Currency value problems

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One truly unique problem area of multinational accounts receivable management has to do with the risk of currency value changes. The accounts receivable manager should understand this risk and take all necessary actions to minimize it. Multinational accounts receivable are created by two separate types of transactions, sales to customers outside the corporate group and intracompany sales. We must consider these two types of transactions separately, because their economic consequences are different.

Sales to independent customers Management of accounts receivable from independent buyers involves two types of decision, the denomination of currency to be used for payment and the terms of payment. Domestic sales are always denominated in the local currency. In contrast, export sales can be denominated in the currency of the exporter, the currency of the importer, or a third-country currency. The exporter would prefer to price and to invoice in the strongest currency, while the importer would prefer to pay in the weakest currency. Competition or custom will frequently resolve the problem, but the usual result is a trade-off between the terms of payment and the denomination of currency. For example, an exporter may grant a longer credit period in exchange for an importer's promise to pay for its purchase in a hard currency.

Many factors affect the terms of payment, but perhaps one of the most important is the strength of the currency denominated in a transaction. If payments are to be made in a soft currency, accounts receivable should be collected as quickly as possible in order to minimize the possibility of exchange losses between the sale date and the collection date. Sales made in a hard currency may be permitted to remain outstanding somewhat longer. If the devaluation of its home currency is imminent, an exporter might want to encourage slow payment of its hard-currency receivables.

There are at least two ways in which the accounts receivable manager can alleviate currency value problems: currency denomination and the use of factors. A seller may require that all payments are to be made in hard currencies. This requirement assures the seller that payments are to be made in currencies likely to face little or no devaluation on the foreign-exchange market. In certain instances, an MNC refuses credit sales denominated in foreign currencies altogether. MNCs may buy currency credit insurance. For example, American exporters can purchase protection from the Foreign Credit Insurance Association or the Export-Import Bank described in chapter 13.

Accounts receivable managers also use factors to minimize accounts receivable risks from changes in exchange rates between the sale date and the collection date. Factoring is a process whereby a company sells its accounts receivable on a nonrecourse basis. Nonrecourse means that the factor takes the loss if the customers of its client do not pay their accounts. In addition to risk bearing, the factor performs a number of additional services such as credit checking, bookkeeping, and the collection of accounts.

Intracompany sales Intracompany sales differ from sales to independent customers in that little concern is given to credit standing and the timing of the payments may depend upon a company's desire to allocate resources rather than normal payment schedules. Such sales are necessary for many reasons. Subsidiaries produce different products and often sell to each other. Like the location of cash balances, the location of intracompany receivables and their amounts are a policy consideration of the MNC when it allocates its resources on a global basis. If a parent company desires to transfer funds to its affiliate, it may do so by having the affiliate delay the payment for intracompany purchases.

Because international credit sales usually cross national boundaries, companies are concerned about currency values. Changes in exchange rates between the sales date and the collection date create accounts receivable risks. Leading and lagging can be used to alleviate currency value problems of intracompany credit sales. If subsidiaries are located in countries whose currencies are likely to devalue or to float downward, a parent company may instruct its subsidiaries to pay for their purchases more quickly (leading). In contrast, if subsidiaries are located in countries whose currencies are expected to upvalue or to float upward, the parent company may instruct its subsidiaries to delay payments (lagging). It is important to note that early payments and later payments in conjunction with intracompany sales are feasible only when the parent company owns 100 percent of its various affiliates.

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