Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250



Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

What are the four key factors in a firm's credit policy? How would a relaxed policy differ from a restrictive policy? Give examples of how the four factors might differ between the two policies. How would the relaxed versus the restrictive policy affect sales? Profits?

Summary Introduction

To explain: The key factors of credit policy, the difference between relaxed and restrictive policy with examples in relevance of factors of credit policy. The effect of the policy on sales and profit.


Credit Policy:

It refers to the policy which states interest rate and duration that are relevant to the funds raised on credit. The company needs to raise funds on credit, when available funds with company are not sufficient.


The key factors of credit policy are mentioned below:

  • Credit period
  • Discounts
  • Credit standards
  • Collection policy

Difference between relaxed policy and restrictive policy:

 Relaxed policyRestrictive policy
MeaningThe relaxed policy includes all contingencies and provisions (those events which may take place in future) to estimate the balance of current assets. The other name for this policy is conservative policy.This policy is an opposite of relaxed policy because it does not includes the contingencies and provisions to estimate the balance of current assets more aggressively. The other name for this policy is aggressive policy.



The credit period is longer in such policy.The credit period is shorter in such policy.
DiscountsThe customers enjoy higher discounts in relaxed policy.The customers get lowered discounts under this policy in comparison of relaxed policy.



The credit standards relevant to relaxed policy is generally of low level.The credit standards relevant to restrictive policy is generally of high level.



Under this policy, collection procedure is lenient, it means the borrower can get extra time to repay the amount...

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