Strategic Planning & Analysis Flashcards

Which financial ratio is most directly used to evaluate a customer's ability to meet short-term obligations in credit analysis?

Answer: Current ratio

The current ratio (current assets divided by current liabilities) directly measures a company's short-term liquidity and ability to meet near-term obligations.

A credit manager conducting a PEST analysis would categorize interest rate fluctuations under which factor?

Answer: Economic

Interest rate fluctuations are an economic factor in PEST analysis because they directly affect borrowing costs and macroeconomic conditions.

In strategic credit management, what does a 'days sales outstanding' (DSO) trend increasing over multiple quarters most likely indicate?

Answer: Deteriorating accounts receivable quality or collections performance

A rising DSO trend signals that customers are taking longer to pay, indicating weakening collection performance or deteriorating receivable quality.

When a credit department implements a portfolio segmentation strategy, the primary goal is to:

Answer: Allocate resources based on risk and profitability profiles

Portfolio segmentation allows credit managers to direct monitoring resources, credit limits, and terms to customer groups based on their relative risk and revenue contribution.

Which scenario best represents a reactive rather than proactive credit strategy?

Answer: Tightening credit terms only after a significant bad debt loss occurs

Reacting to credit losses after they occur is reactive; proactive strategy involves monitoring early warning signs and adjusting exposure before losses materialize.

A company's strategic plan calls for entering a new market segment with historically higher default rates. The credit manager should recommend:

Answer: Adjusting pricing and credit terms to compensate for additional risk

When entering higher-risk segments, pricing credit risk into terms (higher rates, shorter payment windows, or collateral) allows profitable participation while managing exposure.

In a strategic credit planning session, scenario analysis is primarily used to:

Answer: Evaluate credit portfolio behavior under multiple possible future conditions

Scenario analysis tests how the credit portfolio would perform under different economic or business conditions, supporting better-informed strategic decisions.