NAME : ABHISHEK

SINGH
COURSE : BBA
SECTION : BBA24

material BANARASI
DAS
management UNIVERSIT
Y
MATERIAL MANAGEMENT
MODULE-IV
PRODUCTIVITY
Productivity is the quantitative relation between what we
produce and we use as a
resource to produce them, i.e., arithmetic ratio of amount
produced (output) to the
amount of resources (input). Productivity can be expressed as:
Productivity=Output/Input
Output Input Productivity refers to the efficiency of the
production system. It is the
concept that guides the management of production system. It
is an indicator to how well
the factors of production (land, capital, labour and energy) are
utilised. European
Productivity Agency (EPA) has defined productivity as,
“Productivity is an attitude of
mind. It is the mentality of progress, of the constant
improvements of that which exists.
It is the certainty of being able to do better today than
yesterday and continuously. It is
the constant adaptation of economic and social life to
changing conditions. It is the
continual effort to apply new techniques and methods. It is the
faith in progress.” A
major problem with productivity is that it means many things
to many people.
Economists determine it from Gross National Product (GNP),
managers view it as cost
cutting and speed up, engineers think of it in terms of more
output per hour. But
generally accepted meaning is that it is the relationship
between goods and services
produced and the resources employed in their production.

Factors Influencing Productivity

Factors influencing productivity can be classified broadly into two
categories: (A)
controllable (or internal) factors and (B) un-controllable (or external)
factors.

(A) CONTROLLABLE (OR INTERNAL)

FACTORS
1. Product factor: In terms of productivity means the extent
to which the product meets
output requirements product is judged by its usefulness. The
cost benefit factor of a
product can be enhanced by increasing the benefit at the same
cost or by reducing cost
for the same benefit.
2. Plant and equipment: These play a prominent role in
enhancing the productivity.
The increased availability of the plant through proper
maintenance and reduction of idle
time increases the productivity. Productivity can be increased
by paying proper attention
to utilisation, age, modernisation, cost, investments etc.
3. Technology: Innovative and latest technology improves
productivity to a greater
extent. Automation and information technology helps to
achieve improvements in
material handling, storage, communication system and quality
control. The various
aspects of technology factors to be considered are: (i) Size and
capacity of the plant, (ii)
Timely supply and quality of inputs, (iii) Production planning
and control, (iv) Repairs
and maintenance, (v) Waste reduction, and (vi) Efficient
material handling system. 4.
Material and energy: Efforts to reduce materials and energy
consumption brings about
considerable improvement in productivity. 1. Selection of
quality material and right
material. 2. Control of wastage and scrap. 3. Effective stock
control. 4. Development of
sources of supply. 5. Optimum energy utilisation and energy
savings. 5. Human factors:
Productivity is basically dependent upon human competence
and skill. Ability to work
effectively is governed by various factors such as education,
training, experience
aptitude etc., of the employees. Motivation of employees will
influence productivity. 6.
Work methods: Improving the ways in which the work is done
(methods) improves
productivity, work study and industrial engineering techniques
and training are the areas
which improve the work methods, which in term enhances the
productivity. 7.
Management style: This influence the organizational design,
communication in
organization, policy and procedures. A flexible and dynamic
management style is a
better approach to achieve higher productivity.
(B) UN-CONTROLLABLE (OR
EXTERNAL) FACTORS
1. Structural adjustments: Structural adjustments include both
economic and social
changes. Economic changes that influence significantly are:
(a) Shift in employment from agriculture to manufacturing
industry, (b) Import of
technology, and (c) Industrial competitiveness. Social changes
such as women’s
participation in the labour force, education, cultural values,
attitudes are some of the
factors that play a significant role in the improvement of
productivity. 2. Natural
resources: Manpower, land and raw materials are vital to the
productivity improvement.
3. Government and infrastructure: Government policies and
programmes are significant
to productivity practices of government agencies, transport
and communication power,
fiscal policies (interest rates, taxes) influence productivity to
the greater extent.
(A) TECHNOLOGY BASED 1. Computer Aided Design
(CAD), Computer
Aided Manufacturing (CAM), and Computer Integrated
Manufacturing Systems (CIMS):
CAD refers to design of products, processes or systems with
the help of computers. The
impact of CAD on human productivity is significant for the
advantages of CAD are: (a)
Speed of evaluation of alternative designs, (b) Minimisation
of risk of functioning, and
(c) Error reduction.
CAM is very much useful to design and control the
manufacturing. It helps to achieve
the effectiveness in production system by line balancing. (a)
Production Planning and
Control (b) Capacity Requirements Planning (CRP),
Manufacturing Resources Planning
(MRP II) and Materials Requirement Planning (MRP) (c)
Automated Inspection. 2.
Computer integrated manufacturing: Computer integrated
manufacturing is
characterised by automatic line balancing, machine loading
(scheduling and
sequencing), automatic inventory control and inspection. 1.
Robotics 2. Laser
technology 3.Modern maintenance techniques 4.Energy
technology 5. Flexible
Manufacturing System (FMS)
(B) EMPLOYEE BASED 1. Financial and non-financial
incentives at
individual and group level. 2. Employee promotion. 3. Job
design, job enlargement, job
enrichment and job rotation.
4. Worker participation in decision-making 5. Quality Circles
(QC), Small Group
Activities (SGA) 6. Personal development.
(C) MATERAL BASED 1. Material planning and control
2.Purchasing,
logistics 3.Material storage and retrieval 4.Source selection
and procurement of quality
material 5.Waste elimination.
(D) PROCESS BASED 1. Methods engineering and work
simplification 2. Job design evaluation, job safety 3.Human
factors engineering.
(E) PRODUCT BASED 1. Value analysis and value
enginering 2.Product
diversification 3.Standardisation and simplification
4.Reliability engineering 5.Product
mix and promotion.
(F) TASK BASED 1. Management style 2. Communication in
the organisation
3. Work culture 4. Motivation 5.Promotion group activity.
Receipt of Material
Receipt of Material by Central Receiving
Materials will be processed through Central Receiving on a
First-In / First-Out basis
unless the nature of the material dictates special handling.
Special handling exceptions may include:
all air and overnight shipments
materials on dry ice or frozen
live materials
blood and blood platelets
packages labeled “refrigerate immediately", “freeze upon
arrival” or “special
handling” instructions. Also included are radioactive materials
and controlled
substances.
Items that cannot be processed by Central Receiving include
the following:
Live animals. Any department ordering live animals should
make arrangements to
have them delivered directly to the department's desired
location.
Items ordered by contractors for work being done at the
University. These items are
to be delivered by the carrier directly to the contractor.
Select agents.
The following steps and procedures are performed by Central
Receiving staff:
A visual inspection for damage to the carton or container at
the time it is offloaded
from the carrier truck.
Verify the number of packages indicated on the freight bill.
Enter the item into the Supply Chain Logic (SCL) tracking
system, which will track
the item throughout the receiving and delivery process. The
item is classified as
“Docked” at this stage in the process.
Create a label in the tracking system and label the package
so that it can be
tracked throughout the rest of the receiving and delivery
process.
If visible damage is apparent, conduct a more thorough
inspection of the contents
of the packages to look for obvious damage to the item in the
carton or container.
Enter the item, based on packing slip information, into the
PeopleSoft system for
Acquisition tracking.
Alert Delivery to the presence of the package and need for
delivery to the
requested campus location.
Direct Receipt by Department
When a purchase order item is delivered directly to the
department, a
representative for the department should do a receipt in
PeopleSoft. If the
department cannot do this, Central Receiving must be notified
immediately of the
receipt of any material which requires processing by Central
Receiving in order to
close the order and allow for the process of payment to
vendor. Failure to do so
may cause delays in payment to vendors.

