Abstract
Credit extension evaluation is traditionally marked by customer’s credit risk and his business potential, normally, the profitability that limit utilization may provide the company is not considered. Therefore, the purpose of this paper is to present a trade credit extension profitability measurement model. The literature used for the theoretical basis involves the profitability concept of the Theory of Restrictions (TOC) and the performance measure calculation as in RAROC model. Proposed model was applied in a wholesaler-distributor company and its results have enabled concluding that credit extension to customers rated as low risk is not always the most profitable option. The decision of companies that only take into consideration credit risk and customer size to set the credit limit may entail incorrect decisions that are decreasing the company’s gain instead of increasing the wealth of its owners.
Highlights
The role of the financial manager is of fundamental importance in a context of constant changes, mainly in the functions of financial analysis and planning, investment decisions ad financing operations
For calculation of credit limit amount made available to customer, magnitude referentials are used: gross billing, share capital, purchase volume made on the market, etc; and credit risk
A breakeven point is achieved in which credit extension is adequate to customer’s risk profile and business potential
Summary
The role of the financial manager is of fundamental importance in a context of constant changes, mainly in the functions of financial analysis and planning, investment decisions ad financing operations. A breakeven point is achieved in which credit extension is adequate to customer’s risk profile and business potential Another important factor is that in these companies credit treatment as an investment is not always possible, mainly due to lack of tools. For credit extension performance measurement, RAROC methodology adoption is justified, which relates return on capital offered by a transaction, or a deal, at the investment risk rate, in other words, risk-adjusted return on capital (CROUHY, GALAI and MARK, 2004) With exclusion of this introduction, the article is structured on four sections: the second part will do the theoretical referential description; the purpose of part three will be to present proposed model; in the fourth section practical application of the model in a trade company of the wholesaler-distributor branch will be made; and section five will remain for final considerations of the paper
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