CCM CCM Credit Policy & Procedures 1 — Questions and Answers
Question 1: What is the primary purpose of a written credit policy in an organization?
- To reduce the number of customers
- To establish consistent guidelines for extending credit (Correct answer)
- To eliminate all credit risk
- To replace the credit manager
Correct answer: To establish consistent guidelines for extending credit
A written credit policy provides consistent guidelines ensuring all credit decisions align with company objectives and risk tolerance.
Question 2: Which element is MOST critical when setting customer credit limits?
- Customer's geographic location
- Customer's payment history and financial strength (Correct answer)
- Customer's number of employees
- Customer's years in business only
Correct answer: Customer's payment history and financial strength
Payment history and financial strength are the most critical factors because they directly reflect the customer's ability and willingness to pay.
Question 3: A credit hold is BEST used when:
- A new order is placed by any customer
- A customer's account is significantly past due (Correct answer)
- A customer requests a higher credit limit
- Sales volume decreases
Correct answer: A customer's account is significantly past due
A credit hold is placed on significantly past-due accounts to stop further exposure until the delinquency is resolved.
Question 4: Which metric is most commonly used to evaluate the effectiveness of a credit department?
- Number of credit applications denied
- Days Sales Outstanding (DSO) (Correct answer)
- Total number of customers
- Sales growth percentage
Correct answer: Days Sales Outstanding (DSO)
DSO measures how quickly a company collects receivables, making it the primary metric for evaluating credit department effectiveness.
Question 5: When a credit policy review is recommended, what should trigger an immediate update?
- A change in office location
- Significant changes in economic conditions or business strategy (Correct answer)
- Hiring of new sales staff
- Annual calendar schedule only
Correct answer: Significant changes in economic conditions or business strategy
Credit policies must be updated immediately when economic conditions or business strategy shift to ensure risk parameters remain appropriate.
Question 6: What does a tiered credit approval process typically involve?
- Approving all credit requests at the same level
- Delegating approval authority based on dollar amount thresholds (Correct answer)
- Requiring board approval for all credit decisions
- Outsourcing all credit approvals
Correct answer: Delegating approval authority based on dollar amount thresholds
A tiered process assigns different approval authority levels based on credit limit size, improving efficiency while maintaining controls.
CCM CCM Credit Policy & Procedures 1
What is the primary purpose of a written credit policy in an organization?