Free Online Course in International BusinessOpportunity Cost and, Alternate Use of CapitalConsider an example using a yearly sales figure of $12,000,000 or $33,000 per day. If you were receiving $33,000 in cash every day, you would have the opportunity to invest that money back into your business by making more product, investing in marketing, creating a new product line, purchasing new equipment, and investing in internal improvements for employees. However, if you extend credit to a buyer and agree to wait for that $33,000, you are missing the opportunity those investments could yield. Depending on the investment, the opportunity cost would vary. Therefore, the goal is to gain access to your $33,000 per day as soon as possible. One way to do this is to reduce your DSO (day’s sales outstanding). If you are currently receiving your daily $33,000 45 days after the sale and you reduce that 45 DSO to 30, you have just gained access to approximately $500,000 that you could invest sooner rather than later. Sooner could mean the difference between getting into the Chinese market or not.AdministrativeThere are several examples of administrative costs. Losing the ability to discount For example, if a seller sold to a buyer who was slow to pay, this seller’s cash flow is impacted. Assume this seller has purchased products and services from vendors as part of the business. These vendors may offer a 1% discount to the seller if paid in 10 days. If the buyer had paid on time, the seller could have paid the vendor in 10 days and therefore saved 1%. This is an example of the seller losing the ability to take the 1% discount offered by the vendor. Another discount example may include a transaction with a bank. Assume a seller has the option to prepay his loan with a bank. In return, the bank will discount the fees due the bank. Just as in the other example, if a buyer does not pay on time this seller might not have the money to prepay the loan and receive a discount. This seller has lost the opportunity to save costs associated with the loan. This is a crucial cost, especially in a high - interest period. Paying penalty/late charges In this situation, instead of missing out on a discount for not being able to pay earlier, a seller has to pay a penalty for being late. If this seller does not receive payment promptly from the buyer, this seller’s cash flow may be impacted; thus, there is the potential that suppliers will be paid (obligations) late and therefore incur charges. Another impact associated with late penalties is the possibility of restricted credit in the future. Increasing risk factors Uncollected debt is a cost to a business. The older the debt, the harder to collect. Maintaining administrative, bookkeeping functions Uncollected debt costs not only include the cost of the product sold and the lost profit but they also mean administrative costs ( letters, bill chasers, etc) that a seller might use to try and recoup some of the initial cost associated with the product. In other words, another impact of nonpayment is the need to chase the reluctant debtor.SummaryAn international credit manager must understand the principles of risk assessment since the extension of credit requires an analysis that determines the ability of the customer to pay. In addition, it is important to know credit risk features, not only the “basic” tools (the “5 C’s”) but the additional attributes of international risk (the 3 “C’s). As guardian of the accounts receivable investment, an international credit manager is the company representative who needs to know and to be able to describe how customer nonpayment impacts the company’s business.ResourcesCoface North America - www.coface - usa.comCredit Management Information & Support - www.creditworthy.com Web ResourcesCredit Reports Worldwide - www.creditreportsworld.comDun & Bradstreet – www.dnb.com Experian – www.experian.com FCIB - www.fcibglobal.com Graydon America - www.graydonamerica.com Hoovers – www.hoovers.com SJ Rundt & Associates - www.rundtsintelligence.com OECD – www.oecd.org US Dept of Commerce – International Company Profile – www.export.gov
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