FIN 3163 Unit 4 slides.pptx

 International Trade Finance UNIT 4 Cash Flow Management ◎ Projecting Cash Flow ◎ Operational Considerations for Managing Cash Flow ◎ Securing Financing ◎ Pursuing Collectio...

 International Trade Finance UNIT 4 Cash Flow Management ◎ Projecting Cash Flow ◎ Operational Considerations for Managing Cash Flow ◎ Securing Financing ◎ Pursuing Collection © 2017, 2020, 2021 FITT All Rights Reserved  Why Is This Important? Cash flow planning is one of the most important aspects of running any business, and it is particularly important for companies engaged in international trade. It can mean the difference between success and failure in the global market. If a company does not plan its cash flow appropriately, it risks running out of cash to pay its suppliers and employees, among other financial obligations. Appropriate cash flow planning is key to success, and is usually completed through budget preparation. © 2017, 2020, 2021 FITT All Rights Reserved  Why Is This Important? Budgeting takes into consideration the cash inflows and outflows a company should expect in an upcoming period based on its current contracts and anticipated business. Budget planning includes cash receipts, expected cash disbursements, and the calculated cash surplus (to be invested) or shortfall (to be borrowed). Although these are based on signed contracts, companies tend to face uncertainty in collections due to a variety of factors, including: Transmission delays Foreign exchange fluctuations Political risks Slow receivables © 2017, 2020, 2021 FITT All Rights Reserved  Projecting Cash Flow Knowing the Costs o Cash flow planning starts with preparation of forecasted income and an expense statement based on the anticipated sales over an upcoming 12- month period o A cash flow forecast is used to project cash inflows and outflows This compares monthly inflows with outflows, arriving at either a surplus or deficit – deficit amount to be covered by some form of financing – either external or internal. o When projecting the impact of a transaction on cash flow, a good place to start is with the cost calculations used to assess the transaction's viability. © 2017, 2020, 2021 FITT All Rights  Projecting Cash Flow Knowing the Costs o All of the costs in the export process must be considered. The timing – when costs are incurred and when they must be paid – will have a direct impact on cash flow. o To fully understand the impact of export costs on cash flow, it is useful to set them along a timeline that tracks where and when they are incurred and when they are due for payment. o These costs should be added to the company's domestic costing worksheet to help the exporter fully understand the cash flow implications of trading internationally. See Figure 4.1 – Export Cost Timeline © 2017, 2020, 2021 FITT All Rights  Export Cost Timeline FIGURE 4.1 © 2017, 2020, 2021 FITT All Rights Reserved  Projecting Cash Flow, Continued It is important to know which of these costs are the responsibility of the exporter and which ones are the responsibility of the importer. This can be easily determined by looking at the terms agreed upon during contract negotiations. The contract terms negotiated between the two rule determines the importer’s obligations and the exporter’s obligations, such as who pays the cost of transport, delivery and insurance. Let us look at the cost items and their typical payment terms in detail…… © 2017, 2020, 2021 FITT All Rights Reserved  Projecting Cash Flow, Continued Business Development Costs - Even before a deal is signed, there are various business development costs associated with making the sale. These may include travel, telephone and fax, promotional and marketing costs, legal fees, and possibly foreign agent’s fees. Most of these costs must be paid up front, regardless of when/if a deal generates revenues. These initial costs can impose a significant burden on the cash flow, which may make the need for financing even more urgent. Contract Negotiations - Once the importer shows interest in dealing with the exporter, both parties begin negotiating a firm contract. Depending on the complexity of the product, contract negotiations require input from many professionals. A lawyer may be required to help negotiate terms and conditions that secure each party in the event of contract cancellation, non- performance and non-payment, among many other possible scenarios. The time invested during this time is at the cost of each company with no compensation other than the hope that the contract with bring fruitful benefits to each company. © 2017, 2020, 2021 FITT All Rights Reserved  Projecting Cash Flow, Continued Manufacturing Cost Per Unit - In most cases, these costs are the same as those for domestic transactions, except where production is modified to meet specific foreign requirements. Labelling - This is one of the up-front costs incurred in exporting. If it is done in-house, special