44337444 credit evaluation
TRANSCRIPT
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Types of Errorsy Type I error
y Type II error
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Traditional Credit Analysisy Character
y Capacity
y Capitaly Collateral
y Conditions
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Strong Week
StrongWeek
Capacity
Capital
Strong
Capital
Week
Doughtful Risk
Week
Dangerous
Risk
WeekStrong
Should Credit
be Granted?
Character
Capacity
Capital
Strong
Capital
Week
Excellent risk
Strong
Fair risk
Strong
How much
credit should
be granted?
Week
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Numerical Credit Scoringy Identifyfactors relevantfor credit evaluation.
yAssign weightto these factors that reflectthere
relative importance.y Rate the customer on various factors, usinga suitable
rating scale.
y For eachfactor, multiplythe factor rating withthefactor weightto getfactor score.
yAdd allthe factor scores to get overallcustomer ratingindex.
y Based on the ratingindex, classifythe customer.
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Credit Rating Index
Factor Factor
weight
Rating Factor Score
5 4 3 2 1
Past payment 0.30 1.20
Net profit
margin
0.20 0.80
Current Ratio 0.20 0.60
Debt-equity
ratio
0.10 0.40
Return on
equity
0.20 1.00
Rating index 4.00
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Discriminant Analysis
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Risk Classification SchemeRisk Class Description
1 Customer with no risk ofdefault
2 Customer with negligible risk ofdefault
3 Customer withlittle risk ofdefault
4 Customer with some risk ofdefault
5 Customers with significant risk ofdefault
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Controls of Accounts Receivables
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Days Sales Outstandingy The days sales outstanding at a given time t maybe
defined as the ratio of accounts receivable outstanding
at that time to average daily sales figure during thepreceding 30 days, 60 days, 90days or some otherrelevant period.
Accounts receivables at time t
y DSOt = --------------------------------------
Average daily sales
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Sales and Receivables Data
Month Sales Receivables Month Sales Receivables
January 150 400 July 190 340
February 156 360 August 200 350
March 158 320 September 200 350
April 190 310 October 220 380
May 170 300 November 230 400
June 180 320 December 240 420
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Ageing ScheduleAge Group (in days) Percent of Receivables
0-30 35
31-60 40
61-90 20
More than 90 5
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Collection Matrix
Percentage of Receivables
Collected During the
January
Sales
February
Sales
March
Sales
April
Sales
May
Sales
June
Sales
Month of sales 13 14 15 12 10 9
First following month 42 35 40 40 36 35
Second following month 33 40 21 24 26 26
Third following month 12 11 24 19 24 25
Fourth following month - - - 5 4 5