Issue of Materials
The materials stored in the stock room are issued to various
jobs or production
departments against the authorized materials requisitions. The
issues are recorded in the
store ledger and the respective jobs or production departments
are debited with the price
of the material issued. As the time of purchase and the time of
issue are mostly different
and the market price of the materials tends to vary, the
problem of pricing the materials
issued necessitates certain policy formulation. It is an
important consideration not only
under stores management but also for costing and pricing
policies. The fundamental
consideration is whether to price the issues at historical price
i.e. the original purchase
price, at the replacement price i.e. the prevailing market price
at the time of issue or at
some other price.
The various methods are used for pricing the material issues
which are based on different
principles. The following are the important methods of pricing
the material issues.
First In First Out Method (FIFO Method): FIFO as its
name suggests is governed by
the principle that the materials which are received first are
issued first. The issues are
priced at the cost price of the oldest consignments till it gets
exhausted. As soon as the
oldest lot is exhausted, the issues are priced at the cost price of
the next of oldest lot in
the sequence, e.g.
Last In First Out method (LIFO Method): LIFO method
reverses the procedures as
followed under FIFO. The cost of the last lot of materials
received is used to price the
issues until that consignment is exhausted then the next lot of
pricing is used and so on
through the successive lots. This method is based on the
premises that the materials
which are issued to the jobs should carry the cost of the most
recently purchased
materials, and that is why it is also known as the replacement
cost method. It should be
noted that like FIFO method, the actual physical handling of
the material in the bins and
shelves in the sequence of purchases is imaginary.
Average Cost Method: Under this method, the issues are
charged at a price ascertained
from the common pool made up of the varied prices of a
several lots. It is advantages to
use this method when the prices are subject to constant
changes. In the periods of rise or
fall of materials prices, an average cost tends to even out the
extreme price changes.

Material Variance
MATERIAL COST VARIANCE
The difference between the standard cost of direct
materials specified for production
and the actual cost of direct materials used in
production is known as Direct
Material Cost Variance. Material Cost Variance
gives an idea of how much more or less
cost has been incurred when compared with the
standard cost. Thus, Variance
Analysis is an important tool to keep a tab on the
deviations from the standard set by a
company.
MATERIAL COST VARIANCE FORMULA
Formula for Material Cost Variance = Standard
Cost – Actual Cost
Material Cost Variance can be due to less
purchase price being paid than the standard
or because of change in the quantity of material
used. Thus, Material Cost Variance is
made up of two components namely; Material Price
Variance and Material Usage
Variance.
MATERIAL PRICE VARIANCE
Material Price Variance is the difference between
the standard price and the actual price
for the actual quantity of materials used for
production. The cause for material price
variance can be many including changes in prices,
poor purchasing procedures,
deficiencies in price negotiation, etc.
MATERIAL PRICE VARIANCE FORMULA
Material Price Variance can be calculated using the
following formula:
MPV = (Standard Price – Actual Price) x Actual
Quantity
Let us understand this formula with the help of an
example.
Standard Actual
Price $ 10 per kg. $ 8 per kg.
Quantity 200 kgs. 150 kgs.
Here, the Material Price Variance can be calculated
as follows:
MPV = (10 – 8) x 150
= 300 (F)
Here (F) stands for favorable. The variance is
favorable because the actual price is less
than the standard price. In cases where the actual
price is more than the standard price,
the result is (A) which means adverse.
MATERIAL USAGE VARIANCE
Material Usage Variance is the difference between
the standard quantity specified for
actual production and the actual quantity used at
the standard purchase price. There
can be many reasons for material usage variance
including the use of sub-standard or
defective products, pilferage, wastage, the
differences in material quality, etc.
MATERIAL USAGE VARIANCE FORMULA
MUV = (Standard Quantity – Actual Quantity) x
Standard Price
With the help of the above example, let us now
calculate Material Usage Variance.
MUV = (200 – 150) x 10= 500 (F)
The result is Favorable, since the standard quantity
is more than the actual quantity. In
cases where the actual quantity is more than the
standard quantity, the result is in (A)
which means Adverse.
CONCLUSION
Material Cost Variance is composed of Material
Price Variance and Material Usage
Variance. This means Material Cost Variance =
Material Price Variance + Material
Usage Variance. We can confirm and cross check
this equation with the help of our
example.
MATERIAL COST VARIANCE FORMULA
Standard Cost – Actual Cost
In other words, (Standard Quantity x Standard
Price) – (Actual Quantity x Actual
Price)
= (200 x 10) – (150 x 8)
= 800 (F)
Favorable, since the actual cost is less than the
standard cost. If the actual cost is more
than the standard cost, the result is Adverse (A).
MCV= MPV + MUV
= 300 (F) +500 (F)
= 800 (F)
International working capital management

Working capital:- Working capital is money that’s

available to a company for its day-to-day operations.
Simply put, working capital
indicates a company's operating liquidity and efficiency.
A company's working capital reflects a host of company
activities, including cash, inventory, accounts
receivable, accounts payable,
and the portion of debt due within one year (as well as
any other short-term accounts), This can extend to
inventory management, debt
management, revenue collection, and payments to
suppliers.
How to Calculate Working Capital:- Working capital can
be calculated by determining the current assets and the
current liabilities of
a company. Current assets include a company’s liquid
cash as well as other assets that can be converted to
cash within one year or less.
Some examples of current assets include money in
checking accounts, inventory, supplies, equipment, and
temporary investments.
Current liabilities include all the expenses and debts
that a company needs to pay within one year. Examples
of current liabilities
are accounts payable, dividends, and income taxes
owed.
What Is the Working Capital Formula?
You can calculate the working capital of an organization
by using the following formula:
Working Capital = Current Assets - Current Liabilities
Working Capital – Circulation of Working Capital

Working Capital Management:- Working capital

management is a business strategy designed to ensure
that a company operates
efficiently by monitoring and using its current assets
and liabilities to the best effect. The primary purpose of
working capital
management is to enable the company to maintain
sufficient cash flow to meet its short-term operating
costs and short-term debt
obligations.
Classification of Working Capital
(1) On the Basis of Concept: -
(i) Gross Working Capital
(ii) Net Working Capital
(2) On the Basis of time or Need:-
(i) Permanent Working Capital
(ii) Temporary Working Capital
On the Basis of Concept:-

