Effects of Late or Non-payments/Risk and Reward
|Unit 3.3- Effects of Late or Non-payments
Introduction | Tenets of Risk Assessment | Risk and Reward | "Eight C's" | 5 "C's" | 3 "C's" | Applying the "C's" | Impact of Nonpayment | Identifying Costs | Bad Debt Value | Interest | Cost and Capital | Administrative | Summary | Resources | Activities | Assessment
Risk and Reward
To risk non-payment or to risk not meeting sales expectations--that is the decision. The issue of selling into the international environment revolves around balancing the risk of being paid on time against the reward of meeting sales and profit targets. The goal, therefore, is to maximize sales while minimizing losses by being paid according to payment terms. There are many risk/reward factors that must be taken into account to balance the expectations of sales and marketing against the financial concerns of slow, partial or complete non-payment. Each company normally establishes expectations or policies as to sales volume and market share.
An example of risk/reward factors could involve selling at a higher price to a customer in a country with significant political and/or economic risk, where risk of nonpayment would be greater than selling the same product in Western Europe at a lower price where risk of nonpayment is lower. Another example might involve working with the sales department for a “first sale” into a new market, perhaps at a lower price than listed on the price sheet, in order for a seller to try and gain a “foothold” for additional business in a country new market, one not sold to before. The risk of selling at the usual price may increase the risk that a foothold in that market will not be gained.
With financial statements, trade references, and bank relationship information, an international credit manager can begin to evaluate a buyer by determining a buyer’s financial capabilities, the manner in which a buyer pays competitors, and how and when a buyer pays bank loans.
The credit risk evaluation is also influenced by the specific situation and country of the customer. Experienced international credit managers (five or more years of credit and collections experience) use their experience to establish levels of risk factors, high and low, depending on the manner in which a seller approaches risk analysis, and reach a credit decision that best meets the needs of marketing and finance.