Chapter 3: Working Capital (Managing foreign receivables)

Question 1

What is a key consideration when managing foreign accounts receivable?

Answer 1

Credit periods tend to be longer due to transportation and paperwork delays

This can lead to larger investments in inventories and accounts receivable.

Question 2

Why is the bad debt risk higher in foreign accounts receivable?

Answer 2

The exporter must pursue debts in the debtor’s country, subject to local laws

This complicates the collection process.

Question 3

How can companies reduce their investment in foreign accounts receivable?

Answer 3

By insisting on earlier payment for goods

This can be achieved through reduced credit terms.

Question 4

What is one method of obtaining cash upfront for foreign debts?

Answer 4

Advances on or discounting of Bills of Exchange

This involves a bank taking collection and making an advance against it.

Question 5

What is export factoring?

Answer 5

Paying for specialist expertise to reduce bad debts and investment in foreign accounts receivable

Factors help manage the risks associated with foreign accounts.

Question 6

What is a documentary credit or letter of credit?

Answer 6

A secure method of payment in international trade guaranteeing payment to the exporter

It involves a bank’s guarantee after a contract is established.

Question 7

What does countertrade involve?

Answer 7

Exchanging goods for other goods instead of cash

This can be used to finance international trade.

Question 8

What is export credit insurance?

Answer 8

Insurance against the risk of non-payment by foreign customers for export debts

Premiums can be high and benefits may not be fully recognized.

Question 9

Fill in the blank: The value of debts denoted in a foreign currency will vary as the _______ vary.

Answer 9

exchange rates