(1) Gross working capital: Gross working capital; refers

to firm's investment in current assets. Current assets
are the assets
which can be converted into cash within an accounting
year and include cash, short-term securities, debtors,
bill receivables and
stock.
According to this concept, working capital means Gross
working Capital which is the total of all current assets of
a business. It can be
represented by the following equation:
Gross Working Capital = Total Current Assets
Definitions favoring this concept are:-
According to Mead, Mallot and Field : "Working Capital
means total of Current Assets".
(2) Net Working Capital Concept:- Net working capital
refers to the difference between current assets and
current liabilities.
Current liabilities are those claims of outsiders
which are expected to mature for payment within an
accounting year and include
creditors, bills payables, and outstanding expenses.
Net working capital can be positive or negative. A
positive net working capital will arise when current
assets exceed current
liabilities. A negative Net working capital occurs when
current liabilities are in excess of current assets.
Net Working Capital = Current Assets - Current
Liabilities
Definitions Favoring Net Working Capital Concept:-
According to C.W.Gestenbergh:- "It has ordinarily been
defined as the excess of current assets over current
liabilities".
According to Lawrence. J. Gitmen;- " The most common
definition of net working capital is the difference of
firm's current assets
and current liabilities".
II. On the basis of time or need

(1) Permanent or Fixed Working Capital:- The need for

working capital fluctuates from time to time. However,
to carry on day-
to-day operations of the business without any
obstacles, a certain minimum level of raw materials,
work-in-progress, finished goods

and cash must be maintained on a continuous basis.

The amount needed to maintain current assets on this
minimum level is called
permanent or regular working capital.
The amount involved as permanent working capital has
to be meet from long-term sources of finance, e.g.
(i) Capital
(ii) Debentures
(iii) Long-term loans.
(2) Temporary or Variable or Fluctuating Working
Capital:- Depending upon the changes in production
and sales, the need for
working capital, over and above the permanent level of
working capital is called temporary, fluctuating or
variable working capital. It
may be two types:-
(a)Seasonal-Due to seasonal changes, level of business
activities is higher than normal during some months of
year and therefore
additional working capital will be required along with
the permanent working capital. It is so because during
peak season, demand rises
and more stock is to be maintained to meet the
demand.
(b) Special- Additional doses of working capital may be
required to face cut throat competition in the market or
other contingencies
like strikes, lock outs, theft etc.
International Working Capital:- Working capital
management in international context involves
managing cash balances, account
receivable, inventory and current liabilities when
confronted with political, foreign exchange, tax and
liabilities constraint across borders.
It also includes the need to borrow short term funds to
finance current assets from both in-house banks and
external local and international
commercial banks. The overall goal is to lessen funds
tied up in working capital. WCM also improve efficiency
Working capital management in an MNE requires
managing the repositioning of cash flows, as well as
managing current assets and
liabilities, when faced with political, foreign exchange,
tax and liquidity constraints. The overall goal is to
reduce funds tied up in
working capital. While simultaneously providing
sufficient funding and liquidity for the conduct of global
business.
Management of working capital in an international firm
is more complex than in a domestic firm. The reasons
are
Exposure to Foreign Exchange: The most significant
difference is of foreign currency exposure. Currency
exposure impacts almost
all the areas of an international business starting from
your purchase from suppliers, selling to customers,
investing in plant and
machinery, fund raising etc. Wherever you need money,
currency exposure will come into play and as we know
it well that there is no
business transaction without money.

Macro Business Environment: An international business

is exposed to altogether a different economic and
political environment. All
trade policies are different in different countries.
Financial manager has to critically analyze the policies
to make out the feasibility and
profitability of their business propositions. One country
may have business friendly policies and other may not.
Legal and Tax Environment: The other important aspect
to look at is the legal and tax front of a country. Tax
impacts directly to your
product costs or net profits i.e. ‘the bottom line’ for
which the whole story is written. International finance
manager will look at the
taxation structure to find out whether the business
which is feasible in his home country is workable in the
foreign country or not.

Financing Foreign Trade

Foreign Trade:- Foreign trade is nothing but trade

between the different countries of the world. It is also
called as International trade,
External trade or Inter-Regional trade. It consists of
imports, exports and entrepot. The inflow of goods in a
country is called import
trade whereas outflow of goods from a country is called
export trade. Many times goods are imported for the
purpose of re-export after
some processing operations. This is called entrepot
trade. Foreign trade basically takes place for mutual
satisfaction of wants and utilities
of resources.
Foreign Trade can be divided into following three
groups
1. Import Trade: Import trade refers to purchase of
goods by one country from another country or inflow of
goods and services
from foreign country to home country.
2. Export Trade: Export trade refers to the sale of goods
by one country to another country or outflow of goods
from home country
to foreign country.
3. Entrepot Trade: Entreport trade is also known as Re-
export. It refers to purchase of goods from one country
and then selling
them to another country after some processing
operations.
Need and Importance of Foreign Trade
1. Division of labor and specialization: Foreign trade
leads to division of labour and specialization at the
world level. Some countries
have abundant natural resources. They should export
raw materials and import finished goods from countries
which are advanced in
skilled manpower. This gives benefits to all the
countries and thereby leading to division of labour and
specialization.
2. Optimum allocation and utilization of resources: Due
to specialization, unproductive lines can be eliminated
and wastage of
resources avoided. In other words, resources are
channelized for the production of only those goods
which would give highest returns.
Thus there is rational allocation and utilization of
resources at the international level due to foreign
trade.
3. Equality of prices: Prices can be stabilized by foreign
trade. It helps to keep the demand and supply position
stable, which in turn
stabilizes the prices, making allowances for transport
and other marketing expenses.
4. Availability of multiple choices: Foreign trade helps in
providing a better choice to the consumers. It helps in
making available new
varieties to consumers all over the world.
5. Ensures quality and standard goods: Foreign trade is
highly competitive. To maintain and increase the
demand for goods, the
exporting countries have to keep up the quality of
goods. Thus quality and standardized goods are
produced.
6. Raises standard of living of the people: Imports can
facilitate standard of living of the people. This is
because people can have a
choice of new and better varieties of goods and
services. By consuming new and better varieties of
goods, people can improve their
standard of living.
7. Generate employment opportunities: Foreign trade
helps in generating employment opportunities, by
increasing the mobility of
labour and resources. It generates direct employment
in import sector and indirect employment in other
sector of the economy. Such as
Industry, Service Sector (insurance, banking, transport,
communication), etc.
8. Facilitate economic development: Imports facilitate
economic development of a nation. This is because with
the import of capital
goods and technology, a country can generate growth
in all sectors of the economy, i.e. agriculture, industry
and service sector.
9. Assistance during natural calamities: During natural
calamities such as earthquakes, floods, famines, etc.,
the affected countries
face the problem of shortage of essential goods.
Foreign trade enables a country to import food grains
and medicines from other countries
to help the affected people.
10. Maintains balance of payment position: Every
country has to maintain its balance of payment
position. Since, every country has
to import, which results in outflow of foreign exchange,
it also deals in export for the inflow of foreign
exchange.
12. Promotes World Peace: Foreign trade brings
countries closer. It facilitates transfer of technology and
other assistance from
developed countries to developing countries. It brings
different countries closer due to economic relations
arising out of trade
agreements. Thus, foreign trade creates a friendly
atmosphere for avoiding wars and conflicts. It promotes
world peace as such countries
try to maintain friendly relations among themselves.
Foreign trade Financing – Modes of Payment
While a seller (or exporter) can require the purchaser
(an importer) to prepay for goods shipped, the
purchaser (importer) may wish to
reduce risk by requiring the seller to document the
goods that have been shipped. Banks may assist by
providing various forms of
support. For example, the importer's bank may provide
a letter of credit to the exporter (or the exporter's bank)
providing for payment
upon presentation of certain documents, such as a bill
of lading. The exporter's bank may make a loan (by
advancing funds) to the
exporter on the basis of the export contract.
Different ways of Payment and Risk Involve

