Is made to evaluate ability of the customers before making credit sales. A firm should determine procedure to evaluate applications for credit. On the basis of credit analysis only, a firm should decide to whom it will sell on credit & for how much amount. To sell on credit, all customers should not be treated a like. Each customer should be examined properly before selling goods on credit to him.
1) Trade Refrences:-
Firm can ask its customers to mention such names/firms with which they are dealing at present. This is an important source of credit information after receiving trade references, firm should get desired informations from them. Sometimes, customer provides names of wrong persons, therefore, before believing the informations received, the honesty and sincerity of traders should be examined.
2) Bank References:-
The bank of the customers can also provide important credit information’s about the customer. Such information’s are obtained by the firm with the help of its bank. Sometimes, firm ask customers to direct his bank to provide necessary information’s to it. The information’s like average bank balance of customer, loan given to customer, experience with customer etc can be obtained from bank of customer. Normally, bank does not give clear answer to firm’s question Therefore the firms should collect information’s from other sources.
3) Financial Statements:-
This is one of easiest way to obtain information’s about credit worthiness of prospective customers. If prospective customer is a public limited company, there may not be any difficulty in getting financial statements, in form of profit & loss Account & balance sheet. However, getting financial statements may be difficult in case of Private Limited companies of partnership firms.
4) Past Experience:-
This can be considered to be most reliable source of getting information about credit-worthiness of customer who is dealing with company presently. If there is the question of extending further credit to existing customer, the company should inevitable consider pas experience while dealing with that customer.