print runs must be performed and adjustments must be made to machinery. For many overseas markets, label information must be translated. If both translation and printing are contracted out, the exporter can expect that payment for these services will be due within 30 to 60 days after the order has been completed. Packing - Shipments must be prepared and packed for international transportation. Many countries have strict regulations. The packing could be done in-house or by an external supplier, such a s freight forwarder. If done in-house, the exporting firm may have to purchase materials, such as crates, boards or Styrofoam. These materials will need to be paid for within 30 to 60 days of delivery. If outsourced, timing of payment to external supplier would depend on credit terms agreed upon. © 2017, 2020, 2021 FITT All Rights Reserved  Projecting Cash Flow, Continued Forwarding Agents Fees - The forwarding agent's fees cover activities such as preparing documents, securing insurance and arranging for transportation. These fees are usually payable in 30 to 60 days from the time the shipment is loaded onto an international carrier. The timing of payment may be negotiable, but the negotiation must be done before the transaction occurs. Export Commissions – These are earned upon signing of an export transaction, but payment terms may be negotiable. The exporting company should try to move the due date for payment of commissions either close to or past the date on which it expects to receive payment from the importer. Shipping and Storage Costs - The shipping process entails many costs, payable to a wide variety of service providers. Freight forwarders, domestic carriers, port authorities, and international carriers may all perform services requiring payment. As suppliers of shipping services are familiar with the realities of international trade, they may agree to payment terms that are common among domestic suppliers. © 2017, 2020, 2021 FITT All Rights Reserved  Projecting Cash Flow, Continued Cargo Insurance - This cost is payable within 30 to 60 days of shipment. Shippers may offer extended cargo insurance as part of their service, and may thus accord extended payment terms for it. Otherwise, this cost must be factored into a transaction as being payable before full funds are received for the deliverable. Customs and Clearance Fees – These are due immediately on arrival of the shipment in the destination country. If a customs broker is employed to clear the goods, those fees will also be added to the costs. If the contract specifies that the exporting firm is responsible for this part of the transaction, the firm will need cash on hand to cover these costs before the goods can be landed and delivered to their destination. © 2017, 2020, 2021 FITT All Rights Reserved  Key Factors Affecting Cost and Cashflows FIGURE 4.2 © 2017, 2020, 2021 FITT All Rights Reserved  Key Factors Affecting Cost and Timing of Cashflows Transmission Delays – This is an often-overlooked cost of doing business abroad, and can affect cash flow significantly. International shipments and the resulting payments are complex enough—delays can slow the transmission of funds from the paying country to the receiving country by a few days to several weeks. The cash budget must consider the possibility of technical or bureaucratic delays along the payment chain. The delays may be the result of improperly completed documentation or foreign administrative procedures. Exchange Controls - Resulting from the host government's attempt to conserve its hard currency reserves, exchange controls can prevent or restrict the payment of funds by the trading parties in a country. At times, export controls can result in all payments being stopped. This can have a devastating effect on a company's cash flow, and it should be insured against if the amounts involved are relatively large. © 2017, 2020, 2021 FITT All Rights Reserved  Key Factors Affecting Cost and Timing of Cashflows Political Risks - can also severely affect a company's cash flow. For instance, the revocation of an export or import permit frustrates performance under an international trade transaction. In the meantime, the exporter may have already covered the costs of arranging for the export sales, purchased supplies, fixed costs, paid salaries or prepared the products for shipment. Such a situation will have an obvious negative impact on cash flow. Delayed Collection of Receivables - The slower collection of international accounts receivable can strain a company's cash position. To avoid this, care must be taken to select appropriate payment terms for each foreign buyer, and to factor likely delays into the cash budget. If the receivables involved are substantial, the exporter should use export credit insurance or export receivables Technologydiscounting facilitiessystems - from processing to avoidtoexcess risk. web-accessed software and sophisticated reporting systems - is