Least Secure Less Secure More Secure Most Secure

Exporter Consignment Open Account Documentary
Collections Letters of Credit Cash-in-Advance
Importer Cash-in-Advance Letters of Credit
Documentary Collections Open Account Consignment

1. Cash in Advance
With the cash-in-advance payment method, the
exporter can eliminate credit risk or the risk of non-
payment since payment is received
prior to the transfer of ownership of the goods. Wire
transfers and credit cards are the most commonly used
cash-in-advance options
available to exporters. With the advancement of the
Internet, escrow services are becoming another cash-in-
advance option for small

export transactions. However, requiring payment in

advance is the least attractive option for the buyer,
because it tends to create cash-
flow problems, and it often is not a competitive option
for the exporter especially when the buyer has other
vendors to choose from. In
addition, foreign buyers are often concerned that the
goods may not be sent if payment is made in advance.
Exporters who insist on
cash-in-advance as their sole payment method for
doing business may lose out to competitors who are
willing to offer more attractive
payment terms.
Modes of Payment in Cash in Advance
Wire Transfer: Most Secure and Preferred Cash-in-
Advance Method
An international wire transfer is commonly used and is
almost immediate. Exporters should provide clear
routing instructions to the
importer when using this method, including the
receiving bank’s name and address, SWIFT (Society for
Worldwide Interbank Financial
Telecommunication) address, and ABA (American
Bankers Association) number, as well as the seller’s
name and address, bank account
title, and account number. The fee for an international
wire transfer can be paid by the sender (importer) or it
can be deducted from the
receiver’s (exporter’s) account.

Credit Card: A Viable Cash-in-Advance Method

Exporters who sell directly to foreign buyers may select
credit cards as a viable cash-in-advance option,
especially for small consumer
goods transactions. Exporters should check with their
credit card companies for specific rules on international
use of credit cards. The
rules governing international credit card transactions
differ from those for domestic use. Because
international credit card transactions
are typically placed using the Web, telephone, or fax,
which facilitate fraudulent transactions, proper
precautions should be taken to
determine the validity of transactions before the goods
are shipped. Although exporters must tolerate the fees
charged by credit card
companies and assume the risk of unfounded disputes,
credit cards may help the business grow because of
their convenience and wide
acceptance.
Escrow Service: A Mutually Beneficial Cash-in-Advance
Method
Exporters may select escrow services as a mutually
beneficial cash-in-advance option for small transactions
with importers who demand
assurance that the goods will be sent in exchange for
advance payment. Escrow in international trade is a
service that allows both
exporter and importer to protect a transaction by
placing the funds in the hands of a trusted third party
until a specified set of conditions
are met. Here’s how it works: the importer sends the
agreed amount to the escrow service. After payment is
verified, the exporter is
instructed to ship the goods. Upon delivery, the
importer has a pre-determined amount of time to
inspect and accept the goods. Once
accepted, the funds are released by the escrow service
to the exporter. The escrow fee can either be paid in
full by one party or split
evenly between the exporter and the importer. Cross-
border escrow services are offered by international
banks and firms that specialize
in escrow and other deposit and custody services.
2. Letter of Credit (L/C):- A letter of credit is a document
that guarantees the buyer’s payment to the sellers. It is
issued by a bank and
ensures the timely and full payment to the seller. If the
buyer is unable to make such a payment, the bank
covers the full or the remaining
amount on behalf of the buyer. A letter of credit is
issued against a pledge of securities or cash. Banks
typically collect a fee, ie, a
percentage of the size/amount of the letter of credit.
Parties to a letter of credit
• Applicant (importer) requests the bank to issue the LC
• Issuing bank (importer’s bank which issues the LC
[also known as the Opening banker of LC])
• Beneficiary (exporter)
Types of a letter of credit:- The letters of credit can be
divided into the following categories:
Sight Credit
Under this LC, documents are payable at the sight/
upon presentation of the correct documentation.
For example, a businessman can present a bill of
exchange to a lender along with a sight letter of credit
and take the necessary funds
right away. A sight letter of credit is more immediate
than other forms of letters of credit.
Acceptance Credit/ Time Credit:-
The Bills of Exchange which are drawn and payable after
a period, are called usance bills. Under acceptance
credit, these usance bills
are accepted upon presentation and eventually
honoured on their respective due dates. For example, a
company purchases materials
from a supplier and receives the goods on the same
day. The bill will be delivered with the shipment of
goods, but the company may
have up to 30 days to pay it. This 30 day period marks
the usance for the sale.
Revocable and Irrevocable Credit
A revocable LC is a credit, the terms and conditions of
which can be amended/ cancelled by the Issuing Bank.
This cancellation can be
done without prior notice to the beneficiaries.
An irrevocable credit is a credit, the terms and
conditions of which can neither be amended nor
cancelled. Hence, the opening bank is
bound by the commitments given in the LC.
Confirmed Credit
Only Irrevocable LC can be confirmed. A confirmed LC is
one when a banker other than the Issuing bank, adds its
own confirmation to
the credit. In case of confirmed LCs, the beneficiary’s
bank would submit the documents to the confirming
banker.
Back-to-Back credit
In a back to back credit, the exporter (the beneficiary)
requests his banker to issue an LC in favour of his
supplier to procure raw
materials, goods on the basis of the export LC received
by him. This type of LC is known as Back-to-Back credit.
Example: An Indian
exporter receives an export LC from his overseas client
in the Netherlands. The Indian exporter approaches his
banker with a request to
issue an LC in favour of his local supplier of raw
materials. The bank issues an LC backed by the export
LC.
Transferable Credit
While an LC is not a negotiable instrument, the Bills of
Exchange drawn under it are negotiable. A Transferable
Credit is one in which
a beneficiary can transfer his rights to third parties.
Such LC should clearly indicate that it is a ‘Transferable’
LC

3. Draft
In international trading, a bill of exchange or
commercial draft that is presented for payment with
the required documents such as
a clean bill of lading, certificate of insurance, certificate
of origin. A type of bill of exchange, in which the
exporter holds the title to the
transported goods until the importer receives and pays
for them.
Types of Draft
Sight Drafts - are used with both air shipments and
ocean shipments for financing transactions of goods in
international trade. Unlike
a time draft, which allows for a short-term delay in
payment after the importer receives the goods, a sight
draft is payable immediately.

