CCM Strategic Planning & Analysis 3 — Questions and Answers
Question 1: Which of the following best describes a 'credit policy' in the context of strategic planning?
- A list of customers who have defaulted
- A formal set of guidelines governing how credit is granted, monitored, and collected (Correct answer)
- The annual bad debt expense recorded in financial statements
- A legal contract between buyer and seller
Correct answer: A formal set of guidelines governing how credit is granted, monitored, and collected
A credit policy is a formal document that defines criteria for extending credit, credit limits, payment terms, and collection procedures, aligning credit operations with corporate strategy.
Question 2: A company experiencing rapid growth in credit sales but flat gross margin should strategically focus on:
- Expanding credit limits for all customers unconditionally
- Analyzing whether incremental credit sales are generating adequate net contribution after bad debt costs (Correct answer)
- Reporting higher revenue without adjusting credit risk monitoring
- Reducing the credit department headcount to cut costs
Correct answer: Analyzing whether incremental credit sales are generating adequate net contribution after bad debt costs
Rapid credit sales growth with flat margins requires ensuring that bad debt and financing costs don't erode net profitability on incremental sales.
Question 3: What is the primary purpose of establishing a credit risk appetite statement in strategic planning?
- To set the maximum annual sales target for the sales team
- To define the maximum level of credit risk the organization is willing to accept in pursuit of its objectives (Correct answer)
- To establish the minimum credit score required for all customers globally
- To document historical bad debt losses for audit purposes
Correct answer: To define the maximum level of credit risk the organization is willing to accept in pursuit of its objectives
A risk appetite statement formally communicates how much credit risk senior leadership accepts, guiding credit policy and limit-setting decisions across the organization.
Question 4: When benchmarking DSO against industry peers, a credit manager discovers the company's DSO is 15 days higher than the industry median. The most appropriate strategic response is to:
- Immediately sue all overdue customers
- Investigate root causes and develop an action plan to improve collections and/or tighten credit terms (Correct answer)
- Accept the gap as normal variation and take no action
- Reduce the credit department's collection targets
Correct answer: Investigate root causes and develop an action plan to improve collections and/or tighten credit terms
A DSO significantly above industry median warrants investigation into billing accuracy, collection effectiveness, and credit terms to identify and address the underlying drivers.
Question 5: In credit strategy, 'concentration risk' refers to:
- The risk that the credit department is understaffed
- Excessive credit exposure to a single customer, industry, or geographic region (Correct answer)
- The chance that all customers will pay early
- The risk of offering too many payment term options
Correct answer: Excessive credit exposure to a single customer, industry, or geographic region
Concentration risk arises when a large portion of the receivables portfolio is exposed to a single entity or correlated group, amplifying losses if that group defaults.
Question 6: Which metric would a credit manager most likely use to evaluate the effectiveness of a revised collections strategy after six months?
- Gross revenue growth
- Change in DSO and bad debt write-off rate compared to the prior period (Correct answer)
- Number of new customer accounts opened
- Total headcount in the credit department
Correct answer: Change in DSO and bad debt write-off rate compared to the prior period
DSO and bad debt write-off rate directly reflect collections effectiveness and receivables quality, making them the most relevant KPIs for evaluating a collections strategy change.
Question 7: A strategic credit analysis reveals that a key customer represents 30% of total receivables. The recommended action is to:
- Immediately terminate the relationship to eliminate risk
- Develop a concentration risk mitigation plan, such as credit insurance or payment plan restructuring (Correct answer)
- Double the credit limit to strengthen the relationship
- Transfer the account to the sales team for management
Correct answer: Develop a concentration risk mitigation plan, such as credit insurance or payment plan restructuring
High concentration in a single customer requires risk mitigation tools like credit insurance, security, or structured payment plans rather than abrupt termination or increased exposure.
CCM Strategic Planning & Analysis 3
Which of the following best describes a 'credit policy' in the context of strategic planning?