Credit Management Homework Help

Credit Management

Multinational firms located in different countries compete for the same global export markets. Being so, it is imperative that they offer  attractive liberal credit terms to potential customers While  the favorable credit terms are desirable to enhance sales and hence profits,  N Cs should ensure that the risk/cost of default is lower than the incremental profits expected from such liberal credit  terms because  ranting credit is more risky’ in the international context. In particular, such an exercise is required in the case of sales/exports to   enveloping countries (given the risks associated with “Such sales and their lack of ‘hard’ currency). To sunrise the risk, ‘In Cs should seek  he  backing bf their respective governments in extending credit.

 Risk also emanates from exchange rate fluctuations on account of time  Ag between when the  sale is made and time when collections are made’ from debtors Hedging can reduce this type of risk, but at a cost. In  general, cost incurred in hedging techniques (such as options, forward  contracts)

may outweigh the benefit, Therefore international firms  hold adopt the appropriate hedging techniques) to miniseries exchange rate risk, particularly with respect to export sales made  to less  enveloped countries, as their currencies are prone to depreciation/devaluation. Finally, it will be useful to apply the “leads and lags”   technique for advancing or delaying  settlements, both in respect of debtors and creditors, as per the need (explained in Chapter 35).

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