Divisions (Corporate)

A credit The privilege of buying goods, services or borrowing mone A medium of exchange; coined or stamped currency. y in return for a promise of future payment. executive who approves sales to a division of a corporation A corporation may be defined as a voluntary association of persons who are organized under state or federal law and recognized by the law as having a corporate name, and being entirely separate and distinct from the people who own it; having continuous li need not analyze the division as a separate entity. A division is an internal arrangement of a corporation made for the convenience of the company's management. It does not affect the legal status of the corporation.

The key point is this: A division is not a separate entity. A division is an artificial construct used by corporations to make the management of the business or the accounting process easier. A division is indistinguishable from the larger corporation from the perspective of the credit manager meaning that if the corporation is creditworthy the division is also creditworthy. It also means that if the corporation as a whole is not creditworthy, neither is the division --- irrespective of how well the division appears to be doing, and irrespective of how well the debts incurred by the division are being paid by the corporation at the time the credit department evaluates the credit risk Conditions in which the decision maker has to estimate the likelihood of certain outcomes. .

Reprinted with the permission of Credit Research Foundation.

Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.