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Unit 12: Receivables Management

an exchange rate loss, the yen collected are worth fewer dollars than expected at the time when Notes
the sale was made. The exchange rate variation can happen the other way yielding an exchange
rate gain to the US exporter.
For a major currency such as the Japanese Yen, the exporter can bridge against this risk by using
currency, forward or option markets, but it is costly to do, particularly for relatively small
amounts.
This risk may be further magnified because credit standards may be different and acceptable
collection techniques much different.

Notes The exporter cannot take the “not to bother” approach and concede foreign markets
to international rivals. Those export sales, if carefully monitored and (where possible)
effectively hedged against exchange rate risk, often prove to be very profitable.
Self Assessment

Fill in the blanks:
13. International operations typically expose a firm to …………………risk.
14. For a major currency, the exporter can bridge against the risk by using currency, forward
or …………….markets.
15. This risk in international credit may be further magnified because credit standards may be
different and …………………techniques much different.



Case Study Case: Agarwal Cast Company Inc.

On August 30, 2006, Agarwal Cast Company Inc., applied for a $200,000 loan from the
main office of the National bank of New York. The application was forwarded to the
bank’s commercial loan department.
Gupta, the President and Principal Stockholder of Agarwal cast, applied for the loan in
person. He told the loan officer that he had been in business since February 1976, but that
he had considerable prior experience in flooring and carpets since he had worked as an
individual contractor for the past 20 year. Most of this time, he had worked in Frankfert
and Michigan. He finally decided to “work for himself” and he formed the company with
Berry Hook, a former co-worker. This information seemed to be consistent with the Dun
and Bradstreet report obtained by the bank.
According to Gupta, the purpose of the loan was to assist him in carrying his receivables
until they could be collected. He explained that the flooring business required him to
spend considerable cash to purchase materials but his customers would not pay until the
job was done. Since he was relatively new in the business, he did not feel that he could
compete if he had to require a sizeable deposit or payment in advance. Instead, he could
quote for higher profits, if he was willing to wait until completion of the job for payment.
To show that his operation was sound, he included a list of customers and projects with his
loan application. He also included a list of current receivables.
Contd...

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