enabling the delivery of trade finance solutions across the life of a transaction, and doing so at an ever-faster pace, to keep up with the evolving needs and increasing expectations of importers and exporters. © 2017, 2020, 2021 FITT All Rights Reserved  Monthly Cash Flow Statement OVERVIEW s FIGURE 4.3 © 2017, 2020, 2021 FITT All Rights Reserved  Cash Flow Forecast © 2017, 2020, 2021 FITT All Rights Reserved FIGURE 4.3 © 2017, 2020, 2021 FITT All Rights FIGURE 4.3  FIGURE 4.3 © 2017, 2020, 2021 FITT All Rights Reserved  Operational Considerations for Managing Cash Flow The lifeblood of a business is cash flow Large receivables, the consummation of large deals or contracts, or the successful closure of a first international transaction are not as vital as healthy cash flow. SMEs, in particular, must not only be doing business (cash), but the revenue must be coming in (flow) within reasonable and predictable time frames. Relevant strategies required for managing debt, international transactions and blocked funds. © 2017, 2020, 2021 FITT All Rights Reserved  Operational Considerations for Managing Cash Flow – Relevant Strategies Creating Operational Systems Trade finance products, techniques and mechanisms exist to support effective management of cash flow for both importers and exporters across industries and across all segments, from SMEs to multinational organizations. SMEs will need a good cash flow to thrive and survive, while larger ventures will require the use of various financing options. Larger corporations and multinationals will need to focus on risk mitigation strategies to maintain a predictable cash flow. The core financing needs of a company can be linked to the size and stability of a business, as demonstrated by Figure 4.4. © 2017, 2020, 2021 FITT All Rights Reserved  Managing Cash Flow – Relevant Strategies Typical Financing Needs Small Larger Larger Businesse Commercial Corporations s With maturityand Ventures Frequent Multinationals comes a strong contract signing asset base and Contract signing stabilizes Cash cash flow self and cash flows flows from sufficiency. happen at operations. Need risk different times Need mitigation thus creating financing support from fluctuations in solutions to banks and cash flow from purchase ECAs to operations. So assets and prevent loss cash flow help with of future support is growth of revenues and needed for production ensure opertaions facility and capacity to large contract pay debts and signing sustain operations. © 2017, 2020, 2021 FITT All Rights Reserved  Managing Cash Flow – Relevant Strategies Typical Financing Needs Small Larger Businesse s Commercial Larger Ventures Corporations and Multinationals FIGURE 4.4 © 2017, 2020, 2021 FITT All Rights Reserved  Operational Steps to Improve Cash Flow Inefficient to conduct business successfully and issue an invoice for products or services duly rendered only to have to wait 30, 60 or 90 days or longer for funds to be credited to the company account. Operating expenses, debt servicing payments etc can force a company to abandon international expansion, or worse, push a business to the brink of bankruptcy. Therefore, creating an operational system to improve cash flow is of a great assistance to companies of all sizes. FIGURE 4.5 © 2017, 2020, 2021 FITT All Rights Reserved  Operational Steps to Improve Cash Flow Several techniques can help a company speed up the receipt of cash on the one hand and slow its outflow on the other. There are three operational steps which can assist companies to improve their cash flow FIGURE 4.5 © 2017, 2020, 2021 FITT All Rights Reserved  Operational Steps to Improve Cash Flow Companies should The sooner a Good collection Follow-up should begin prioritize work that is company policies can start about one week after needed to fulfill invoices for a with a company invoice is sent, to ensure contractual product or performing credit that the customer did obligations. service, the checks on each receive the invoice and Completing the work sooner the customer, and that all the accompanying ahead of schedule or invoice gets then using the information is acceptable. on schedule will paid. information Follow up on due date to allow the company to gleaned to set make sure invoice will be FIGURE 4.5 invoice right away. individual credit paid as and when due. © 2017, 2020, 2021 FITT All Rights Reserved limits for each  Operational Steps to Improve Cash Flow Controlling Cash Outflows A company can slow down cash outflows, or disbursements, by: Controlling petty cash and advances Using credit cards for employee expenses Paying taxes and bills only when due Taking every opportunity to pay for items such as insurance on an "as-you-go" basis rather than prepaying Flexible and longer terms of payment will probably best serve a company's interests, and will motivate it to keep inventories at a "just in time" or optimal level. FIGURE 4.5 © 2017, 2020, 2021 FITT All Rights