Question

Scenario: At Company B, each salesperson is responsible for deciding on the correct credit policies for his or her customers. For example, the salesperson decides if Nexus should sell to the customer on credit and how high the credit limit should be. Salespeople receive a commission based on their sales. 1. Based on the scenario, identify the weakness. 2. What could go wrong? 3. Provide a recommendation to address/remove the control weakness

Answer 1

1.weakness :

the weakness is that the sales person have the controll to decide whether the credit should be granted to their customers and how much high/low the credit limit should be . the salesperson alone makes the decisions on credit policies and this is not a good indicator of control in the organisation as such important decisions can affect companys liquidity/financial position and should be taken based on proper guidelines .higher level management involvement or providing certain guidelines/rules on making credit policy is recommended in making such important decisions.

2.what could go wrong?

as the sales person have the controll in making credit policies to their customers and if there is no rules or guidelines provided to salespersons regarding the creditlimits or no higher level management is involved in making credit policies the salesperson may often end up with making the inapproriate credit policies to increase the sales . as the salesperson receives a commission based on their sales , there are chances that he/she may decide to grant credit policies to customers without considering their ability to payback credit . the salesperson may end up in making credit policies that are favourable to his/her commission without properly considering the customers credit position .

for example , the salesperson may decide to grant high credit limit to increase the sales so that he/she can  earn more commission even if he/she knew that the customers ability to payback the credit is not good. this situation will arise particulary if the sales person have some financial crisis . he/she may end up in deciding to increase sales and to grant high credit limit to customers that have poor credit position .this is not good for the company as the salesperson is acting in his/her personal interest and not in the best interest of the company .company's receivables balance will increase the company will suffer from its liquidity position .ultimately the company is going to suffer  if the customer is not paying back .

3. recommendation to remove the weakness :

company should consider providing certain rules and guidelines to the salespersons for making credit policy decisions to their customers .customers credit position should be given more importance in making credit policies than simply increasing the sales . higher level management involvement in making credit policies is also recommended .management should make sure that customers credit position is well evaluated before granting them credit limits .involving the higher level management in deciding the credit policies to customers will remove the biased and personal interest decisions and this way management can make sure that appropriate credit limits are given to customers according to their credit position .