ACCA FM Syllabus C. Working Capital Management - Managing Foreign Receivables - Notes 5 / 5
Managing Foreign Receivables
How to manage them
The more complex nature of trade transactions and their elements means foreign accounts receivable need more investment than their domestic counterparts
The risk of bad debts is higher with foreign accounts receivable.
Exporters seek to reduce the risk of bad debt and to reduce the level of investment in foreign accounts receivable.
These are the options to help:
Agree early payment with an importer
For example by payment in advance, payment on shipment, or cash on delivery.
These terms of trade are unlikely to be competitive however
Use bills of exchange
A signed agreement to pay the exporter on an agreed future date, supported by a documentary letter of credit, can be discounted by a bank to give immediate funds.
Documentary letters of credit
Are a payment guarantee backed by banks.
They carry almost no risk, provided the exporter complies with the terms and conditions
Assess the creditworthiness
Of new customers, such as bank references and credit reports.
Insurance
can also be used to cover some of the risks associated with giving credit to foreign customers.
This would avoid the cost of seeking to recover cash due from foreign accounts receivable through a foreign legal system, where the exporter could be at a disadvantage due to a lack of local or specialist knowledge.
Export factoring
Can also be considered, where the exporter pays for the specialist expertise of the factor as a way of reducing investment in foreign accounts receivable and reducing the incidence of bad debts.