Costello, J., C.P.A. (2010). How do your borrowers' inventory practices stack up. The Secured Lender, 66(1), 34-36. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/224916673?accountid=40195

Topic 5: Credit Policy

            In managing a business it is a good idea to have a policy on almost all aspects of what goes on. Of course in the real world not all situations will fit a policy, but hopefully the policy can be written to fit the needs of the common situations. One of the policies that need to be addressed is a credit policy. When writing a credit policy the first thing a firm needs to decide is whether or not to offer its customers credit, the easiest policy being to not offer credit. If the firm decides to offer credit the next three things it needs to address is terms of sale, credit analysis, and collection policy.

            The terms of sale portion of the credit policy would address whether or not a firm accepts credit, the credit period, cash discounts, discount period, and the type of credit instrument. The credit period would be the amount of time until the balance is due. The cash discount would be an amount of the total amount owed if the customer paid before the due date. The time the customer has to pay this amount with the discount would be the discount period. The credit instrument would be the document that secured the customer to the amount owing. It would usually be some time of document that the customer agrees to sign that makes them liable for the amount owing. Once a firm has the terms of sale decided upon they could offer credit to any of its customers.

            The next choice the firm would have to make would be to decide on how it will handle its credit analysis. For example an individual getting a credit card or a loan usually has to have a somewhat good credit score. As firms obviously want to receive its revenues it would not want to extend credit to those that would not be likely to pay it back. A firm could decide to run a credit check on each of its customers that request a line of credit. The firm could also use a number of other devices and procedures to calculate the probability of repayment. Some firms may keep it simple and only extend credit to customers who have purchased from the firm for a year or more. Other firms may have more drawn out and detailed procedures for credit analysis.

            The collection policy is pretty straightforward in that it is the policy the firm has on how it will collect the cash that is owed. If a customer’s cash payment is overdue how will the firm go about collecting the cash? The firm could choose to charge a service fee or interest rate on amounts overdue. They could also have a policy for how often to call a customer that is past due. Lastly a firm could choose to send all overdue credit to a collections agency.

            The important thing to remember when thinking about offering a credit policy is that the firm takes on the liability of its own revenue; the book refers to this as an investment in receivables. Too much investment in receivable could lead to the firm not having enough cash to meet its expenses. A company could have a million dollars in net income, but could still go under if that entire amount was in accounts receivables. That is why it is important for a firm to evaluate what kind of risks it can take when extending credit to its customers.

            Deciding on what credit policy to put into place depends upon the specific firm and its needs. Frederick Scherr in advanced Credit policy states “telling analysts to "maximize sales and minimize bad debt" is not good credit policy because these are conflicting objectives and there is a tradeoff between the two.” (Scherr, 2011) These could be conflicting objectives because the people you could be selling might not pay it back. A furniture store could sell out the entire store if they offered credit to anyone, but if they did do that it might become unlikely that they would actually see any cash from those sales. The furniture store would only end up incurring more expenses trying to collect from people they should not have loaned to in the first place.

            Credit policies are difficult to put into place. It can be complicated to figure out the needs of the firm and update policies when those needs change. What kind of policy needs to be put in place might seem like commonsense, but there can be complicated nuances. In an article on effective credit policies it states “Fully 85% of credit departments either don't have a written credit policy or haven't revised their policy within the past three years.” (CRF Experts, 2005) This just goes to show that a lot of businesses are unsure of the best policy to have and may be suffering because of it. If a policy is too strict the business may be missing out on potential sales. If the policy is too lax the business could be incurring even greater cost through collection.

            In an article by Dev Strischek he recommends differentiating credit policy and procedure. What he means is that the policy addresses issues in a broad sense. They are put into place with the ideal client in mind. It explains what the rules are for issuing credit. A procedure on the other hand is the step by step instructions on what to do with a customer that is given or asks for credit. Until the procedures and policy are in order it would be very risky for a firm to offer credit to its customers.

           

 

           

           

References

CRF expert outlines essentials of writing an effective credit policy. (2005). IOMA's Report on Managing Credit, Receivables & Collections, 05(09), 1-1,6+. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/200134411?accountid=40195

Ross, S. A., Westerfield, W. R., & Jaffe, J. (2013). Corporate Finance (10th ed.). New York: McGraw-Hill/Irwin.

Scherr, F. (2011). Advanced credit policy. Business Credit, 113(2), 4-5. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/849556874?accountid=40195

Strischek, D. (2008). Writing a credit policy much to do about something. The RMA Journal, 90(5), 60-62,64-65,9. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/209781356?accountid=40195