A shortcoming of sight drafts is that if the importing

country disallows the shipment or the importer is
unable to pay for the shipment
when it arrives, the exporter will not get paid and will
be responsible for return shipping or disposal costs.
Sight drafts must be
accompanied by a letter of credit and other required
documents, such as an ocean bill of lading, in order to
be paid.

Time Draft - A type of foreign check that is guaranteed

by the issuing bank, but that is not payable in full until a
specified amount of
time after it is received and accepted. Time drafts are a
type of short-term credit used for financing transactions
of goods in international
trade. They allow the buyer a delay in payment after
accepting a shipment of exported goods.
Once the buyer accepts the time draft, it becomes a
trade acceptance. The exporter can hold the
acceptance until maturity and be paid
in full, or sell it before maturity at a discount to obtain
earlier access to the funds. The time between
acceptance and maturity is called
"tenor" or "usance." As such, time drafts may be
referred to as "usance draft
4. Consignment
Consignment in international trade is a variation of the
open account method of payment in which payment is
sent to the exporter only
after the goods have been sold by the foreign
distributor to the end customer. An international
consignment transaction is based on a
contractual arrangement in which the foreign
distributor receives, manages, and sells the goods for
the exporter who retains title to the
goods until they are sold. Payment to the exporter is
required only for those items sold. One of the common
uses of consignment in
exporting is the sale of heavy machinery and equipment
because the foreign distributor generally needs floor
models and inventory for
sale. Goods not sold after an agreed upon time period
may be returned to the exporter at cost.
Exporting on consignment is very risky as the exporter is
not guaranteed any payment and someone outside the
exporter’s control has
actual possession of its inventory. However, selling on
consignment can provide the exporter some great
advantages which may not be
obvious at first glance. For example, consignment can
help exporters compete on the basis of better
availability and faster delivery of
goods when they are stored near the end customer. It
can also help exporters reduce the direct costs of
storing and managing inventory,
thereby making it possible to keep selling prices in the
local market competitive. However, though
consignment can definitely enhance
export competitiveness, exporters should keep in mind
that the key to success in exporting on consignment
and in getting paid is to
partner with a reputable and trustworthy foreign
distributor or a third-party logistics provider.
Consignment sales offer both advantages and
disadvantages. From the exporter's standpoint,
consignment sales are advantageous in that
the exporter's marketing area can be expanded even
when the exporter cannot find an importer to purchase
his/her goods. However,
consignment sales are extremely risky to the exporter
for several reasons. Firstly, the exporter bears the
financial risk for the goods until
the merchandise is sold by the importer. Additionally,
the seller must be concerned about the availability of
foreign exchange in the
importer's country because importers will give priority
to merchandise covered by documentary drafts over
goods shipped on
consignment. Insurance can be purchased to guard
against credit risk and political risk affecting
consignment sales but the cost of this
insurance, of course, reduces the exporter's profits
5. Open Account
An open account transaction in international trade is a
sale where the goods are shipped and delivered before
payment is due, which is
typically in 30, 60 or 90 days. Obviously, this option is
advantageous to the importer in terms of cash flow and
cost, but it is consequently
a risky option for an exporter. Because of intense
competition in export markets, foreign buyers often
press exporters for open account
terms. In addition, the extension of credit by the seller
to the buyer is more common abroad. Therefore,
exporters who are reluctant to

extend credit may lose a sale to their competitors.

However, though open account terms will definitely
enhance export competitiveness,
exporters should thoroughly examine the political,
economic, and commercial risks as well as cultural
influences to ensure that payment
will be received in full and on time. It is possible to
substantially mitigate the risk of non-payment
associated with open account trade
by using trade finance techniques such as export credit
insurance and factoring. Exporters may also seek export
working capital financing
to ensure that they have access to financing for
production and for credit while waiting for payment.
Characteristics of an Open Account Transaction
Applicability Recommended for use (a) in low-risk
trading relationships or markets and (b) in competitive
markets to win

customers with the use of one or more appropriate

trade finance techniques

Risk Substantial risk to the exporter because the buyer

could default on payment obligation after shipment of
the
goods

Pros • Boost competitiveness in the global market

• Help establish and maintain a successful trade

relationship
Cons • Significant exposure to the risk of non-payment
• Additional costs associated with risk mitigation
measures

Document Used in International trading

Bill of Lading
Document Used in International trading
Bill of Lading
Sometimes abbreviated as B/L or BoLis a document
issued by a carrier which details a shipment of
merchandise and gives title of that
shipment to a specified party.
Bills of lading are one of three important documents
used in international trade to help guarantee that
exporters receive payment
and importers receive merchandise. A straight bill of
lading is used when payment has been made in advance
of shipment and requires
a carrier to deliver the merchandise to the appropriate
party. An order bill of lading is used when shipping
merchandise prior to payment,
requiring a carrier to deliver the merchandise to the
importer, and at the endorsement of the exporter the
carrier may transfer title to the
importer. Endorsed order bills of lading can be traded
as a security or serve as collateral against debt
obligations.
Types of Bill of Landing
• Straight Bill of Landing
• Order Bill Of Landing
• Clean Bill of Lading: A Clean Bill of Lading is simply a
BOL that the shipping carrier has to sign off on saying
that when the
packages were loaded they were in good condition. If
the packages are damaged or the cargo is marred in
some way (rusted
metal, stained paper, etc.), they will need issue a
"Soiled Bill of Landing" or a "Foul Bill of Landing."
Inland Bill of Lading: This allows the shipping carrier to
ship cargo, by road or rail, across domestic land, but not
overseas.
• Ocean Bill of Lading: Ocean Bills of Lading allows the
shipper to transport the cargo overseas, nationally or
internationally.
Through Bill of Lading: Through Bills of Lading are a little
more complex than most BOLs. It allows for the
shipping carrier to
pass the cargo through several different modes of
transportation and/or several different distribution
centers. This Bill of Landing
needs to include an Inland Bill of Landing and/or an
Ocean Bill of Landing depending on its final destination.

• Multimodal/Combined Transport Bill of Lading: This is

a type of Through Bill of Lading that involves a
minimum of two
different modes of transport, land or ocean. The modes
of transportation can be anything from freight boat to
air.
Direct Bill of Lading: Use a Direct Bill of Lading when
you know the same vessel that picked up the cargo will
deliver it to its final
destination.

• Stale Bill of Lading: Occasionally in cases of short-

over-seas cargo transportation, the cargo arrives to port
before the Bill of
Landing. When that happens, the Bill of Landing is then
"stale."

