Why does a firm need Credit Policy ? How does the effectiveness of a credit policy recognized?

Of ineffective credit policy

The company will not succeed

Credit gives new opportunities to work

 

But be careful

Agree with all answers thank you

Credit policies help govern the lending or credit activities of an organization. There are different types of credit polices which can affect the efficiency and cash flow of an organization.

Your business credit policy should clearly outline the sources of data to be used when making a credit evaluation.

for a better receivable management, constant cash flow, planning our Debt Service Coverage, working capital management etc we need a defined credit policy. Through debtors turnover ratio, cash flow statement, bad debt analysis and working capital nalysis we recognized effectiveness of credit policy

Not only a firm but every firm who offer their goods on credit needs a credit policy in order to have a grip over its cash flow and also to make sure that its debtors don't get converted in to defaulters & ultimately the money to be received into bad debts. If this happens will lead to cash flow being dried up and eventually closure of firm. The effectiveness of credit policy can be recognised if the amount is recovered on time and the cash flow is not effected.

It is very important to have credit policy to recover money from people. After all, it is money. All want to take credit, but no one wants to return it.

Dear Colleague, I have read all the answers and they are close and correct.. However, Just I need to add an important answer getting from my experience that regarding the credit policy, if it is a correct and effective policy, it will grant good financing for the activities of the company with NO  COST, in the short-run. This, if we use it wisely, we can push money into the companies process with zero cost to run our business. Thank You

Firms stay acurrent about their payments and receivables via credit policy. Customers who were slow payers and fall behind or are unable to pay at all can be checked via credit policy.

A credit policy should include clearly outlined procedures and actions for when someone can't pay so you can immediately take steps to help your customer and protect your business.

Thus the significance of a credit policy is recognized when with the strength of a firm. It is not useful to have your money floating in your the market and you dont have enough to run the business or meet the administrative costs.

A business without a credit policy will suffer and the consequences can be extreme, such as going out of business.  Not to mention all the stress and frustration that goes along with a customer that is not paying you!

The credit policy protects the business’ cash.  

If you extend credit you need to protect your cash flow and your ability to pay your own bills on time to maintain your business credit.  

The Customer are also sale our product on credit base, So they need a stock on credit.

It is effective because it is opportunity to the customer who purchase on advance.

A credit policy is needed when things are not straight forward or not as good as they we wish them to be.