Credit Policy Review
Companies with Loose Credit Policies May be In For a Rough Ride
As the economy recedes, many companies will find it necessary to loosen long-standing credit policies in an attempt to maintain growth targets. Companies with no credit policies or non-restrictive ones will have nothing to loosen.
Tighten credit standards during the good times and loosen them during the bad times is one of the oldest and most tested of all credit principles and practices. It's based on the sensible premise that when times are good, businesses can afford to be more selective in granting trade credit and terms to customers. When times are bad, however, selectivity is much more challenging in order to maintain growth levels from previous periods. This is particularly the case for publicly-traded companies, which tend to be more top-line focused than their privately-held counterparts.
Most economists agree that the U.S economy is headed for a recession. Real GDP, which is GDP adjusted for inflation, is expected to grow just .06% in the fourth quarter of 2007 after growing 4.9% in the third quarter, according to advance estimates from the U.S. Commerce Department. In 2007, real GDP increased 2.2% after increasing 2.9% in 2006.
As a result, those companies that have adhered to sound credit and accounting policies during the past six years of virtually unparalleled growth are now best positioned to maintain adequate growth and possibly even survive the lean times ahead.
