CCM Strategic Planning & Analysis 2 — Questions and Answers
Question 1: Which financial ratio is most directly used to evaluate a customer's ability to meet short-term obligations in credit analysis?
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Return on assets
- Gross profit margin
Correct answer: Current ratio
The current ratio (current assets divided by current liabilities) directly measures a company's short-term liquidity and ability to meet near-term obligations.
Question 2: A credit manager conducting a PEST analysis would categorize interest rate fluctuations under which factor?
- Political
- Economic (Correct answer)
- Social
- Technological
Correct answer: Economic
Interest rate fluctuations are an economic factor in PEST analysis because they directly affect borrowing costs and macroeconomic conditions.
Question 3: In strategic credit management, what does a 'days sales outstanding' (DSO) trend increasing over multiple quarters most likely indicate?
- Improving collection efficiency
- Deteriorating accounts receivable quality or collections performance (Correct answer)
- Higher credit sales volume only
- Stronger customer payment discipline
Correct answer: Deteriorating accounts receivable quality or collections performance
A rising DSO trend signals that customers are taking longer to pay, indicating weakening collection performance or deteriorating receivable quality.
Question 4: When a credit department implements a portfolio segmentation strategy, the primary goal is to:
- Reduce the number of customers
- Allocate resources based on risk and profitability profiles (Correct answer)
- Eliminate all high-risk accounts
- Standardize credit terms across all segments
Correct answer: Allocate resources based on risk and profitability profiles
Portfolio segmentation allows credit managers to direct monitoring resources, credit limits, and terms to customer groups based on their relative risk and revenue contribution.
Question 5: Which scenario best represents a reactive rather than proactive credit strategy?
- Setting credit limits based on forward-looking financial analysis
- Tightening credit terms only after a significant bad debt loss occurs (Correct answer)
- Conducting quarterly portfolio reviews to identify emerging risks
- Implementing early warning indicators for customer distress
Correct answer: Tightening credit terms only after a significant bad debt loss occurs
Reacting to credit losses after they occur is reactive; proactive strategy involves monitoring early warning signs and adjusting exposure before losses materialize.
Question 6: A company's strategic plan calls for entering a new market segment with historically higher default rates. The credit manager should recommend:
- Refusing all new customers from that segment
- Adjusting pricing and credit terms to compensate for additional risk (Correct answer)
- Accepting all accounts with standard terms to gain market share quickly
- Delegating credit decisions entirely to the sales team
Correct answer: Adjusting pricing and credit terms to compensate for additional risk
When entering higher-risk segments, pricing credit risk into terms (higher rates, shorter payment windows, or collateral) allows profitable participation while managing exposure.
Question 7: In a strategic credit planning session, scenario analysis is primarily used to:
- Determine the single most likely outcome for receivables performance
- Evaluate credit portfolio behavior under multiple possible future conditions (Correct answer)
- Replace the need for customer credit scoring
- Set the annual bad debt reserve at a fixed percentage
Correct answer: Evaluate credit portfolio behavior under multiple possible future conditions
Scenario analysis tests how the credit portfolio would perform under different economic or business conditions, supporting better-informed strategic decisions.
CCM Strategic Planning & Analysis 2
Which financial ratio is most directly used to evaluate a customer's ability to meet short-term obligations in credit analysis?