credit standards (ii) credit term (iii) collection period/policy.
The implication of the above policy are many, for instance, it will result to less bad debt
losses and cost of credit administration. But such a firm adopting the policy may not be able
to expend sales. That is, the profit sacrificed on lost sales may be more than the cost saved by
the firm on the contrary, if credit standards are loose, the firm may have large sales volume.
But the firm will have to carry large receivables (debtors). The cost of administering credit
and bad debts losses will also increase, thus, the choice of optimum credit standards involves
a trade-off between incremental return and incremental cost.Weston and Brigham (1986),
they enumerated the different types of cost associated with credit sales. Such as: (i) cost of
capital tied up in receivables (debtors), (ii) bad debts, (iii) higher investigation, (iv) collection
cost.