In: Finance
Compare two (2) methods that a company can use as payment for international trade. Examine the advantages and disadvantages of financing with a portfolio of currencies. Provide two (2) examples of how companies or MNCs finance international transactions by using their own “bank” or by keeping currencies on hand (marketable securities).
Analyze internal control over funds and two (2) methods for external short-term financing. Determine the primary way they all affect a company’s short-term financing decision. Support your response with one (1) example of the how internal control over funds and external short-term financing methods affect a company’s financing decision.
* Comparison of 2 methods a company can use as payment for international trade are as follows:
Categories | Cash-in-Advance | Open Accounts |
Definition | The Buyer makes full payment to the Seller before merchandise is delievered. | We can also it as Accounts Payable and under this method, merchandise is delivered prior to payment. |
Benefit to Party | It is least attractive option to buyers. | It is least attractive option to sellers. |
Risk | Buyer has high risk | Seller has high risk |
Cash Flow | Unfavorable cash flow | Favorable cash flow |
* Pros and Cons of Financing with portfolio of currencies :
Pros - A firm can lower it's to any single currency by borrowing a portfolio of currencies. Under portfolio, currencies would have low degree of volatility ( frequent changes ).
Cons -Highly correlated and volatile currencies can cause effective financing rate of gthe portfolio to be very volatile over time.
If we examine, we can say that the advantage section is much more high for Financing with portfolio of currencies rather than going for specific currency financing because risk is lesser in portfolios of currencies.
* Provide two (2) examples of how companies or MNCs finance international transactions by using their own “bank” or by keeping currencies on hand (marketable securities).
Example 1 - Copmany A is an importer and it's bank will make the payment to the Company B and issues Letter of Credit ( L/C ) to the Company A. Bank does this once the delivery of goods is confirmed.
Example 2 - In recent trends, we have seen innovation in this field. For example, a new payment method has been launched called as " bank payment obligation" ( a payment method which offers a similar level of payment security just like that of L/Cs.
* Analyze internal control over funds and two (2) methods for external short-term financing. Determine the primary way they all affect a company’s short-term financing decision.
Ans- Whenever we talk/analyze about internal control over funds, one important point comes in our mind and that is Fraud. Fraud can happen at any level and an internal control is very much required in order to prevent it. Employee frauds and accounting errors are some of the major types of areas which need to be controlled. A separate control is required which is intended to limit the cash to specified employees and verify that all documents like refunds, receipts or transfers are documented correctly and in a timely manner. Some best practices of internal controls are giving receipts to each customer, giving each cashier a separate cash drawers, approvals mandatory at every remittance stage etc.
We are going to talk about 2 methods for external short-term financing and they are - Factoring and Bank Loan. Factoring - When a person buys trade receivables with or without recourse ( legal agreement ), his profit accruding from commissions and from interest on advance is called a factor. Please note that the commissions are less costly than any source of finance.
Bank Loan - When an entity borrows money from a financial institution ( Banks ) in order to meet it's regular day to day trading activities, is called as Bank Loan. They can be in the form of Cash Credits or Overdrafts by means of unsecured promissory notes for 90 to 180 days. The advantage for borrowers is that they need not draw at once the whole amount of credit granted to them ( borrowing companies ) and can repay the money in installments as and when required.