Reserved  Strategies for Improving Collection TABLE 4.1 © 2017, 2020, 2021 FITT All Rights Reserved  Operational Considerations for Managing Cash Flow, Continued Debt Management o Maintain a balance between short-term debt and longer-term debt o Ensure money is borrowed with a repayment term that matches the use it was borrowed for o Ensure there is a comfort margin in cash flow to service outstanding debt o Explore different sources of capital, and approach those who are familiar with exporting company to get faster and more knowledgeable service Speeding International Transactions Pre-investment planning Managing, repatriating and maintaining blocked funds © 2017, 2020, 2021 FITT All Rights Reserved  Operational Considerations for Managing Cash Flow, Continued Pre-investment planning can provide some relief from exchange controls. Good planning limits a company’s net investment and develops trading relationships that permit the use of the blocked funds and the transferring of value back to the company's home country. There are several pre-investment planning strategies shown in Table 4.2 that can be used when investing within a foreign country that may invoke currency controls. © 2017, 2020, 2021 FITT All Rights Reserved  Investment Strategies to Manage Exchange Controls TABLE 4.2 © 2017, 2020, 2021 FITT All Rights Reserved  Operational Considerations for Managing Cash Flow, Continued Managing, Repatriating and Maintaining Blocked Funds Value Optimal management of blocked currency funds usually requires a degree of pre-investment planning and careful assessment of country risk A cash-rich local subsidiary can start to source locally and supply the parent company with the goods and services it requires Parallel loans can be negotiated, with the subsidiary agreeing to lend local currency to another company in the country in exchange for a similar loan to the parent company from the local borrower's affiliate Depending on how long exchange controls are envisaged to last for, company must invest the funds in short-term or longer-term © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing Overall, financial instruments that support international trade are versatile and provide a variety of options that are adaptable to a wide range of legal, political and geographic jurisdictions, business practices, and financing requirements. Trade finance instruments and processes have evolved in very specific ways to meet the business needs of a country or region. For example, the option to use certain trade finance instruments as collateral for straight loans is common in parts of Asia but is less common in the Americas and Europe. Also, financing can be provided to parties with recourse or without recourse. © 2017, 2020, 2021 FITT All Rights Reserved  Financing With and Without Recourse FIGURE 4.6 © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued The importer may wish to delay payment for long as possible, perhaps even until after the purchased goods have been sold, thereby generating the cash flow to pay for the purchase of the goods, while the exporter will typically seek payment as soon as it can be arranged. When choosing a payment method, a company must consider the following factors:  The nature of the transaction—whether it involves goods in stock, surplus inventory or special production per specifications.  The financial health and solvency of the partners to the transaction.  The risks involved and the conditions offered by competitors, © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Sample Financing Solution Various payment methods effectively become financing solutions in an international trade transactions. Payment in advance becomes a prime source of financing for the exporter, who may then use the importer’s money before shipping the goods. The funds may cover all or part of the production costs, as well as the costs of the materials needed to fill the order. In the case of open account terms, the importer takes delivery of the goods before paying for them, and may have sufficient time to sell them and generate the cash required to pay the exporter.. © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Factoring o Factoring house o Factoring with recourse o Factoring without recourse Forfaiting o Availizing o Purchasing bills of exchange drawn up by exporter o Promissory notes issued by importer o Similar instruments representing underlying debt at an all-fixed rate © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Factoring is basically selling receivables at a discount. Under this arrangement, a factoring company, often a bank, will take the credit risk of the invoice and pay the client a percentage up front. Factoring houses are companies that purchase domestic and foreign receivables and provide immediate payment of the invoice to the exporter at a discount. The receivables are discounted by an amount deemed to cover financing charges and risk. The purchase of