• Shipped On Board Bill of Lading: A Shipped On board

Bill of Lading is issued when the cargo arrives at the
port in good,
expected condition from the shipping carrier and is
then loaded onto the cargo ship for transport overseas.
Received Bill of Lading: It is simply a Bill of Lading
stating that the cargo has arrived at the port and is
cleared to be loaded on
the ship, but has not necessary mean it has been
loaded. Used as a temporary BOL when a ship is late
and will be replaced by a
Shipped On board Bill of Lading when the ship arrives
and the cargo is loaded.

Commercial Invoice
A commercial invoice is a document used in foreign
trade. It is used as a customs declaration provided by
the person or corporation that
is exporting an item across international borders.
Although there is no standard format, the document
must include a few specific pieces
of information such as the parties involved in the
shipping transaction, the goods being transported, the
country of manufacture, and
the Harmonized System codes for those goods. A
commercial invoice must also include a statement
certifying that the invoice is true,
and a signature.
A commercial invoice is used to calculate tariffs,
international commercial terms (like the Cost in a CIF)
and is commonly used for
customs purposes.
Commercial invoices are in European countries not
normally for payment. The definitive invoice for
payment usually has only the words
"invoice". This invoice can also be used as a commercial
invoice if additional information is disclosed.

A sample commercial invoice format

COMMERCIAL INVOICE
SENDER:
AUTO PARTS FEE WAREHOUSE
7634 KIMBEL STREET UNIT 1-9
MISSISSAUGA,ON L5S-1M6
Phone:905.677.0996
Fax: 999-999-9999
Tax ID/VAT/EIN# nnnnnnnnnn

RECIPIENT:
XYZ Company
3 Able End
There, Shropshire, UK
Phone:99-99-9999

Invoice Date: 12 December 2007 Invoice Number:

0256982
Carrier tracking number: 526555598 Sender's
Reference: 5555555
Carrier: GHI Transport Company Recipient's Reference:
5555555
Quantity Country of

Origin Description of Contents Harmonised Code Unit

Weight
Unit
Value
Subtotal
(USD)

1,000

United
States of
America

Widgets 999999 2 10.00 10,000

Total Net
Weight (lbs): 2,000 Total Declared Value (USD): 10,000
Total Gross
Weight (lbs): 2,050 Freight and Insurance Charges
(USD): 300.00
Total
Shipment
Pieces:

1,000 Other Charges (USD): 30.00

Currency
Code: USD Total Invoice Amount (USD): 10,000
Type of Export: Permanent Terms of Trade: Delivery
Duty Unpaid
Reason for Export: stated reason
General Notes: notes and comments
The exporter of the products covered by this document
- customs authorization number - declares that, except
where otherwise clearly
indicated, these products are of United States Of
America preferential origin.
I/We hereby certify that the information on this invoice
is true and correct and that the contents of this
shipment are as stated above.
Name, Position in exporting company, company stamp,
signature

International Financial Institutions

The international financial institutions (IFIs) are financial

institutions that have been established (or chartered)
by more than one
country, and hence are subjects of international law.
Their owners or shareholders are generally national
governments, although
other international institutions and other organizations
occasionally figure as shareholders. The most
prominent IFIs are creations of
multiple nations, although some bilateral financial
institutions (created by two countries) exist and are
technically IFIs. Many of these
are multilateral development banks (MDB).

Multilateral development bank

A multilateral development bank (MDB) is an
institution, created by a group of countries, that
provides financing and professional
advising for the purpose of development. MDBs have
large memberships including both developed donor
countries
and developing borrower countries. MDBs finance
projects in the form of long-term loans at market rates,
very-long-term loans (also
known as credits) below market rates, and through
grants.
The following are usually classified as the main MDBs:
• World Bank
• European Investment Bank(EIB)
• Asian Development Bank (ADB)

• European Bank for Reconstruction and Development

(EBRD)
• CAF - Development Bank of Latin America (CAF)
• Inter-American Development Bank Group (IDB, IADB)
• African Development Bank (AfDB)
• Islamic Development Bank (IsDB)
There are also several "sub-regional" multilateral
development banks. Their membership typically
includes only borrowing nations. The
banks lend to their members, borrowing from the
international capital markets. Because there is
effectively shared responsibility for
repayment, the banks can often borrow more cheaply
than could any one member nation. These banks
include:

• Caribbean Development Bank (CDB)

• Central American Bank for Economic Integration
(CABEI)
• East African Development Bank (EADB)
• West African Development Bank (BOAD)
• Black Sea Trade and Development Bank (BSTDB)
• Eurasian Development Bank (EDB)
There are also several multilateral financial institutions
(MFIs). MFIs are similar to MDBs but they are
sometimes separated since they
have more limited memberships and often focus on
financing certain types of projects.
• European Commission (EC)
• International Finance Facility for Immunisation (IFFIm)
• International Fund for Agricultural Development
(IFAD)
• Nordic Investment Bank (NIB)
• OPEC Fund for International Development (OPEC
Fund)
•
NederlandseFinancieringsmaatschappijvoorOntwikkelin
gslanden NV (FMO)
India Financial Institutions
According to Economic Survey 2012-13,[1] at the end of
March 2012, there were four institutions regulated by
Reserve Bank of India as
all-India Financial Institutions:
• Export - Import Bank of India (Exim Bank)
• National Bank for Agriculture and Rural Development
(NABARD)
• Small Industries Development Bank of India (SIDBI)
• National Housing Bank (NHB)
Industrial Development Bank of India
The IDBI was established to provide credit for major
financial facilities to assist with the industrial
development of India. It was
established in 1964 by RBI, and was transferred to the
government of India in 1976. The government holdings
in IDBI, after the IPO,
are 51.4%.[2] By the end of September 2004, the IDBI
asset base was Rs. 36850 crore

International Cash Management

Cash management refers to a broad area of finance

involving the collection, handling, and usage of cash. It
involves assessing market
liquidity, cash flow, and investments.

