Case study on Foreign Exchange (FX)

Ostan Ltd is an Irish company that supplies booking software to

the hotel industry, selling to the Irish, French and German
markets. Turnover was EUR 3.5m in 2013, and the company
currently has bank facilities of EUR 350K (with the overdraft
drawn to EUR 330k). The company operates a EUR account in
their local branch.
They have recently secured a 3 year contract to supply their
software to a large UK hotel chain. The contract is priced in GBP
and the hotel chain is due to pay them a quarterly licensing fee
of GBP 200k. The first of these payments will be made in January
2015. The company also has ad-hoc expenses in the UK from
time to time, which they currently pay in EUR.
Separately, the company has carried out a feasibility study about
the merits of entering the US market, and has spotted an
opportunity. To exploit this fully, their local EI Development
Advisor has advised that they will need to establish a presence in
the US. The company plan to rent office space, and to employ 4
full time sales representatives in the US. The projected monthly
cost of this is USD 25k and they plan to pay this from existing
EUR income. They estimate that it will take 6 months before they
earn revenues in the US.

The Financial Controller has no previous experience with FX, but

has been asked by his CEO to put a Risk Management policy in
place.
1. What FX exposures does the company face?
2. What suggestions would you make to the Financial
Controller to address these exposures? Why?
Case study on Trade Finance
Company ABC ltd is a €15m turnover company supplying IT
equipment and services to domestic businesses in Ireland. The
company has gradually grown through excellent service
competitive pricing and generally promoted itself in industry
magazines and trade shows. Typical sale values have been in
the region of €50k to €100k and gross sales margin has been in
the region of 10-15%.

An unsolicited approach has been made by a Russian buyer that

attended a Trade show requesting detailed specifications of the
services and potential costs. Interestingly the buyer is looking to
install and pay for a number of systems in a number of its stores
in Russia and is looking at a potential order of €600k which
would represent the largest single order supplied by ABC Ltd. It
would also enable entrance into a significant emerging market.

Initial contact with the company has confirmed they are a

substantial operation in Russia. However, one unexpected twist
is that they wish to make 90% of the contract payment at 6
months after the final installation date. ABC Ltd have assessed it
would take 3 months to install the equipment from receipt of
order. This would mean that 90% of the €600k payment due
would be received 9 months from receipt of order date. The
remaining 10% will be paid in advance by the Russian buyer at
the time of order.

ABC Ltd has not previously exported and has no previous

experience of working overseas, however, given the size of the
potential order (and the possibility of achieving increased margin
in a less competitive overseas market) would like to quote for
the business.

The Finance Director and Sales Director are scheduled to meet

and discuss the implications of taking the order.

Discuss the risk implications for ABC Ltd and consider the safe
guards you might wish to put in place to mitigate payment risk
and ensure this is a safe and profitable transaction for the
company. Would you consider providing credit terms for a new
overseas customer? How might you accelerate cash flow?

Consider when you should approach BOI Trade Finance

Would you take the Order?