Trade credit profitability measurement: application in a wholesalerdistributor case
Credit extension evaluation is traditionally marked by customerâ€™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 wholesalerdistributor 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 companyâ€™s gain instead of increasing the wealth of its owners.
Volume (Year): 8 (2011)
Issue (Month): 2 (April)
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May.
- Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
- Bams, Dennis & Lehnert, Thorsten & Wolff, Christian C.P., 2005.
"An evaluation framework for alternative VaR-models,"
Journal of International Money and Finance,
Elsevier, vol. 24(6), pages 944-958, October.
- Bams, Dennis & Lehnert, Thorsten & Wolff, Christian C, 2002. "An Evaluation Framework for Alternative VaR Models," CEPR Discussion Papers 3403, C.E.P.R. Discussion Papers.
- Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
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