Successful cash management involves not only avoiding

insolvency (and therefore bankruptcy), but also
reducing days in account
receivables (AR), increasing collection rates, selecting
appropriate short-term investment vehicles, and
increasing days cash on hand all
in order to improve a company's overall financial
profitability
From an International perspective, cash management is
very complex because laws pertaining to cross border
cash transfer differ among
countries. In addition, exchange rate fluctuations can
affect the value of cross-border cash transfer.
International cash management is a field that helps
smooths the process of moving money between
countries. The cash manager is in
charge of setting up accounts in local currencies within
areas or interest and moving necessary money into and
out of foreign countries.
This requires the manager to understand the intricacies
of local and international banking laws as they apply to
any country in which the
company has money. In addition, international cash
management systems work with people in different
countries that use the
same financial system, such as when a bank operates in
multiple nations.
Cash Flow – Perspective
Subsidiary Revenue: Begin with outflow payments by
the subsidiary to purchase raw material or supplies. The
subsidiary will normally
have a more difficult time forecasting future outflow
payments if its purchase is international rather than
domestic because of exchange
rate fluctuations. In addition, there is a possibility that
payments will be substantially higher due to
appreciation of the invoice currency.
Consequently, the firm may wish to maintain a large
inventory of supplies and raw material so that it can
draw from its inventory and
cut down on purchase if the invoice currency
appreciates. Still another possibility is that imported
goods from another country could.
Be restricted by the host government. In this event, a
larger inventory would give firm more time to search
for alternative sources of
supplies or raw materials. A subsidiary with domestic
supply sources would not experience such a problem
and therefore would not
need such a large inventory.
Outflow payment for supplies will be influenced by
future sales. If the sales volume is substantially
influenced by exchange rate
fluctuations, its future level becomes more uncertain,
which makes its need for supplies more uncertain.
Subsidiary Revenue: If subsidiaries export their product,
their sales volume may be more volatile than if the
goods were only sold
domestically. This volatility could due to the fluctuating
exchange rate of the invoice currency. Importers’
demand for these finished
goods will most likely decrease if the invoice currency
appreciates. The sales volume of exports is also
susceptible to business cycles
of the importing countries. If the goods were sold
domestically, the exchange rate fluctuations would not
have direct impact on sales,
although they would still have an indirect impact since
the fluctuations would influence prices paid by local
customers for imports from
foreign competitors.
Subsidiary Dividend Payments: The subsidiary may be
expected to periodically send dividend payments and
other fees to the parent.
These fees could represent royalties or charges for
overhead cost incurred by the parent that benefit the
subsidiary for example research
and development.
Subsidiary Liquidity Management: After accounting for
all outflow and inflow payments, the subsidiary will find
itself with either
excess or deficit cash. It uses liquidity management to
either invest its excess cash or borrow to cover its cash
deficiencies.

Centralized Cash Management

Each subsidiary should manage its working capital by

simultaneously considering cash inflow and outflow.
Often, though each
subsidiary is more concerned with its own operations
than with overall operations of the MNC. Thus, a
centralized cash management
group may need to monitor, and possible manage, the
parents-subsidiary and inter subsidiary cash flows.This
role is critical since it can
often benefit individual subsidiaries in need of funds or
overly exposed to exchange rate risk.
Techniques to Optimize cash flow
Accelerating cash inflows- The first goal in international
cash management is to accelerate cash inflows, since
the more quickly the
inflows are received, the more quickly they can be
invested or used for other purpose.
Minimizing currency conversion costs – Netting can be
implemented with the joint effort of subsidiaries or by
the cash centralized
cash management group. This technique optimizes cash
flows by reducing the administrative and transaction
costs that result from
currency conversion. Under netting techniques parent
company instruct subsidiaries to both the subsidiaries
to net their payment
transaction on monthly basis so that only one net
payment is made at the end of the month. By using this
approach, both subsidiaries
avoid or at least reduce the transaction cost of currency
conversion.
Types of Netting
Bilateral netting system involves transactions between
two units: between the parent and a subsidiary, or two
subsidiaries.
Multilateral Netting system usually involves a more
complex interchange among the parent and several
subsidiaries.
Managing Blocked Funds – Cash flow can also be
effected by host government’s blockage of funds, which
might occurs if the
government requires all fund to remain within the
country in order to create jobs and reduce
unemployment. In such scenario MNC may
instruct the subsidiary to utilize cash within at domestic
level sometime on behalf of other subsidiaries. For
example setting up research
and development division, which incurs costs and
possibly generates revenues for other subsidiaries.
Managing Inter subsidiary Cash transfer – Proper
management of cash flows can be also be beneficial to
a subsidiary in need of
funds. Texas, Inc, has two foreign subsidiaries called
short sub and long sub. Short sud needs funds while
long sub has excess funds. If
long sub purchase supplies from short sub it can
provide financing by paying in advance often called
leading. Alternatively, if long sub
sells supplies to short to short sub, it can provide
financing by allowing short sub to lag payment often
called lagging
Complications in Optimizing Cash Flow
Company related characteristics: In some cases
optimizing cash flow can become complicated due to
characteristics of the MNC. If
one subsidiary delays payment, the other subsidiary
may be forced to borrow until payment arrives.
Government Restriction: Some government prohibits
the use of netting system. In addition some countries
prevent cash from leaving
the country.
Banking system: Poor and underdeveloped banking
system. American banking system are advance in this
field, but banks in some
other countries do not offer services. Example
maintaining zero balance account, where excess fund
can be used to make payment.

Export Financing and Import Financing

Export: Export financing is a key competitive factor for

exporters and may increase their opportunities of
signing a contract. There are
several advantages for both importers and exporters in
having the Bank handle and finance the transaction.
Import: The delays and complications associated with
trading overseas can be a great burden on an importer's
cash flow. Import finance
specializes in overcoming these challenges, leaving
working capital free to invest into growing the business.

Advantages for exporter

▪ Gains competitive edge by offering financing to
prospective
buyers
▪ Receives cash payment upon shipment or
commissioning
▪ Does not tie up assets
▪ Avoids credit, currency and interest-rate risks in the
settlement
period
▪ Does not need to use administrative resources to
collect the debt
Advantages for importer
▪ Can use long-term financing to match expected
revenues with
expenditures, making cash flow more efficient
▪ Obtain financing that is less expensive than local
financing
which may be subject to restrictions
▪ Obtain additional savings on financing as exporters
can use
private insurance programmes which can make
financing
available at competitive rates
▪ Can obtain fixed-rate financing and be certain of the
size of
future payments
Modes of Payment
Documents Against Payment
The D/P transaction utilizes a sight draft. Payment is on
demand.
After the goods are shipped, the exporter sends the
sight draft to the clearing bank, along with documents
necessary for the
importer/buyer to obtain the goods from customs. The
buyer has to settle the payment with the bankbefore
the documents are released
and he can take delivery of the goods. If the buyer fails
or refuses to pay, the exporter has the right to recover
the goods and resell
them.
On the surface, D/P transactions seem fairly safe from
the seller’s perspective. However, in practice there are
risks involved.
• The buyer can refuse to honor payment on any
grounds.
• When the goods are shipped long distances, say from
Hong Kong to the United States, it is usually impractical
and too
expensive for the seller to ship them back home. Thus,
the seller is forced to sell the goods in the original
country of
destination at what is usually a heavy discount.
• In cases of shipments by air freight, it is possible that
the buyer will actually receive the goods before going to
the bank and
paying for them.
D/A – Documents Against Acceptance
The D/A transaction utilizes a term or time draft. In this
case, the documents required to take possession of the
goods are released by
the clearing bank only after the buyer accepts a time
draft drawn upon him. In essence, this is a deferred
payment or credit
arrangement. The buyer’s assent is referred to as a
trade acceptance.
D/A terms are usually after sight, for instance “at 90
days sight”, or after a specific date, such as “at 150 days
bill of lading date.”
As with open account terms, there are some inherent
risks in selling on D/A:
• As with a D/P, the importer can refuse to accept the
goods for any reason, even if they are in good
condition.
• The buyer can default on the payment of a trade
acceptance. Unless it has been guaranteed by the
clearing bank, the seller
will need to institute collection procedures and/or legal
action.
Advantages for the Seller in D/P and D/A Transactions
• The bill of exchange facilitates the granting of trade
credit to a buyer.
• It can provide the seller access to financing.
• The bill of exchange is formal, documentary evidence,
acceptable in most courts, confirming that the demand
for payment (or
acceptance) has been made to the buyer.

