MORT-TF.RM mp.-LVC/.VC 503
bnmt of offsetting the credit policies «)f its sales. Or, on occasion, both labor
and material?! arc financed by bank loans. As was shown in an earlier
chapter, however, at Hst a purr of current operation? should be financed by
permanent investment. Wh« never purchase;? and sales are made on credit,
there is always a ri.-k t«i be uiidfTtaken by the creditor. This ri>k i> compen-
sated for by higher prices «m term- than for cash. This price differential is
generally larger than the interest on bunk loan?. Corporations with lines of
bank credit available to them will do well to buy for cash, take the discount?,
and finance the purchases, if necessary, by bank loans..
Credit and Production.—Sales and collections may be highly seasonal.
The nature of the product may dictate this. Seasonal production, with an
alternation of peaks and valleys, is usually more expensive than regularized
production. If the nature of the product permits, production, even of
seasonal goods, may be spread out tind regularized through the aid of credit,
Reduced costs may be reflected in reduced prices. These may be offered as
special inducements to attract advance commitments, which in turn reduce
the risks taken by the corporation that operate? in off seasons and stores
its products until the buying season arrives.
Products requiring long production periods, whether manufactured on
order or for stock, require financing until they can be produced, sold, and
collected for. Products of this kind usually represent producers' rather than
consumers' goods. The purchaser in turn may depend upon their use to
liquidate much of their cost to him. The credit policies used to dispose of
such products may involve financial programs quite different from other
types of business operations.
Credit and Markup Margins.—Where credit lows occur, someone must
pay the fiddler. The corporation that suffers them cannot long remain in
business unless it can pass the loss along. For that reason, profit margins
usually anticipate the proportion of losses to be expected and contain a
measure of insurance against them. Markup margins are greater when
losses from bad debts and from returned goods are greater, and vice versa.
In the absence of effective competition, large profit margins may sen'e as a
cloak to cover inefficient collection practices of the seller. It is not a
sufficient answer to advise corporations never to grant credit where large risk
is present. The nature of some industries is such that goods can be disposed
of in no other way. The ultimate test is the willingness of consumers to buy
such products in sufficient quantities to justify their continued production.
Credit and Financial Limitations.—The needs of the purchaser form one
wheel of the credit bicycle; the ability of the seller to supply those needs is
the other. It may be necessary for some corporations to reject sound credit
risks because their own financial limitations cannot stand the strain of even
small losses. It is easy for a corporation to sell itself out of business—on
such liberal credit terms that it has so much capital tied up in accounts