Fundamentals of Financial Management, Third Edition

10.2 CREDIT POLICY

10.2.1 Optimising the Term of Credit

Whether the credit policy is tight or liberal depends upon what the term of the credit is. A credit term with longer period for making payments is supposed to be liberal. For example, a net 60 credit term is more liberal than a net 30 credit term. It also depends on whether the term includes any discount if payment is made by a section of the customers at any time earlier than the stipulated date. For example, a credit term of 2/10 net 30 means that the amount is to be paid within 30 days, but a customer will be entitled to a 2% discount if he or she pays the amount within 10 days.

Maximising the Value of the Firm: A firm cannot go on liberalising its credit policy indefinitely. This is ...