D/Cs involve using a bill of exchange (commonly known

as a draft) that requires the importer to pay the face
amount either at sight
(document against payment [D/P] or cash against
documents) or on a specified future date (document
against acceptance [D/A] or
cash against acceptance). The collection cover letter
gives instructions that specify the documents required
for the delivery of the
goods to the importer. Although banks do act as
facilitators (agents) for their clients under collections,
D/Cs offer no verification
process and limited recourse in the event of non-
payment. D/Cs are generally less expensive than letters
of credit (LCs).
Documents against Payment Collection
With a D/P collection, the exporter ships the goods and
then gives the documents to his bank, which will
forward the documents to the
importer’s collecting bank, along with instructions on
how to collect the money from the importer. In this
arrangement, the collecting
bank releases the documents to the importer only on
payment for the goods. Once payment is received, the
collecting bank transmits
the funds to the remitting bank for payment to the
exporter. Table 1 shows an overview of a D/P collection:
Time of Payment After shipment, but before documents
are released
Transfer of Goods After payment is made at sight
Exporter Risk If draft is unpaid, goods may need to be
disposed of r may be delivered without

payment if documents do not control possession

Documents against Acceptance Collection

With a D/A collection, the exporter extends credit to
the importer by using a time draft. The documents are
released to the importer to
claim the goods upon his signed acceptance of the time
draft. By accepting the draft, the importer becomes
legally obligated to pay at
a specific date. At maturity, the collecting bank contacts
the importer for payment. Upon receipt of payment,
the collecting bank
transmits the funds to the remitting bank for payment
to the exporter. Table 2 shows an overview of a D/A
collection:
Time of Payment On maturity of draft at a specified
future date
Transfer of Goods Before payment, but upon
acceptance of draft
Exporter Risk Has no control over goods after
acceptance and may not get paid at due date

International Receivable and Inventory Management

Accounts Receivable - Management
Accounts receivable is a term used to describe the
quantity of cash, goods, or services owed to a business
by its clients and customers.
The manner, in which the collection of outstanding bills
is handled, especially in a small business, can be a
pivotal factor in determining
a company's profitability. Getting the sale is the first
step of the cash flow process, but all the sales in the
world are of little use if
monetary compensation is not forthcoming. Moreover,
when a business has trouble collecting what it is owed,
it also often has trouble
paying off the bills (accounts payable) it owes to others.
A good way to improve cash flow is to make the entire
company aware of the importance of accounts
receivable, and to make collections
a top priority. Invoice statements for each outstanding
account should be reviewed on a regular basis, and a
weekly schedule of collection
goals should be established. Other tips in the realm of
accounts receivable collection include:
• Get credit references for new clients, and check them
out thoroughly before agreeing to extend the client
credit

• Do not delay in making follow-up calls, especially with

clients who have a history of paying late
• Curb late payment excuses by including a prepaid
payment envelope with each invoice
• Know when to let go of a bad account; if a debt has
been on the books for so long that the cost of pursuing
payment is proving
exorbitant, it may be time to consider giving up and
moving on (the wisdom of this depends a lot on the
amount owed, of course)

Accounts Receivable Financing

Accounts receivable financing provides cash funding on
the strength of a company's outstanding invoices.
Instead of buying accounts,
lenders use invoices as collateral against which they
extend short-term loans. Besides benefiting a business
in debt, accounts receivable
financiers can assume greater risks than traditional
lenders, and will also lend to new and vibrant
businesses that demonstrate real
potential. An accounts receivable lender will also
handle other aspects of the account, including
collections and deposits, freeing the
company to focus on other areas of productivity.
However, risks are involved in this sort of undertaking
and agreements are typically
lengthy and steeped in legal lingo. Before considering
this type of financing it is recommended that an expert
assessment of the specific
collection situation be sought.
Inventory management
The overseeing and controlling of the ordering, storage
and use of components that a company will use in the
production of the items it
will sell as well as the overseeing and controlling of
quantities of finished products for sale. A business's
inventory is one of its major
assets and represents an investment that is tied up until
the item is sold or used in the production of an item
that is sold. It also costs
money to store, track and insure inventory. Inventories
that are mismanaged can create significant financial
problems for a business,
whether the mismanagement results in an inventory
glut or an inventory shortage.
Successful inventory management involves creating a
purchasing plan that will ensure that items are available
when they are needed

(but that neither too much nor too little is purchased)

and keeping track of existing inventory and its use. Two
common inventory-
management strategies are the just-in-time method,
where companies plan to receive items as they are
needed rather than maintaining
high inventory levels, and materials requirement
planning, which schedules material deliveries based on
sales forecasts.
What is Inventory Management?
Effective inventory management is all about knowing
what is on hand, where it is in use, and how much
finished product results.
Inventory management is the process of efficiently
overseeing the constant flow of units into and out of an
existing inventory.
Calculating what is known as buffer stock is also key to
effective inventory management. Essentially, buffer
stock is additional units
above and beyond the minimum number required to
maintain production levels. For example, the manager
may determine that it would
be a good idea to keep one or two extra units of a given
machine part on hand, just in case an emergency
situation arises or one of the
units proves to be defective once installed.
Inventory management is not limited to documenting
the delivery of raw materials and the movement of
those materials into operational
process. The movement of those materials as they go
through the various stages of the operation is also
important. Typically known as
a goods or work in progress inventory, tracking
materials as they are used to create finished goods also
helps to identify the need to
adjust ordering amounts before the raw materials
inventory gets dangerously low or is inflated to an
unfavorable level.
Finally, inventory management has to do with keeping
accurate records of finished goods that are ready for
shipment.

Ways to Manage Inventory

Supplier Assistance: An effective way to manage
inventory is to solicit the help of suppliers. Supplier-
managed inventory gives the

vendor access to the distributor's inventory data. The

supplier generates purchase orders based on the
distributor's needs. Distribution-
intensive companies utilize vendor managed inventory
controls to eliminate data-entry errors and to
effectively manage the timing of

purchase orders.
Inventory Control Personnel: An efficient method for
managing inventory is to hire a dedicated inventory
control specialist. Inventory
specialists manage all merchandise items that are on
hand and in transit. They also perform adjustments,
manage returns, validate
received merchandise and implement inventory
reporting strategies.
Monitor Inventory Levels: Having high levels of
inventory adds to expenses and increases overhead
costs. An effective way to manage
inventory is to determine the inventory demands of the
business. Limit seasonal inventory and cut back on
inventory that does not sell.