Trade credit profitability measurement: application in a wholesalerdistributor case

Dany Rogers Silva, Karem Cristina de Sousa Ribeiro and Hsia Hua Sheng
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Dany Rogers Silva: Federal University of Uberlândia
Karem Cristina de Sousa Ribeiro: Federal University of Uberlândia
Hsia Hua Sheng: Getulio Vargas Foundation

Brazilian Business Review, 2011, vol. 8, issue 2, 22-41

Abstract: Credit extension evaluation is traditionally marked by customer’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 company’s gain instead of increasing the wealth of its owners.

Keywords: Trade credit; credit risk; theory of restrictions; RAROC. (search for similar items in EconPapers)
Date: 2011
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