the receivables, typically results in the factor assuming the risks and costs associated with collecting payment on the invoice. © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Factoring with recourse means that if the debtor does not pay, the Factoring without recourse company that issued the invoice must means that the factoring company reimburse the factor. This type of purchases the invoice from the transaction is considered a company that originally issued it contingent liability for the exporter, and assumes ownership of that given the remaining risk of default by invoice in the same way that it the importer, and the possibility that would take ownership of purchased the factor will return to claim the goods. When an invoice is funds. Factoring with recourse is most purchased on a non-recourse basis, common in international transactions the risk of collection passes from due to the risk, as well as the cost the issuer of the invoice to the and complexity of collecting funds factoring company. from a foreign importer. Advantages and disadvantages of factoring? © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Factoring provides two distinct advantages: It provides a solution to short-term cash flow problems. Approval is based on the importer’s credit rating rather than that of the exporter (i.e. the factor’s client). This can prove very helpful if the exporter has poor or unestablished credit, and needs to rely on the creditworthiness of the importer. Factoring may satisfy a need for cash flow, but is generally an expensive form of financing. To minimize costs, a company should move to a conventional line of credit as soon as possible. © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Forfaiting is a trade finance tool that involves selling medium-term foreign accounts receivable at a discount and on a without recourse basis. Like factoring, forfaiting removes much of the risk of non-payment, once the goods have been delivered to the importer. Forfaiting requires the assistance of a financial institution that acts as the forfaiter.This is a specialized firm or a bank that is prepared to offer non-recourse financing through the purchase of the medium-term receivables. In general, forfaiters typically work with companies that produce capital goods or engage in large projects where the customer may need long-term credit, for example from 180 days to seven years. The minimum transaction size for forfaiting is substantial, and can be in the range of $100,000 or more, depending on the institution Forfaiting can also take the following forms:  Purchase of a series of bills of exchange drawn up by the exporter  Promissory notes issued by the importer  Similar instruments representing an underlying debt at an all-in fixed rate © 2017, 2020, 2021 FITT All Rights Reserved  Securing Financing, Continued Avalizing is the process whereby the importer or importer’s bank attaches its stamp to a promissory note, in effect, guaranteeing payment. A bank will purchase avalized notes with no recourse to the exporter. In general, banks prefer to forfait notes thast have been avalized. The purchase of debt instruments in this manner (forfaiting) allows these assets to be removed from the balance sheet of the party to whom a debt is owed, and enables that party to monetize the debt instruments, creating liquidity and enhancing its balance sheet accordingly. © 2017, 2020, 2021 FITT All Rights Reserved  Pursuing Collection Even when the exporter has insurance to cover commercial credit risks, a default by an importer still requires time, effort and cost. The exporter must exhaust all reasonable means of obtaining payment before an insurance claim is honoured, and there is often a significant delay before the insurance payment is made. Where open account terms result in non-payment by the importer, the exporter must commence collection procedures. © 2017, 2020, 2021 FITT All Rights Reserved  Pursuing Collection Collections Procedures Communicate directly with importer or buyer first Negotiate with the importer if necessary If unsuccessful, use collection agency or legal firm Using External Parties Determine the total amount outstanding with supporting documents like invoices, proof of shipment, email communications etc © 2017, 2020, 2021 FITT All Rights Reserved  Pursuing Collection Insurance Policies: To mitigate risk, many exporters obtain an accounts receivable insurance (ARI) policy that helps secure their receivable in case of non-collection. In such a situation, the exporter should contact the insurance company to inform them of the situation and collaboratively identify the necessary steps moving forward. Collection Services: There are a multitude of collection agencies around the world that offer collection services. For example, Dun & Bradstreet offers worldwide collection services through its international affiliates. Fees are calculated as a © 2017, 2020, 2021 FITT All Rights Reserved